The Sensex has lost around 7% since the start of the year with the market recovering after it came off by about 10% from its early-January peak. So worried is the Street about how the government will manage its finances, that most investors are playing it safe. Indeed brokerages are willing to be underweight on the Indian market till it?s clear how large the fiscal deficit, which is estimated at 6.8% of GDP for 2009-10, is going to be.
The key number that the market is watching in the Union Budget for 2010-11 is how much the government is going to borrow in 2010-11 at a net level. Should the number exceed Rs 3.9 trillion, the amount borrowed in 2009-10, the market will be disappointed. Actually adjusting for MSS operations, the net borrowing number for 2009-10 was slightly lower. So, if the net borrowings number comes in below that level, the Street should be satisfied even if the finance minister raises excise duties and service tax by about 200 basis points. The government needs to keep the markets in a good mood because it?s hoping to raise money through disinvestments. A target of Rs 250 billion for disinvestments should be achieved if all goes well. But given that at 16,254 levels, the market is not particularly cheap, and also given that markets in the region have been somewhat weak, the concern on the fiscal deficit, which the market wants to see at 5.5% or thereabouts, needs to be addressed.
The market?s biggest fear is that if the government corners most of the money in the system in the next financial year, there may not be enough left for companies in the private sector. Around Rs 36,000 crore will be drained from the system by the end of
February because of the hike in the CRR. So money, they feel could soon be less abundant than it has been for the last six to eight months. While the government?s borrowing programme would push up bond yields, to levels of 8% or more, bankers are convinced that interest rates will move up sooner rather than later and they sense a signal, in this regard, from the central bank in early April.
The RBI data shows that credit growth is inching up??net non-food credit grew 15.4% year-on-year, in the fortnight to February 12, 2009, a 100 basis points increase over the 14.4 % year-on-year growth seen in the fortnight to January 14, 2010.
However, these growth figures should be read in the context of a low base and are nowhere near the 25% numbers that were being reported before the downturn. While bankers confirm they?re seeing demand for money across retail, SME and corporate segments, there is little evidence of companies making big investments and that is not good news. Buta nticitipating that money could become expensive, they?ve started upping their deposit rates.
Over the past month, four banks including the two large private sector players, HDFC Bank and ICICI Bank have tried to raise money by increasing rates by around 25-50 basis points. How does monetary tightening affect stocks? According to UBS, a study between the years 2000 and 2009 shows that Indian stocks do not show a sign of recovery even after 120 days of monetary tightening when global cues are weak.
But markets do turn around, in less than 15 days, when global markets are rising. Clearly, the global markets don?t look like they?re going to be ralling in a hurry.