No pre-Budget rally, bearish sentiment plays spoilsport

Written by fe Bureau | Mumbai | Updated: Feb 28 2011, 15:08pm hrs
The Indian markets have typically seen fairly sustained pre-Budget rallies but for this time. The sharp spike in crude oil prices, which hit $117 per barrel last Thursday, have left investors skittish. Given how vulnerable India is to rising oil prices the mood is almost bearish.

Although the Sensex bounced back last Friday, it gave up nearly 3% during the week and the benchmark index is close to 16% down from the highs of 21,005 seen last November. Even before oil prices breached the $100 mark, foreign investors were taking risk off the table, not convinced that the government would be able to rein in inflation, which is ruling at above 8% for more than a year. Investors were also not sure if the government would be able to push through projects, needed to spur the investment cycle and take action on the policy front even as fixed capital formation is slowing down sharply in the six months to March 2011.

The mood in the market is one of complete circumspection, with expectations from the Budget tempered like never before. There is some apprehension that given the state of the governments finances, there could be a 2% hike in central excise duties at a time when the government needs to splurge on social-welfare schemes ahead of elections in five states later in the year.

What is also worrying the Street is that government borrowings, estimated at a net R3.45 lakh crore in the current year, may not come off at all next year and could, to some extent, crowd out private sector borrowings leaving interest rates at elevated levels. What the market has already priced in is that due to higher nominal Gross Domestic Product (GDP) and buyoant revenues, the fiscal deficit could be contained at somewhere close to 5% this year, depending on the subsidies bill.

But it realises that 2011-12 could turn out to be an altogether different year, without the one-time proceeds from 3G spectrum and broadband licences and pressure on expenditure given the governments focus on financial inclusion.

The Food Security Bill could push up subsidies further, hurting the fiscal deficit. Moreover, the government could end up collecting less than the Rs 40,000 crore that it had targetted from disinvestments this year.

Its not surprising therefore, that most money managers are content to stay underweight India for some more time, especially after the poor performance of corporate India in the three months to December 2010. More than any measures in the Budget, what could change the perception of fund managers is better governance; speedy clearances, policy reforms and fewer corruption scams.