Firm but flexible

The concern of the market on some budget proposals can be addressed by learning from the phase-out of PNs

The stock market is supposed to capture local and overseas political shocks and surprises, over and under currents of domestic and global economies, stress and buoyancy in corporate earnings and accidents and incidents in making policies and regulations. Many times equities exhibit irrational exuberance that defies ground reality and underwhelming sluggishness despite optimistic indicators. That there are two views on the direction of the market makes trading exciting and rewarding, uncertain and risky. Hate it or love it but it is hard to ignore it. Three days after the presentation of the budget, when the market mood had turned distinctly dark, Union Finance Minister Nirmala Sitharaman told corporate bigwigs that she does not let the market affect her. In 1992, then Union Finance Minister Manmohan Singh had famously proclaimed that he does not lose sleep over the market. Shortly thereafter the surging stocks tumbled on revelation of manipulators siphoning off funds from banks to rig prices. In contrast, US President Donald Trump makes no secret of his desire for a booming market. Besides exploring the possibility of firing the chair, his own appointee, he has criticised the Federal Reserve for raising the cost of money too soon too often. The tendency is for government to point to the market’s strength as a vindication of the management of the economy but shift the blame to the central bank when the tide is not favourable.  P Chidambaram was not on talking terms with Y V Reddy and shared strained ties with D Subbarao, the two governors he dealt with during his stints as finance minister. 

Paring of lending rates usually points to a pessimistic view on the economy. It is an acknowledgement that the purse strings have to be loosened for consumers to borrow and spend. Yet equities spurt on any hint of a softer rate regime. US indices reached historic highs towards end July in anticipation of the Fed undertaking its first rate cut since the financial meltdown of September 2008 on projections of global trade war tensions shaving off growth after maintaining since late last year that there was no reason to intervene throughout 2019. No sooner did it act, stocks tumbled. More than the action, the disappointment was in the change in the outlook  from accommodative, suggesting an openness to react to any distress signal, to neutral, scotching any room for more snipping in the rest of the year. So here was a situation of the market sulking because the economy is showing resilience. In India, something similar seemed to have happened. The Union Budget for 2019-20 reduced the fiscal deficit target to 3.3% of the GDP, down from 3.4% projected in the interim budget presented in February 2019. Such a scenario should have been ideally very satisfying to investors. There was reiteration of partial or complete divestment from select PSUs and aligning of the FPI limit in stocks to the FDI ceiling of the sector.  Pumping Rs 70000 crore into banks to enable them to start lending, spending Rs 100 lakh crore on infrastructure over the next five years and reducing the corporate tax from peak 30% to 25% on companies with up to Rs 400 crore turnover, thereby covering more than 99% of the corporate sector, have the characteristics of a fiscal stimulus. The market chose to ignore them and obsessed over the higher surcharge on the super rich. Other irritants were the prospect of supply of more paper as companies move to maintain a minimum 35% public float from 25% and 20% tax on buybacks to bring them on par with dividends.  

The question that arises is if monetary or fiscal policies drive the market. Interest rates have been trimmed four times in the current calendar year to encourage private investment and consumption without much success. How much longer the cycle has to continue for risk-taking to make a comeback is uncertain. The goal post keeps shifting. From NBFCs’ liquidity crunch to regulatory overhang on the auto sector, the current crisis of confidence is being attributed to the higher effective tax on foreign investors structured as trusts. Trading had to be halted when Sebi in October 2007 curbed investment by foreign investors through participatory notes. Eventually, a window of 18 months was provided to wind up exposure through PNs, then comprising half of all foreign investment in the Indian market. The share came down to 16% in three years and is now 4% as reporting was made more stringent from 2012 and taking of naked positions in F&O through these instruments banned in September 2017. To resolve the current impasse, the finance minister needs to be firm but flexible to accommodate the concerns without losing sight of meeting the revenue targets.

-Mohan Sule