Relieved rally

Written by Sucheta Dalal | Updated: Mar 1 2005, 06:22am hrs
Main hoon na, said finance minister P Chidam-baram last year. He seems to have delivered on that assurance this year by protecting ordinary people from nasty surprises. The capital market has reacted to Budget 2005-06 with a relieved rally. The pre-Budget posturing by the United Progressive Alliances (UPA) constituents had already lowered budget expectations on the realisation that the FM had little manoeuvrability.

A 144-point post-Budget rally can only be called a relieved rally. The market saw the early part of the Budget speech as a long appeasement of the governments political allies, and prices began to reflect their disappointment when difficult decisions on foreign direct investment (FDI) and disinvestments were avoided. So the market is counting its blessings that there was income tax relief for some segments, corporate tax has been reduced and the tsunami tax and hike in service tax did not materialise (although its reach has been expanded). However, things may still look different when the impact of several measures such as reduction in depreciation for companies and taxation of perks are worked out. From the capital market perspective, the hike in securities transaction tax (STT) is entirely on expected lines, although a section of brokers is hoping to wangle some concessions by claiming that the 25% hike in tax for day traders is on the higher side.

A significant relief is that derivatives income will not be treated as speculative income. Foreign institutional investors (FIIs) have now been allowed to provide non-cash security such as bank guarantee or government securities.

The savings exemption of Rs one lakh could find its way to mutual funds, which are already enjoying a serious resurrection of investor interest, having raised over Rs 4,000 crore in the last couple of weeks.

The introduction of gold unit exchange traded mutual funds provides capital market investors a chance to participate in the global bull run in gold. A curious decision is the redefinition of securities by amending the Securities Contracts (Regulation) Act to provide a legal framework for trading of securitised debt, including mortgage-backed debt over the counter. It would have been far better to push these trades out of a telephone market and on to the two national stock exchanges.