Budget 2022 | Equities have their day in the sun as dark clouds circle

The Budget day action rarely proves to be this good. The Nifty 50 index jumped 1.4 percent even after giving up all of its gains a little after Finance Minister Nirmala Sitharaman ended her shortest speech ever.

The gains were the third-best for a Budget day in the past 10 years as investors rejoiced in the fact that the government will take up the mantle of boosting capital formation in the economy for another year given that private sector CAPEX still remains comatose.

Budget 2022 LIVE Updates

Outlay on capital expenditure jumped over 35 percent to Rs 7.5 lakh crore and compared to the revised estimate for the current financial year it rose by 24.5 percent. These are numbers that exceeded even the optimists on the Street given that consensus hoped for a 20 percent growth in public CAPEX.

The reaction of the market, however, may be myopic.

For starters, the push for capital expenditure is perhaps not as intense as it appeared at face value. Excluding the retirement of Air India’s debt that has been included in the revised estimate of CAPEX for FY22, the capital formation outlay of the government in 2022-23 is less than what was estimated.

“Terming payment of Air India liabilities worth Rs50bn as capital expenditure does not bode well for transparency,” said Amit Kumar Gupta, portfolio advisor for Adroit Financial Services.

Investors wearing pink-tinted glasses may see the higher CAPEX spending even at the cost of a slowdown in government’s fiscal consolidation as “pro-growth” but brokerage firm CLSA India was quick to point out the collateral damage.

Budget 2022 | Government strikes a fine balance between growth and fiscal consolidation

“Another flipside of this singular investment focus is the consumption side was left wanting,” CLSA India said in a post-Budget note.

Prior to the Budget, economists and brokerages had pointed towards the need to boost consumption especially given the fiscal space provided by the higher tax buoyancy yet much of that room was sacrificed to push through the sale of Air India by settling Rs 61,000 crore of the airline’s debt.

The lack of support for consumption raises questions over the sustainability of topline growth for companies once the pent-up demand fizzles out at a time when their margins are already under pressure from lack of ability to pass on higher costs.

Besides the threat to earnings from a delayed recovery in consumer demand, valuations of Indian stocks will remain under threat in the foreseeable future from rising bond yields at home and abroad.

Indian equities have seen some compression in their valuations in the past three months thanks to a global shift towards higher interest rates given the faster-than-expected recovery in the global economy from the dark days of 2020.

CLSA India now fears that the higher fiscal deficit target for 2021-22 and 2022-23 could result in tighter financial conditions in the economy going ahead as large net market borrowings push up bond yields higher at a time when RBI’s support may not be forthcoming.

CLSA India expects RBI to raise interest rates by 100 basis points in 2022-23 and 50 bps in 2023-24. Anubhuti Sahay of Standard Chartered expects the central bank to move as soon as February with a reverse repo rate hike and later with interest rate hikes.

Add to these worries, the risk of the US Federal Reserve raising interest rates so fast to catch up with multi-decade high inflation that the US Treasury bond market is even whispering of a possible recession by 2024.

“Higher yields and lack of demand focus may further reduce the attractiveness of equities against bonds,” CLSA India said. Traders appear to be betting on the same as options expiring in December of this year still point to 18,000 points being a ceiling for the Nifty 50, implying gains of merely 425 points from today’s close.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.