BSE Sensex gains 325 pts to record closing high of 25,841.21 pts after Arun Jaitley talks tough on Budget

Written by Reuters | Mumbai | Updated: Jul 2 2014, 22:53pm hrs
BSE SensexFM Arun Jaitley after the ?halwa Ceremony? marking the beginning of printing of Budgetary documents, in New Delhi. PTI
BSE Sensex surged more than 1 percent to hit record highs on Wednesday after Finance Minister Arun Jaitley's warning against "mindless populism" raised hopes the government would unveil a fiscally prudent Budget next week.

Arun Jaitley on Tuesday also said a high fiscal deficit and inflation are major challenges for India, further soothing market sentiment ahead of the budget to be unveiled on July 10.

Among the top gainers were sectors expected to receive support in the budget such as power and infrastructure, including Larsen and Toubro and Bharat Heavy Electricals Ltd.

Overseas investors who pumped in about $10 billion so far in Indian shares this year, bought shares worth $142.8 million for the third straight day on Tuesday, exchange and regulatory data showed.

"It's a pre-Budget rally and the government is giving enough signals on how it is going to deal with the economy. Market is taking cues from there and expectations are very high. Though we are positive, we advise clients to be cautious and selective as selling pressure can emerge on any negative news," said Suresh Parmar, head, institutional equities, at KJMC Capital Markets.

The benchmark BSE index closed up 1.27 percent at 25,841.21 points. Earlier in the day, it surged 1.37 percent to hit a record high of 25,864.53 points, surpassing its previous life high of 25,735.87 hit on June 11.

The broader NSE index gained 1.18 percent to close at 7,725.15 points, having hit a fresh record high of 7,732.40 points earlier in the session, breaching its previous peak of 7,700.05, also hit on June 11.

Shares in the power and infrastructure sectors, widely expected to be among the biggest focus areas for the new government, rallied. NTPC Ltd closed 3.33 percent higher, Tata Power Co. Ltd ended up 0.9 percent and Larsen and Toubro Ltd gained 1.6 percent.

The sub-index of state-run companies also gained 1.22 percent on hopes of reforms and divestment. Container Corp of India gained 3.3 percent while Rural Electrification Corp ended 3.8 percent higher.

Among blue-chips, Reliance Industries Ltd gained 1.02 percent and Sun Pharmaceutical Industries Ltd ended 2.1 percent higher.

Shrikant Chouhan, Head- Technical Research, Kotak Securities: Nifty has touched life time high mainly on the back of talk from the finance ministry about tough measures to fight with inflation. In addition to that, rating agency Fitch has also upgraded outlook for India that has added extra fuel to lift the market beyond the resistance level 7700/25735. Again it was a broad based move as almost all sectors have taken active interest to move the index into new orbit. Technically it has next major hurdle between 7770/26000 and at 7800/26100. We should be cautious while adding long positions as the risk reward ratio is around 1:1. Our advice is to consolidate portfolio by reducing excess exposure (leveraged) or by adding to conviction ideas instead of looking new ones. On the down side, 7650/25400 should act as a major support in the short term. We like Banks and Capital Goods & Infra stocks. Indian currency is reacting positively to domestic and international developments. It was at 59.70 and heading for 59.40. It has ultimate resistance at 58.80/58.75. In the short term, we are expecting appreciation.


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Jaitley talks tough on Indian Budget

Finance Minister Arun Jaitley's warning against "mindless populism" propelled Indian stocks to record highs on Wednesday, as investors bet that his maiden budget next week will stabilise the wobbly public finances.

Jaitley's comments reinforced expectations that he will curb the state's subsidy bill while taking advantage of the strong stock market to raise more than $10 billion by selling stakes in state companies.

Economists do expect some slippage in the headline budget deficit that Arun Jaitley inherited from the previous government due to a weak economy, but say the asset disposals should avert any need to resort to bigger borrowing.

"(The) fiscal deficit is a major challenge," Jaitley told an audience of accountants on Tuesday evening. "Now India needs a certain amount of fiscal discipline... there is hope that bold decisions will be taken now.

"If you indulge in mindless populism, you burden the exchequer," he added. "It does not work."


Prime Minister Narendra Modi's nationalist Bharatiya Janata Party (BJP) swept to power in May with a promise to revive the economy and create jobs after the longest spell of growth below 5 percent in a quarter of a century.

That rate is too slow to create jobs for the 10 million Indians who enter the workforce every year. Modi's new government has also had to contend with a food price scare just as a weak start to the monsoon delays planting of summer crops.

India's wholesale price inflation hit a five-month high of 6.01 percent in May. Meanwhile, headline inflation has stabilised but "is still beyond the acceptable level", Jaitley said.

The budget is the government's first chance to implement its agenda, and investors were impressed by Jaitley's hawkish tone. Wednesday's rise in the BSE Index extends its gains for this year to 22 percent.

"The statements and the body language indicate that they are here for the long run," said Jagannadham Thunuguntla, head of research and chief strategist at SMC Global Securities Limited.

"The government is giving the right messages and the market has taken it in its full spirit. We may not see all announcements in one shot in the budget, but the messages in between the lines are more important."


The interim budget set by the previous government in February set a deficit target of 4.1 percent of gross domestic product for the financial year that began in April.

But, in an indication of the challenges Jaitley faces in balancing the books, the fiscal gap has already risen to 2.4 trillion rupees ($40 billion), or 45.6 per cent of the full-year target.

"We can have a higher deficit number, possibly at 4.42 percent (of GDP) without disturbing the borrowing estimates," State Bank of India chief economist Soumya Kanti Ghosh said in a research report.

Economists at Deutsche Bank Securities also forecast an upward revision in the deficit target to 4.3-4.4 percent of GDP, assuming record revenue of 600-800 billion rupees ($10 billion-$13 billion) from the sale of stakes in state-run companies.

Finance Ministry officials are locked in pre-budget silence, meaning that many details of the spending package are unlikely to become clear until Jaitley addresses parliament on July 10.

But, sources say, work is progressing on plans to sell a 5 percent stake in Steel Authority of India, worth around $330 million. Disposing of the stake would kick off a series of deals that could quickly raise funds and impose greater discipline on India's bloated state industrial sector.

Trimming subsidies - particularly on energy - that cost nearly 2 percent of gross domestic product (GDP) will be another focus as the government seeks to allocate scarce funds to growth-promoting capital investments.

State Bank of India estimates that every rupee of capital spending generates 2.45 rupees of GDP - two and a half times the GDP impact of transfer payments.

That would buy time for the economy to recover and for the government to widen its revenue base by bring in a general sales tax, which economists at Deutsche Bank Securities expect to be introduced in the 2015-16 fiscal year.