Investors brace for annual budget

Mumbai: This week all eyes will be on India's annual budget, which is widely expected to lower taxes and boost spending - two ingredients that usually power a stock rally. But if the run-up to the big event is any indication, the outlook for the market is clouded by uncertainty.

The budget session of parliament begins on Monday and the railway budget for 2008-09 will be presented on Tuesday. This will be followed by the economic survey, a report card for 2007-08, on Wednesday. The main budget will be presented on Friday.

"We're bracing for an election budget," said equity trader Rasesh Shah. "There will be handouts to large sections of the people to garner votes. But we don't know who will pick up the bill."

Prime Minister Manmohan Singh's Congress party-led ruling coalition government is likely to call for early polls before the five-year term ends in May 2009. The political factor has cast a shadow on the budget at a time when a global economic slowdown looms.

"There will be cuts in duties on consumer products, lower personal income tax rates and a big jump in subsidies," Shah said, all of which should boost spending.

However, if these expectations were cast in stone the Sensex would not have fallen 4.2 per cent last week - its fifth weekly loss in the past six weeks.

"With the last Union budget before the general elections around the corner, taxpayers' hopes [and fears[ rule high," said an editorial in The Economic Times.

"Given the excessive and needlessly secretive nature of budget formulation in India, it is anybody's guess what Finance Minister P. Chidambaram will finally pull out of his hat on February 29," it said.

Stocks trader Ashwin Dalal said this would keep the market choppy, while investors try to gauge the signals from subtle policy moves. "It is the finer print that matters," he said.

State Bank of India (SBI), the country's largest lender, said last week it was cutting its prime lending rate by a quarter point to 12.25 per cent from February 27. It was the second reduction this month, with no comparative changes in deposit rates.

SBI was joined by other state-controlled banks in what was clearly an unwritten order from Chidambaram to lower lending rates. "A cut of this magnitude with no reduction in the cost of funds would squeeze SBI's margins drastically," Dalal said. Shares in SBI fell more than seven per cent last week to Rs2,133.

"The second reduction in rates by SBI comes as a surprise," Credit Suisse said in a note to clients. "We expect further lending rate cuts in April, but see risk to margins if not accompanied by deposit rate reductions."

Dalal said jittery global markets will add to the volatility, as investors brace for more bad economic news from the US.

Foreign funds have been net buyers of Indian shares worth $1.2 billion between February 1-21, data from the Securities and Exchange Board of India showed, with flows into debt during the same period at $821.5 million.

These inflows helped boost India's foreign exchange reserves to a record $292.86 billion on February 15, up $2 billion from a week earlier, the central bank said on Friday.

Still, the stock market will be swayed by moves in global markets, brokerage India Infoline said. "Even after the budget, worries of a US slowdown will continue to haunt the bulls."

- The writer is a journalist based in India.