A Flash In The Pan?

Even Yashwant Sinha must be a trifle taken aback at the stockmarket’s frenziedwelcome to his second budget. In three days to March 3, rising share prices had added Rs40,000 crore to total market capitalisation. And he must be awfully glad that the marketscreated history again in the ’90s. Post 1992, it was only the second time that themarkets added 100 points each on those three consecutive days. For instance, even if youhad 10 shares of Infosys on February 22, you could have made a cool Rs 85,000 had you soldthem on March 3, brokerage not included.

Of course, hard-nosed punters knew that the good times would not last. The Sensexdropped 80 points on March 3 and 4 and closed Thursday at 3602. But it was only anexpected technical correction, according to market circles, and the rally has probablysettled down to a new level.

The cautious, though, are decidedly cool to the bull attack, which theysay follows every budget. In 1997, for example, after Chidambaram’s "DreamBudget", the Sensex—which had dropped to 3427.87 on February 27—touched3941 on March 5, a rise of 500 points in a week.

But Sinha may well have achieved his short-term objective. Especiallyafter the well-timed announcement of the cuts in bank rate and the cash reserve ratio(CRR) of banks, the markets seemed well set on the road to recovery. "The bull run isnot over," exults an upbeat BSE broker. "This time the Sensex may well cross3900 by the end of March."

Sentiments are further buoyed this time because there’s hope that theretail investor might soon return to the market. Explains Dhiren Shah, BSE sub-broker:"Suddenly I’m getting queries from several of my old clients, mainly officeworkers and mid-level executives who had ignored the markets for more than a year. Thisinterest augurs well for the future."

But more credit should go, and rightfully, to the investor-friendly stepsin Budget 99, followed by the money market moves. The major incentives here are theproposals that favour notably pharmaceuticals, software and housing finance sectors, andthe steps to revive the bourses: halving long-term capital gains tax on shares—along-standing demand from local players—to create a level playing filed between NRIsand the domestic investors—and a bailout package for the haven of small investors,the Unit Trust of India (UTI). With many of the recommendations of the Parekh Committee oncapital markets finding a place in the budget, analysts have named this budget the"Deepak Parekh budget". Also, the abolition of stamp duty on demat debtsecurities will go a long way in expanding and reviving the debt market.

Foreign institutional investors (FIIs) have been net buyers in indexheavyweights like ITC, Hindustan Lever, Larsen & Toubro, State Bank of India, Tata Teaand others. Domestic institutions picked up shares of MTNL and Reliance, while mutualfunds were reportedly interested in Indian pharma shares. Says broker Ajit Ambani:"The market feels industry will slowly revive with the various incentives. It is apragmatic and practical budget." Adds P.S. Subramanyam, UTI chairman: "Thebudget is targeted to spur the capital markets on the back of mutual funds. We expectinvestors to come back to the markets especially through the mutual funds." While UTIwould now be able to mop up huge funds from the public on the strength of higher yield onfuture investments, the proposals will hit the existing guaranteed return schemes, whichhave less than 50 per cent investment in equity. UTI will now have to pay 10 per cent morewithholding tax on the dividend of such schemes.

But the real fat to the fire was added by the bank rate cut, pushing up even the pricesof gilts, or government securities. Compared to a normal daily trading volume of around Rs300 crore, gilt volumes in the secondary market was in excess of Rs 1,300 crore onWednesday. Bank stocks started moving up on Wednesday, and scrips of all the big publicsector banks gained between 7 and 8 per cent.

Among equities, says a broker with an FII, "shares of informationtechnology firms, pharma companies and companies dealing with fast-moving consumer goodsare right now the darlings of the bourses". Multinational consumer goods companieshave attracted attention, as the tax restructuring would benefit them.

What of the future? Will the markets dance to Sinha’s tunes? Apost-budget UTI Securities research report may well have the answer: "The marketsentiment is positive because of the incentives to UTI, other mutual funds and retailinvestors. However, we do not expect a sustained rally, since earnings prospects for mostof the Indian corporates remain unchanged."