Bombay Stocks Post Largest Single-Day Rally Since 2009
Toronto - Indian stocks posted their largest single-day point gain, in local currency terms, over the past seven years, on the back of news that the government will stay the course of fiscal consolidation and take the necessary steps to invest in development across several sectors, as detailed in the 2016-17 Union Budget.
The BSE Sensex Index surged 777 points, in local currency terms, to close at a level of 23,779, while the NSE Nifty 50 Index added 235 points, also in local terms, to settle at 7,222.1 Shortly after digesting the noteworthy points from the budget, market participants were seemingly optimistic that the Indian central bank will instate further rate cuts in the near future.
Key takeaways from the 2016-17 Union Budget include:
• Strong emphasis on fiscal discipline, targeting a lower deficit of 3.5 percent of GDP for the current fiscal year, versus 3.9 percent in fiscal year 20162
• A government pledge to double the income of farmers by 2020, allocating 360 billion rupees (US$5.3 billion) to the agricultural sector3
• State-run banks to receive 250 billion rupees (US$3.6 billion) to help with recapitalization, part of a larger plan to revamp public sector banks4
• Allocation of 2.21 trillion rupees (US$32 billion) in total public spending on roads, railways and ports, an estimated 24 percent year over year increase1
• Corporate income tax for small to medium sized businesses in fiscal year 2017 unchanged at 29 percent, although new manufacturing companies will be taxed at 25 percent
The government's commitment to fiscal consolidation is a major positive for India's macro stability and has been a key reason for India's outperformance since 2013. Indian government bonds rallied on the news that a lower deficit would be targeted. A lower deficit means a lower net supply of debt, which increases the possibility of further rate cuts from the Reserve Bank of India (RBI). Indian 10-year government bonds currently yield around 7.6 percent and returned 8.1 percent in 2015 and 16.5 percent in 2014, the highest in Asia for both periods.
Notably, RBI Governor, Ragharum Rajan, stated in February, 2016 that he would be keeping a watchful eye on the outcome of the budget, using it to decide if further easing was needed. "Our market view is that, the RBI will cut India's benchmark rate by as much as 50 basis points, from a current rate of 6.75 percent, over the course of the year. Lowering interest rates will have a stimulative impact on the economy," notes Christine Tan, Chief Investment Officer with Excel Investment Counsel Inc.
"Overall, this budget signals that the government continues to maintain its two main policy objectives of increasing capital investment while maintaining fiscal restraint. With the 2016-17 budget clarity, investors should focus on growth opportunities in Indian equities and the attractive yields offered by Indian fixed-income," Ms. Tan, surmised.
The 2016-17 budget is expected to benefit a wide range of industries from infrastructure and farm equipment manufacturers to developers of affordable housing and state-owned banks. "We view the union budget positively given the fact that the Finance Minister [Arun Jaitley] has not resorted to any retrograde steps, like tweaking the capital gain tax benefit and at the same time he has adhered to fiscal prudence," Atul Penkar, Fund Manger at Birla Sun Life AMC Limited, points out. Birla Sun Life AMC Limited is the sub-adviser of the Excel India Fund, the largest and longest-running mutual fund in Canada, focused solely on investing in India. Concluding, Mr. Penkar says, "The focus on rural India and infrastructure is very welcomed and will help negate the effects of two back-to-back poor monsoons and help stoke rural demand…we believe the Finance Minister has done a good job."