Flying Away! Six Reasons the Sensex Has Been on a Crazy High

The Budget may have disappointed you with the EPF tax, but stocks have found enough reasons to cheer.

(Photo: iStockphoto)

The Budget may have been ‘good’ or ‘bad’ depending on who you ask but the stock market has found enough reasons to cheer and is flying away. The Bombay Stock Exchange benchmark index or Sensex rallied 1,240 points, or over 5 percent, touching a 7-year high on Wednesday. The Nifty surged nearly 400 points, or 5.46 percent, to post its biggest two-day gain since June 2009. Here are the six reasons we think the bulls are driving the bears away on Dalal Street.

Budget Fuelled Rate Cut Hopes

Finance Minister Arun Jaitley in his Budget 2016 focussed on fiscal prudence by sticking to the fiscal deficit target of 3.9 percent of GDP for this year and pegging it at 3.5 percent for the next. This boosted investor hopes that the central bank can no longer postpone an interest rate reduction.

The ball is now in RBI’s court, and I almost expect a 50 bps rate cut in the next 48 hours. While there has been a lower-than-expected allocation for the recapitalisation of public sector banks, I feel it’s positive to push the banks to be proactive in cleaning their balance sheet.

Rashesh Shah, Chairman, Edelweiss to ET

With fiscal consolidation firmly in place, I expect RBI to oblige with a repo rate cut of 75 bps by end 2016.

Rana Kapoor, MD & CEO, YES Bank to ET

Chart of the benchmark Sensex in the last one month. (Courtesy: BSE)

Markets Had Already Seen Deep Cuts

Sensex, the benchmark index of the Bombay Stock Exchange, declined by over 3,000 points while the 50-stock Nifty saw a cut of almost 1,000 points ahead of the Union Budget 2016 and so experts say a bounceback was on the cards.

The bank index on the BSE rallied nearly 1,000 pts in a single day in Wednesday’s session. (Courtesy: BSE)

RBI Came to the Rescue, Eased Capital Regulations

Banking stocks surged on Wednesday after the Reserve Bank of India (RBI) eased Tier I capital regulations at a time when banks are grappling with bad loans and increased the need for provisions, which in turn are weighing on capital levels.

The new regulations will help shore up the capital of public sector banks by up to Rs 35,000 crore. That is in addition to the Rs 25,000 crore in capital infusion provided Arun Jaitley in his budget for 2016-17, which most analysts saw as inadequate.

(Courtesy: NSE)

Budget Didn’t Tinker With Long-term Capital Gains Tax

The bogey of an increased holding period for equities to qualify as long-term assets has been banished, for at least a year.

Ahead of the Union Budget, markets were worried that the finance minister may raise the holding period for equities to qualify as a long-term capital asset from one year to up to three years.

If the change was made, it would have meany that long-term capital gains (LTCG) tax will be applicable to stock market holdings even after a year and the gains will be exempt only when equities are held for at least three years.

The move would have hit traders and institutional investors more than it does retail investors, although it have deterred retail investors from investing in equities, an asset class they already shun.

New Deadline for GST Rollout

Jaitley reiterated in his Budget speech that the government would reach out to the Congress in the current session of Parliament to resolve the deadlock over the GST Bill.

While the April 2016 deadline now lies redundant, the government on Tuesday signalled that the goods and services tax (GST) will be implemented from 1 April 2017.

Two secretaries in the finance ministry hinted that implementing this tax reform in the middle of a fiscal year may not be a good idea, according to a Livemint report.

Rally in Global Stocks & Commodities Helped India

A global rally in risk assets has been gathering steam, seen in the rebound of oil, metals and stocks across the world since mid-February. This supported sentiment in India as well.