Markets rally on budgetary push, but upside is limited

MUMBAI: Continuing budget frenzy and optimism over growth boosters proposed by the government drove a robust market rally for the second straight day on Tuesday. The Sensex touched the 50,000 mark once again, recovering around 8% in less than a fortnight as it drew comfort from spending plans that are expected to spur growth in a limping economy.

The BSE Sensex gained 1,197.11 points or 2.46% to close at 49,797.72 while the Nifty jumped 366.65 points or 2.57% to 14,647.85.

Despite the heated valuation concerns, analysts are optimistic that the capex increase and supply side reforms will lead to a quicker economic revival in India following the pandemic. “The budget was more positive for equities, less so for bonds given larger-than-expected supply and the slower pace of deficit normalization,” said Goldman Sachs in a note on 2 February.

Kotak Securities has upgraded its target on both Sensex and Nifty to 51,000 and 15,000 respectively by December on expectations of more earnings upgrades following the budget. “Our revised 2021 end Nifty earnings per share estimate works to ₹770. Assigning a slightly higher multiple of 19.5 times gives us a target of 15,000 for the Nifty for the end of CY21,” Rusmik Oza, executive vice president and head, fundamental research, PCG, Kotak Securities, said. What worries analysts about the budget is that its provisions may create inflationary risks.

“We see risks in inflation heightened by the expansionary push, global stimulus and liquidity support, in all of which India has been a beneficiary, and the markets possibly not pricing it in,” said analysts at Edelweiss Securities. Some analysts fear that global rating agencies may view the budget slightly negatively, given their focus on medium-term fiscal finances. Nomura

believes the budget may have increased the probability of a downgrade from Fitch.

“Of the two rating agencies with a negative outlook for India, we believe the budget may have increased the probability of a downgrade from Fitch,” it said in a note on Tuesday. According to Nomura, setting a significantly higher fiscal deficit target of 9.5% of gross domestic product (GDP) in FY21 indicates “kitchen sinking”, the practice of lumping all the bad news together, and the baton of driving growth may shift from monetary policy in 2020 to fiscal policy in 2021.

BSE SENSEX GAINED 1,197.11 POINTS TO CLOSE AT 49,797.72, WHILE THE NIFTY JUMPED 366.65 POINTS TO 14,647.85