Market Nervousness Ahead of Budget 2023
When we spoke to a media outlet last week, we talked about how nervous the markets were. Events over the last two trading sessions have underscored the same as the markets reacted to a research note by the Hindenburg Group on the Adani Group of Companies, leading to a massive sell-off. We will not delve into the gory details of the report or its accuracy. It is well known that many Adani Group stocks were hugely overvalued and overdue for a correction.
Volatility in Run-Up to Budget
However, even before this played out, we said that the Indian market was showing signs of nervous indian markets ahead of Budget 2023, as traders tried to take positions based on news and rumours circulating in the market. Historically, there has been a lot of volatility in the run-up to the budget, as well as on Budget day, although this trend has been slightly reducing in recent years. However, this year, talk of imposing a tax on long-term capital markets is again creating nervousness in the markets.
In addition to this, global markets continue to be jittery as the world speculates about a possible recession in the US and Europe. These factors will continue to impact the market even after the budget.
Government’s Ability to Stick to Fiscal Discipline
When it comes to expectations from Budget 2023, we believe that the government will be able to stick to fiscal discipline. In the post-COVID era, fiscal deficit targets have been relaxed, but the current year has seen buoyancy in both direct and indirect collections. As such, it is expected that the government will be able to achieve its proclaimed fiscal deficit targets and set a lower fiscal deficit target for FY 2023–24.
Impact of High Gold Prices in India
The recent high in gold prices in India is also raising questions among investors. We opine that gold has now turned into a speculative asset. Historically, gold has been considered an alternative currency and a store of value, but it is no longer playing the role of safe haven during economic crises or serving as an effective inflation hedge. This is because of trading in gold, which has resulted in gold prices increasing in INR terms due to India’s high importation of gold.
Expectations from Budget 2023
When it comes to infrastructural stocks, we believe that they could well outperform in 2023. The Indian Government is expected to continue allocating more funds for Capex, with a bulk of it going into building infrastructure. However, it is important to focus on companies that are efficient in their execution and are relatively debt-free. Stock selection will be key to success in this area.
In terms of specific announcements, many experts believe that the government will come up with schemes to support sustainability in healthcare, green energy, and divestment. Specifically, incentives in the EV space, particularly in the 2-wheeler segment, are expected, as well as a boost in charging point infrastructure for green hydrogen. Additionally, the government may consider the sale or dilution of stakes in loss-making PSUs to generate revenue that can be used for other Capex projects.
Role of Foreign Institutional Investors (FIIs) in Indian Markets
Foreign institutional investors (FIIs) have been a little more nervous indian markets ahead of Budget 2023, raising questions about their role in the market. Even during the Adani stock saga last week, FIIs were the net sellers. However, FII money will return to India once the exchange rate stabilises. India’s high growth rates are also expected to attract capital into the market unless tax provisions require FIIs to pay tax.
Conclusion: Volatility Expected, but Long-Term Story for Indian Market Remains Positive
Overall, we believe that the market will continue to be volatile based on global factors, but the long-term story for the Indian market remains positive. FII money is expected to flow into India, as the exchange rate has now stabilized and India is a promising growth market. Additionally, retail investors are expected to continue with their systematic investment plans (SIPs), which will also support the market.
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