Here are five main reasons that leading stock market investors attribute for the rise in equities:
Enthusiasm of foreign investors: FIIs (foreign institutional investors) have been backing the post Budget rally with all their might. This is because FIIs are impressed with the government’s resolve to keep the fiscal deficit within the targeted 3.5%. This implies that India, unlike other emerging markets, is determined to pursue a stable fiscal policy. On Tuesday, a day after the Budget, FIIs bought Rs 3,000 crore worth of Indian equities. On Wednesday, they again bought Rs 1438 crore worth of shares. Over two days FIIs have bought Rs 9,124 crore of Nifty options, the highest since January 2015, with the emphasis being on call options, instruments that bet on a rising market.
Stocks have been beaten down: There is much buying because most Indian stocks, including large caps and mid caps had fallen quite sharply in the run-up to the Budget. On an average the fall is about 21% over three months, with some large midcap stocks having fallen 60-70%. Since fundamentally nothing has changed to support such a steep fall, investors are finding value in buying stocks which had become cheap.
LIC can again be active: The state-owned insurance major which has supported the government’s efforts to shore up falling capitals in state-owned enterprises including banks and chipped in to contribute to the government’s moves on selling stakes in PSUs, can now get a breather due to the RBI. The central bank on Tuesday allowed banks to recognize some of their assets - real estate, foreign currency and deferred tax - which freed up about Rs 30,000 to 40,000 crore in equity capital. This will now give LIC room to increase its investments in Indian equities, which has improved sentiment.
Stable tax policy: Apart from the strength in rupee adding to the confidence, the Budget announcements to simplify tax rules, keep the GAAR implementation deadline unchanged and postpone any decision on place of effective management by a year, has played a positive role. Arun Jaitley’s decision to not spring tax surprises at foreign investors has gone down well with FIIs.
Rate Cut Hopes: With the government having kept its side of the bargain by maintaining the fiscal deficit at 3.5% of the GDP, there is widespread hope that RBI would cut interest rates ahead of the policy calendar of April. RBI’s top boss, Raghuram Rajan had earlier said that any future rate cut would hinge on the government’s fiscal consolidation exercise. A 25 basis points reduction in repo rate - the rate at which banks borrow from the RBI- could likely lead to cheaper borrowing costs which will in turn lead to reduced interest costs for companies. This is another reason why the markets have been rallying since Budget.