A higher than expected rise in the fiscal deficit of the government spoiled the party in the stock markets. Both Sensex and Nifty fell steeply by 5.8 per cent in its worst-ever performance on Budget day, which market experts said was an over-reaction.
Sensex fell by 870 points and Nifty by 259 points.
"The fiscal deficit has spooked the market, as it stands at 6.8 per cent against the expected 6.2 per cent,” said Aseem Dhru, CEO, HDFC Securities.
<b1>The state fiscal deficit stands at almost 4 per cent and off budget item is at 3 per cent. “The total deficit stands at over 13 per cent and that may lead to a possible downgrade of India by the international rating agencies,” said Dhru.
India currently has an investment grade rating and if it slips one notch below, it will get into the below-investment grade rating.
As the government announced several new schemes, the growing concern is where the money will come from.
The borrowing target for the government has grown from Rs 296,531 crore last year to Rs 400,996 crore in 2009-10.
“The borrowing will put pressure on the liquidity, hence bond yields are likely to climb up which will impact the banks treasury gains going forward,” said Sanjay Sinha, CEO, DBS Cholamandalam Mutual Fund.
The banking index fell the most by 8.2 per cent, fearing a fall in its treasury income going forward as the yields are likely to go up on account of expected increase in borrowings and pressure on liquidity.
Being the first budget of the new government, market was anticipating a policy formulation by the government and got disappointed on its absence. There was nothing more than the thrust to the infrastructure investment and social sector reform.
There was no announcement on disinvestments, which disappointed the market players. “As there was no specific disinvestments roadmap as expected, the budget fell short of expectations,” said Sinha.
While the markets reaction has been termed as on overreaction, experts feel rationalism will come back and markets will reach their fair value.
“While immediate market reaction has been negative as too many expectations were built up, over the medium term, the market would rate it as pragmatic and best in the current situation,” said Sunil Godhwani, MD and CEO, Religare Enterprises.