Budget woes weigh on markets: Lack of stimulus hits Nifty infra, auto

Despite the large FPI pullout last week, the rupee has remained stable

The benchmark Nifty 50 index has declined over 3 per cent since July 4, a sign that Finance Minister Nirmala Sitharaman’s maiden Budget has left investors disappointed as seen in Chart 1.

Lack of a stimulus package, increase in surcharge on the rich as well as foreign portfolio investors (FPIs) and 20 per cent tax on share buyback, has affected sentiment. The bluechip-focused Nifty index has declined in five out of the previous six trading sessions, underperforming global equities (Chart 2).

The fall in the broader market too has been in line with the large caps. Since the Budget, Rs 5.5 trillion worth of investor wealth has got wiped out. Spooked by the steep increase in income tax surcharge for those generating income above Rs 5 crore in a financial year, FPI have pulled out Rs 2,700 crore in the past five trading sessions. While the equity market has seen a negative reaction to the Budget, the debt market made positive strides. The yield on the 10-year gilt has softened from 6.75 per cent on July 4 to 6.49 per cent on Friday.

Bond yields and prices move in the opposite direction.

The 26-basis point drop in the yield has been on account of reduction in fiscal deficit for 2019-20 to 3.3 per cent from 3.4 per cent. The proposal of sovereign borrowing in foreign currency has further aided sentiment.

Despite the large FPI pullout last week, the rupee has remained stable. The infrastructure and automobile sectors have been the worst-performing since the Budget. Analysts and investors were hoping for some stimulus measures to help these two sectors, which are undergoing turbulence. Experts say that the market could continue to remain weak, unless the government rolls back tax on buybacks or clarifies that the higher surcharge will not be applicable to FPIs.