India’s record-setting stock markets could face resistance as New Delhi scrambles to sell government stakes in companies to fix a yawning gap in its budget before the financial year ends in March, a move that will suck cash away from the secondary market and cool red-hot stock indices’ march to historical milestones.

Both the top-30 Sensex and broader 50-share Nifty hit all-time highs this week, and appeared poised to crack 30,000 and 9,000, respectively, when a government sale of 10 per cent holding in Coal India Ltd, the world’s largest coal miner, thwarted the march. The one-day sale on Friday raised about $3.6 billion (Dh13.2 billion) in the nation’s biggest-ever share offering, and could weigh on markets, at least temporarily.

The government had budgeted nearly $10 billion from divestments in 2014-15, but had only managed just around $290 million until the latest sale. Now that the much delayed Coal India sale is out of the way, New Delhi could press ahead with more offerings, including probably in energy explorer Oil and Natural Gas Corp and oil refiner Indian Oil Corp.

The proceeds from these sales and about $3 billion expected by end-March from an auction of airwaves to telecom companies should come handy for New Delhi to honour its commitment to keep the fiscal deficit within target of 4.1 per cent of GDP. The shortfall had reached 99 per cent of the target in the first eight months of the financial year.

Massive savings in subsidies, thanks to the oil price tumble, and higher excise collections from sale of petrol and diesel should also help the government to plug the hole.

Eyes on RBI

A key event in the coming week will be the Reserve Bank of India’s monetary policy meeting on Tuesday, with economists saying it would be a “close one” to call after the central bank unexpectedly cut the main policy rate by 25 basis points in mid-January. Any rate reduction would be good fodder for the bulls.

“We still lean towards a no-move next week,” noted Singapore-based economist Radhika Rao at DBS Bank Ltd. “(However), there is also a risk that the RBI decides to front-load rate cuts to the February meeting, given the appropriate market conditions (lower inflation and stability) and as more regional central banks loosen reins.”

“Moreover, domestic banks have been hesitant to lower lending rates despite January’s cut, which might prompt the RBI to bunch up cuts to facilitate the transmission process. Note also that the rupee has been an outperformer compared with the other Asian and emerging market peers, providing the headroom for further easing.”

Morgan Stanley economists Chetan Ahya and Upasana Chachra, who expect another 125 basis points cut in interest rates in 2015, also think the central bank would likely front-load the cuts to manage real GDP growth and the real rates environment.

“We expect a more than even chance of another 25 basis points cut at the February 3 policy meeting. However, if the RBI keeps policy rates unchanged then, we believe it is likely to move after the budget is announced,” they wrote in a note to their clients.

“We also expect the RBI to potentially make a 50 basis points rate cut in one of the monetary policy meetings after February, to front-load the easing cycle.”

Foreign demand

Cash flow data show foreign appetite for Indian assets and debt are on the rise. So far in January, overseas investors have poured nearly $3 billion into debt securities, much of this after the rate cut, and around $1.5 billion into stocks — excluding the bids for the Coal India offering.

“In a matter of six quarters India has gone from being the poster-child of emerging market vulnerability to the darling of the emerging market universe,” JP Morgan said. “The fiscal deficit has been reduced by 2 percentage point of GDP, the current account deficit has collapsed, and the disinflation has been far more rapid than was expected.”

The Sensex, which is close tracked by foreign fund managers, struck a record high of 29,844.16 before coming off to close at 29,182.95, still notching a 6.1 per cent gain in January. The Nifty ended with a monthly rise of 6.8 per cent, the most since last May, at 8,808.90 after hitting an all-time high of 8,996.60.

“India remains the flavour,” wrote Jyotivardhan Jaipuria, Indranil Sen Gupta and Anand Kumar at DSP Merrill Lynch after meeting more than 70 global investors across the United Kingdom, Europe and the Middle East. “India remains a consensus overweight but investors are not looking to trim their positions. Most investors were looking at dips to buy India.”

Transformation to a higher growth path under Prime Minister Narendra Modi, the start of a rate-cut cycle, subdued oil prices and lack of alternatives in other emerging markets were the factors cited by the investors, they said.

“Clients too believe that rate sensitives will do well over the next few years though near term there is some concern over valuations,” the analysts wrote.

The brokerage’s top buys are: Maruti Suzuki, the country’s top car maker with a more than 50 per cent of the market, State Bank of India, ICICI Bank, state-run oil refiner Bharat Petroleum Corp and pharmaceutical firm Lupin Ltd.

Consumer confidence, especially in big cities, is picking up on the back of easing inflation, according to a survey by brokerage Religare. Nearly 70 per cent of respondents were more upbeat about economic and their own growth prospects, up from 33 per cent in a year-ago survey.

“We upgrade our stance on India’s consumer sector from negative to positive,” the securities firm said, it preferred stocks included ITC Ltd, Hindustan Unilever, Asian Paints, Dabur, Colgate, Britannia, Jubilant and Bata.

As for debt, foreign holdings in government securities stand at the limit of $30 billion and the market expects the RBI to raise the ceiling by $5 billion after the budget due on February 28.

The writer is a journalist based in India.