The big question in everyone's minds is whether the correction has ended, and are we seeing a new leg up in the markets, or whether this is just a dead cat bounce.
My feeling is that this is a real rally, for the following reasons:
- The global situation looks a lot better now after Hosni Mubarak relinquished the Presidency of Egypt. While there was no direct connection between Indian markets and the revolution in Egypt, it is clear that there were quite a few uncertainties - like what would happen to oil supply if the Suez Canal was affected etc.
- We are just 2 weeks away from the budget. Several times, everyone has had very high expectations of the budget, and invariably has been dissapointed on budget day. This time around things will be different. For one, the Fiscal situation of the government is extremely good. Till December, the government was going along at just 2.3% fiscal deficit, vs the targeted 5.5%. Most of this is due to one-off events like 3G auctions, BWA auctions, Coal India IPO, etc. However, there are still several things on the horizon which will help the fiscal situation. TRAI recommendations on 2G spectrum pricing will potentially earn almost as much money for the government as the 3G auctions - simply because almost a dozen operators are impacted. With recent Supreme Court pressure, there is high likelihood of something happening on the Black Money front - possibly an Amnesty scheme. This time around, the Amnesty scheme will be a lot more effective, because the government has information on several offenders. Just the fear that the government might have information about you is a powerful motivator to take advantage of these amnesty schemes. And the last few months have made it amply clear that even if you are extremely rich and/or powerful, you can still get into trouble in the new India. There is also a good chance that the Devas deal with Antrix will get scrapped, and any new deal is likely to happen at much higher prices, giving ISRO (effectively the government) several billion dollars in revenue. On top of this, we are likely to have a continuing disinvestment programme. On subsidy side, at least in Petroleum, the government now has an active mechanism in place to pass on price increases to the end users - so crude oil will hurt the fiscal situation a lot less than it has in the past.
- Very soon, the inflation rate will be under control, as the high base effect from last year kicks in. With Interest rates at a cyclical high, there is ample room for RBI to lower rates and ensure sustained growth.
- If, as expected, the fiscal situation of the government keeps improving over next couple of years, it will give the government a lot of scope to implement GST. Just this one move will help industry, consumers and the government, with streamlined procedures and an efficient indirect taxes regime.
My feeling is that this is a real rally, for the following reasons:
- The global situation looks a lot better now after Hosni Mubarak relinquished the Presidency of Egypt. While there was no direct connection between Indian markets and the revolution in Egypt, it is clear that there were quite a few uncertainties - like what would happen to oil supply if the Suez Canal was affected etc.
- We are just 2 weeks away from the budget. Several times, everyone has had very high expectations of the budget, and invariably has been dissapointed on budget day. This time around things will be different. For one, the Fiscal situation of the government is extremely good. Till December, the government was going along at just 2.3% fiscal deficit, vs the targeted 5.5%. Most of this is due to one-off events like 3G auctions, BWA auctions, Coal India IPO, etc. However, there are still several things on the horizon which will help the fiscal situation. TRAI recommendations on 2G spectrum pricing will potentially earn almost as much money for the government as the 3G auctions - simply because almost a dozen operators are impacted. With recent Supreme Court pressure, there is high likelihood of something happening on the Black Money front - possibly an Amnesty scheme. This time around, the Amnesty scheme will be a lot more effective, because the government has information on several offenders. Just the fear that the government might have information about you is a powerful motivator to take advantage of these amnesty schemes. And the last few months have made it amply clear that even if you are extremely rich and/or powerful, you can still get into trouble in the new India. There is also a good chance that the Devas deal with Antrix will get scrapped, and any new deal is likely to happen at much higher prices, giving ISRO (effectively the government) several billion dollars in revenue. On top of this, we are likely to have a continuing disinvestment programme. On subsidy side, at least in Petroleum, the government now has an active mechanism in place to pass on price increases to the end users - so crude oil will hurt the fiscal situation a lot less than it has in the past.
- Very soon, the inflation rate will be under control, as the high base effect from last year kicks in. With Interest rates at a cyclical high, there is ample room for RBI to lower rates and ensure sustained growth.
- If, as expected, the fiscal situation of the government keeps improving over next couple of years, it will give the government a lot of scope to implement GST. Just this one move will help industry, consumers and the government, with streamlined procedures and an efficient indirect taxes regime.
