The stock market’s listless response to the Union Budget’s announcements on Saturday was a tad surprising. While the Budget did not have any grand capital expenditure or divestment plans, it addressed the most important thing India Inc has been harping about for quite some time — slowing urban consumption demand. An additional Rs 1 lakh crore in the hands of the salaried (tax-free annual amount of Rs 12.75 lakh) is expected to give consumption a fillip, even if just one-third of the amount is used for spending. If some of the money gets invested in systematic investment plans (SIPs), the stock markets, which are under pressure due to foreign portfolio investors (FPIs) selling in droves, are likely to get more domestic help from mutual funds. Since October, FPIs have sold shares of $20.2 billion (Rs 1.72 lakh crore) while domestic institutional investors have pumped in Rs 2.72 lakh crore. At the same time, the SIP book of the mutual fund industry has hit a new high of Rs 26,000 crore in December. Further, the Budget proposal to allow 100% foreign direct investment in insurance, if the premiums are invested in India, will bring more long-term money into the bond and equity markets. These are all good news for stock markets in the long run.
Many market players, however, have a different take. More than the Budget, they are more focused on earnings and monetary policy. On the domestic front, the earnings season has disappointed in FY25. With corporate profits growing in single digits in the first nine months of the financial year, the market is now worried about rich valuations. The Nifty’s price-to-earnings (P/E) at 21.91x (trailing 12 months) is close to its 10-year average of 22.80x. So, unless the corporate profits shine in FY26, stock market investors, especially FPIs, may continue to be cautious. While inflows into mutual funds may continue, if returns are muted over the medium term, even they might become more circumspect.
Hopes are high on the monetary policy front, too, specially after the Reserve Bank of India (RBI) announced a comprehensive package to infuse as much as Rs 1.5 lakh crore after the liquidity deficit hit a 15-year high of
Rs 3 lakh crore. While the Monetary Policy Committee is widely expected to cut rates by 25 basis points, markets will be more interested to know the road ahead, in terms of the number of rate cuts in the coming months. Also, with the December consumer price index at 5.22%, lower than the upper end of the RBI’s tolerance band, the MPC’s comfort to cut rates would be higher. More money in the hands of people, coupled with lower interest rates, is quite a heady mix.
But the real elephant in the room is US President Donald Trump’s tariff tantrums. The latter has already caused jitters after Mexico and Canada slapped retaliatory tariff on the US after Trump announced 25% tariff on goods from Mexico and Canada (10% on energy imports) and 10% on all Chinese goods. All eyes are now on China. When China’s economy is sluggish and domestic consumption is weak, such tariffs will force Chinese manufacturers to dump their output in other markets at low prices. India is a big market for them. This will hurt domestic industry unless India raises its defence measures and becomes more protectionist. For Indian market players, a potential global trade war could make the Budget a distant story.