Beyond the Budget…

Bull Market

Thought many times before writing this note. The fear was that we shouldn’t be adding to the woes of readers who are already inundated with expert views and opinions on the budget. When there is such an overdose of opinions, how do we write something that is relevant for our investors without getting lost in the sea of screaming headlines? It is another matter that budget’s significance is slowly receding into the realm of irrelevance. With indirect taxes (GST) out of its net, budget is turning out to be more of statement of intent with broad contours of expenditure plan than anything material. With Uniform-Tax-Code on the anvil for direct taxes, budget’s role will be get more marginalized in times to come.

So if this is not about budget, what is it about? This is more about the direction of the broader market, now that one event is out of its way.

First, there is no place for debate on the question of increasing stress for the economy. But the key point is, market (esp. the broader small and mid-cap space) is pricing-in a depression, if not anything worse. The objective here to discuss one key take-away from budget which is critical for the trajectory of the broader market. That is, what budget is likely to do for the bond yields and interest rates. They are heading much lower. This is consequent to some key measures in the budget as highlighted below.

  • Govt’s bold decision to go for sovereign bonds for 10 to 15% of its borrowings.
  • Greater liquidity measures for both banks and NBFCs
  • RBI’s immediate announcement after the budget for additional liquidity backstop for banks targeting NBFCs/HFCs
  • Govt’s decision to stick to fiscal glide path target in spite of pressures for increased stimulus.

Market in its knee-jerk reaction failed to appreciate the medium to long term implications on the bond yield (and thereby interest rates) of above critical measures.

Lower interest rates coupled with liquidity measures and with some resolutions in the liquidity-hit NBFC/HFCs, will reignite consumption in the coming months. When that gets supported by low base effect in auto and other consumer discretionary, the negative narrative on the economy will most likely to cede place to optimism in the second half of this year. Overall, when looked at  from this perspective, broader space is likely to reverse trend and might even surprise significantly on the upside when the manic mis-pricing starts playing out in the opposite direction (Small and mid-caps generally do well in a falling interest rate regime, as has been the case in previous cycles).

So, in summary, for getting back to 7 to 8% growth, this budget is good enough, though not for a breakout beyond that. We need a bolder budget to break into 9-10% growth cycle, which may be unrealistic to expect from a Govt. that thinks on incremental fashion. But where it gets interesting is, when the broader market  is pricing-in depressive scenario, 7-8% growth outlook is going to unlock substantial value just by adjustment in mis-pricing in small and mid-caps. Interesting times ahead!