Indian stock market all set for an election rally. Know why

Against the backdrop of a provisional budget lacking growth-oriented objectives, the rather conservative 11% augmentation in capital expenditure, in contrast to the revised target of 28%, may not engender widespread optimism. However, it has set off the market for the next rally in anticipation of the final show on the July budget. This is attributed to the authoritative tone and narrative of the statements, which convey a firm grip on economic matters and a commitment to implementing forward-looking measures. Notably, the market exhibits growing confidence in the current government’s electoral prospects, fostering expectations of a heightened focus on capital expenditure in the coming years.

Some statement in the interim budget which is have a stoke to the market are:

• Drastic drop in fiscal deficit to 5.1% in FY25.
• Govt. will adopt economy policies to foster and sustain the growth.
• Next 5yrs will have unprecedented development.
• Four priorities are Garib, Mahilayen, Yuva, and Annadata.
• A Viksit Bharat by 2047.

This scenario is fuelling the continuation of the pre-election rally. Though there is a possibility of high volatility as FIIs are in a sell-off mode, FII outflows in Asia are increasing, and selling in India is at highest level. Well, FIIs had sold heavily in CY23, with China being the most impacted due to a slowing economy and financial stress like bankruptcy in real estate. During that period, India outperformed due to a lower level of selling compared to the rest of Asia and strong inflows from retail & MFs.

This time, a lower than forecast Q3 result, like for sectors like banks and IT, is leading to more than average selling volumes from FIIs. India has been trading at a premium valuation for a prolonged time. Hence, a slowdown in earnings growth is leading to a moderation in valuation. Estimates are settling from high teens in FY21-24 to mid-double digits in FY25-26. When FIIs are on a risk-off strategy, stocks will high FIIs holding will be vulnerable for price performance due to selling pressure.

The interim budget has promptly delivered a positive outcome by bringing about a reduction in bond yields. Govt 10yr yield has reduced by 10bps to 7.05% from 7.15% on 31st Jan, due to larger than expected reduction in fiscal target to 4.5% in FY26 from 5.8% in FY24. This is expected to reduce the market interest rate, which is positive for equity valuation, corporate earnings, and capex.

On the contrary, a sharp decrease in the fiscal deficit would imply a significant reduction in government spending for FY25. However, analyses of budgetary revenue and expenditure statements reveal that the government’s ambitious target relies on a substantial improvement in efficiency, with a mere 3% YoY increase in non-capital expenditure and a 14% surge in gross tax revenue. The plan is to increase productive capex expenditure by 17% for FY25E and 28% in FY24, based on revised data, and reduce non-productive revenue expenditure. If executed an indeed performance. At the same time, borrowing is forecast to bought under control by maintaining the same level at FY23 and FY24 and dropping it by -3% in FY25.

Although the interim budget appeared somewhat conservative, it comes with a promise to introduce unprecedented growth measures in the final budget. This commitment entails adopting relevant economic policies for the industry and emphasizing four key priorities: Garib (the poor), Mahilayen (women), Yuva (youth), and Annadata (farmers).

The author, Vinod Nair is head of research at Geojit Financial Services.

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