Equities : The Market Prevails…

All the indexes have moved up, benefitting mainly from the accommodative fiscal and monetary policy, which facilitated an unprecedented liquidity expansion. It is the low interest rates and the ample liquidity that have helped rebound in the economy to some extent and spurred the markets to move up. These favourable conditions also helped the overall sentiment. While we have seen huge inflows from overseas investors, there has been selling from domestic investors. The markets have clearly moved ahead of the economy, and therefore, some amount of profit booking can come in from those who accumulated positions around the time of the last fall in markets. For the economic recovery to be sustainable we need to see the major macro variables like growth, manufacturing and industrial production and consumer demand coming back to the pre-pandemic levels. It is rational to expect some corrections in the market due to certain events or due to lower than expected results, or due to similar factors. One factor that is giving strength to the markets is the better-than-expected earnings season we just had, which has further instilled in the market participants a confidence to expect much better results in the ensuing periods as economic growth gathers pace and normalcy returns to the economy.

One of the things which the market may be looking forward to is the Union Budget. The budget in terms of its content, and the message, may not be much different from the earlier budgets. If you take a closer look at the past budgets, it is clear that it is no longer a tool for a one-year financial exercise but an instrument of perspective planning. The budget, as it was in the past, may have some amount of focus on infrastructure development as it forms the basis for future growth and the release of the actual growth potential. The sectoral emphasis given in the PLI scheme may be carried forward as it is very much needed during the current economic recovery phase. One of the things which the market would be looking forward to is the way in which the fiscal reorganization and consolidation is going to be achieved, that is, the path that is envisaged to bring fiscal discipline back again.

The banking and financial services sector is a critical sector for the domestic economy, and therefore, the sector should perform well as economic growth gets accelerated. Credit growth which is aligned with pickup in economic activity is at the heart of performance of this sector. The market rallied all the way up from the bottom witnessed in March, but the banking sector lagged in performance as the bank index stayed at 22000, and only in the last few weeks it regained altitude to 30000. One of the factors that favoured the sector is that contradictory to general expectations, the NPA levels remained more or less at the same levels even after the pandemic and the general moratorium on loan repayments. While NPA levels may not come down drastically all of a sudden.

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