Arun Jaitley's fourth Union Budget has bettered expectations with its focus on low-cost housing and the rural economy, especially the agriculture sector, said Madhu Kela, Chief Investment Strategist at Reliance Capital.
He expects interest rates to head lower going forward, with the government continuing to adhere to fiscal consolidation. The lack of any negatives in the form of a tax on capital gains enthused the equity market, he said, adding that the budget alone can't propel the markets higher, especially given the current global backdrop.
The budget, however, could have done more for bank recapitalisation and incentivising job creation, he added.
Here are edited excerpts from the interview.
What did you make of what the finance minister has presented in Budget 2017?
I would say better than expectation. The first qualification is that even though there are a lot of firsts in this budget, by and large there are no negatives. As they say, often no negatives is a big positive. So this is a positive budget I would say. The finance minister has tried to address all the sections of society and their problems. If you look at the real estate sector, and the affordable housing sector within that, then the rural sector which has been struggling for the last two years, the farm sector, the infrastructure sector...there are lots of incentives which have been given. At the same time, he has kept the fiscal deficit at 3.2 percent which augurs well for lower interest rate during this year. The big fear regarding capital gains tax has been addressed. By and large, the budget has been positive.
What does this mean for financial markets? Do you expect this budget to take the markets higher?
Yes I think so. But the budget on its own cannot take the markets higher and it has never taken the markets higher or lower. Now we are back to other nitty-gritties such as what happens to global markets, what does Mr. Trump do, what is the geopolitical situation. There's so much being talked about and we don't know how of that is going to materialise. We have to watch global events very carefully. And we have to watch how much money comes from local investors because equity isn't the only option. These are the two things which will decide the direction of the market, apart from earnings growth.
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Are you confident that we will see capital flows both from domestic and foreign investors?
Right now since the dollar strength's has reduced. Earlier, when the dollar had strengthened we saw a lot of outflows from emerging markets. Then the dollar weakened somewhat and some inflows returned back into emerging markets. In India also the selling by foreign investors has stopped; in the last few days we have seen positive flows.
Domestic money continues to come. There is Rs 4,000 crore of stable domestic money through SIPs in mutual funds now. That I'm sure will continue. And over and above, we continue to get some net flows. So flows are positive. I think the budget, which could have been a negative event, had some tax on capital gains been introduced, that hump is over and we are now in for good times.
Which sector do you think has benefited the most. Have you had the opportunity to review any of those sectoral views after this budget?
Some sectors which are related to the economy – barring IT, pharma and FMCG – a lot of these sectors are significantly under-owned. For instance, in the housing finance sector if there are companies that focus on constructing affordable housing, they will be big beneficiaries of this budget. Similarly rural India will be a big beneficiary. We still have a lot of work to do on the earning models and implications of these proposals but I would say that economy-related stocks, including financials, will be big beneficiaries of the budget.
We have seen bonds gain after the government announced the borrowing programme which is lower than expectations. What is your views on that? Will the money flowing into the debt side be higher?
If you see the fineprint, they have also tried to make adjustments such that savings move to financial assets. There has been a decent amount of money being made in fixed income and this year too looks positive. With the demonetisation, there is a lot of cash in the banking system and that should augur well for reduction in interest rates. Fixed income, logically, should do well this year.
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Was there anything in the budget that you expected but did not happen?
The only thing is bank recapitalisation, I would have expected that it would have been more than Rs 10,000 crore. That is one issue which has not been addressed. And I would have expected on the job creation front, even though the government has done something through the Mudra funds, I would have expected some more incentives for job creation which is actually a problem. But we will have to see the fineprint to see if those will be addressed.
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