Pranabda Does It Again - Market Maniac

Dr. Risk’s Prescription

Pranabda Does It Again

I was barely 11 when Pranab Mukherjee was nominated best finance minister by Euromoney in 1984, but having watched him deliver the last two budgets, I do appreciate that sentiment. The most refreshing thing about him is the consistency between his speech and actions, and their solid grounding in the economic logic of the prevailing situation – just like the ECB’s Jean Claude Trichet and the Bernanke Fed. There hasn’t been a jarring note since he took office last year and fiscal policy is engaged in a virtuoso ballroom dance with the economy. While the same is true of monetary policy as well, the RBI could learn a few lessons on communication policy and expectations management from the FM.

Coming to the specifics of today’s budget, the FM has pitched for a calibrated withdrawal by raising excise duty by 2% to 10% while leaving service tax unchanged at 10%. This dovetails with the plan to introduce GST next year with a 12% rate, along with the new direct tax code. Personal income tax slabs have been raised to 1.6-5 lac (10%), 5-8 lac (20%), and over 8 lac (30%). Surcharge on domestic companies has been cut from 10% to 7.5% while the minimum alternate tax has been raised from 15% to 18% of book profits. The sum total of these actions is a loss of Rs. 26000 cr on direct taxes and a gain of Rs. 46500 cr on indirect taxes.

The rationalisation of subsidies on fertilizers (last week) and fuels (coming soon) has also had a salutary impact on fiscal projections – with fiscal deficit forecast to decline from 6.9% this year to 5.5%, 4.8%, and 4.1% over the next 3 years. The biggest surprise was the sharp drop in the projected market borrowings – down from Rs. 451k cr to Rs. 345k cr, while the market was expecting something around Rs. 460k cr.

Markets went into the budget with low expectations and responded well, closing 1% higher and off 1% from the peak only due to a holiday on Monday. The rupee closed at the day’s high of 46.08, up 0.7%. These trends are likely to continue at least through next week, as the global backdrop remains positive. Global equities should also gain at least through next week to approach the highs.

While the majors continue to fall against the dollar, they appear to have hit bottom yesterday and this will be confirmed once EUR crosses 1.3691. The DXY has stalled at the top of the Q2 09 congestion bettween 78.50-81.50 and should head down to around 78 to correct the rally thus far. We continue to expect levels above 1.40 on the EUR and will be following up with daily updates in the “Daily Technical Report”.