Budget 2022: With swings likely this year, RBI policy, faster stock rotation will drive market volatility

Certain market outliers are likely to exist within the Auto, Consumption, Real Estate, and Infrastructural sectors. Among these, the Auto sector is slated to lead the charts thanks to EV technology, PLI scheme, and heightened demand predictions.

RBI policy, state elections, and higher rate of sector and stock rotation hold key to market volatility. (File Photo: Reuters)

By Jay Thakkar 

As we inch closer to the Union Budget 2022, the economic opportunities for positive externalities are a lot more apparent. Markets currently in a state of economic recovery are brimming with potential, both in the public and private sectors. Even amid the third wave of the pandemic, which is pegged to don the status of an endemic, budget expectations are forward-looking, focused on revival and public Capex.

Based on our research and evaluations of market markers, here are our expectations from the Union Budget 2022. 

Overall Outlook

Like the past 2 years, 2022 is likely to be volatile with the possibility of a new high in this calendar year based on the unidirectional returns of 2021 that were greater than 23%. Most of the swings in 2022 will be due to domestic and international events. 

Drivers of volatility include:

  • RBI policy hinting at an interest rate hike to combat inflation
  • Varying valuation of certain stocks leading to a higher rate of sector and stock rotation as compared to 2021
  • State elections, which will stabilise with time, leading markets to return the focus to earnings

Certain market outliers are likely to exist within the Auto, Consumption, Real Estate, and Infrastructural sectors. Among these, the Auto sector is slated to lead the charts thanks to EV technology, PLI scheme, and heightened demand predictions. The Infrastructure sector may pick up as well. Riding on the Finance Minister’s plan from last year, the need of the hour is detailed planning, execution, disinvestment, and timely completion.

Foreign Institutional Investment

FIIs will play a returning role in the Indian growth story on account of the fact that the GDP expectation of India is above 8%, backed by the World Bank. FIIs may not adopt a sell stance just yet, but domestic flows are strong enough to fill the momentary gap. 

Commodities

Owing to the strong Dollar Index bounce back, commodities corrected as well. Our view is that the Dollar Index will be bearish for the long term, while commodities look bullish. Strong demand from the real estate, infra, and auto sectors as inflation corrects and the pandemic eases, may be key drivers for this positive shift. 

With regard to bullion, gold and silver prices have corrected. It is a good hedge against inflation and should not fall beyond these levels. Crude is likely to see demand in the short term, but I don’t maintain a bullish outlook for the long term. 

Taxation

We expect minimal disruptions to the existing system as other sectors attract priority. While I do not expect changes in direct tax policies, these are welcomed if non-tax revenue increases. 

Nifty and Sensex

On the downside for Nifty 15500-16000 is a good support area, whereas on the upside Nifty may see levels of 21000 on the upside. Similarly Sensex has a support levels of 54000-55000 and on the upside it can see levels close to 70000.

FY23 may be the period that reigns in post-COVID reactions, and we expect Budget 2022 to set the pace for growth. The multiplier effect arising from incentives provided for industries is expected to boost employment with obvious transpiring of ripples in the economy.

(Jay Thakkar is Vice President and Head of Equity Research at Marwadi Shares and Finance Ltd. The views expressed are author’s own.  Please consult your financial advisor before investing.)

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