Thursday, March 15, 2012

Will the budget be a game changer?

This was supposed to be an eventful week that was going to provide a clear direction for the economy and the stock market. Instead, the events that have unfolded so far have left the future of the economy and the stock market in a state of limbo. Will tomorrow’s budget announcement turn out to be a game changer?

Last week’s surprise announcement of a higher-then-expected 75 bps cut in the CRR rate by the RBI turned today’s policy announcement into a non-event. There were some hopes raised by a few experts that the RBI may cut the repo rate by 25 bps to bolster growth. That was a bit unrealistic. The rate cut may happen in Apr ‘12, provided other factors remain unchanged.

What are these other factors? Industrial production is one. The 8.5% growth in the manufacturing IIP was much higher than expectations – even though it was bolstered by some questionable data. Growth at a time of high interest rates and a liquidity crunch surely didn’t call for a interest rate cut.

The fact that WPI inflation rose in Feb ‘12 further forced the hand of the RBI governor. He had made it quite clear that curtailing inflation, even at the cost of sacrificing growth in the near term, is his prime concern. The government’s proclivity for wasteful expenditure and populist measures is stoking the fire of inflation. High cost of oil – which has not been fully passed on to consumers – is another cause of inflation that has been artificially suppressed.

The drama surrounding the announcement of the Rail budget made headlines. Except for the political party to which the rail minister belongs and the leftists who oppose everything, the rail budget was hailed as a progressive and practical one. But if the first hike in fares in more than 8 years is rolled back due to coalition politics imperatives, then the proposed spending on safety features and infrastructure projects will go to the back burner.

In front of this backdrop, we have a geriatric finance minister who is a shrewd politician but hardly a bold and visionary risk taker. What likely rabbits can he pull out of his hat to dramatically change the current political and financial mess in which the government finds itself? A few token measures may perk up the stock market in the short term, but reality will catch up soon enough.

If the budget proposals turn out to be a damp squib – and the odds of that happening are high – the FIIs may decide to reduce their buying and stall the young bull market. In a worst case scenario, they may decide to book profits. There should be no rush to buy any intra-day dip. The stock market won’t go away. It may be prudent to digest the budget proposals over the weekend and decide on the next course of action.

That was the long answer. The short answer is: Highly unlikely.

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