The month of February was disappointing for the Indian equity market with the key benchmark equity indices CNX Nifty and S&P BSE Sensex ending lower 5.66% and 5.19%, respectively. The fall was a result of discouraging global and domestic cues. On the global front, minutes of US Federal Reserve meeting, which showed that the central bank may slow or stop its bond buying program; political gridlock in Italy, which renewed fears about instability in the euro zone; and discouraging Chinese manufacturing data led to decline in the market. Back home, the biggest disappointment was the Union Budget tabled on the last working day of the month, which lacked significant proposals to boost investor confidence. Lack of clarity over tax residency certificate required to get benefits under the Double Taxation Avoidance Agreement (DTAA) also impacted the markets. The budget was an exercise of fiscal consolidation sans major policy announcements. It focused on capping the fiscal deficit at 4.8% in FY14 compared to 5.2% in FY13. The budget however had few positives for the equity market, such as: a) reduction in Securities Transaction Tax (STT), b) extension of Rajiv Gandhi Equity Savings Scheme (RGESS), and c) a few foreign institutional investor-friendly proposals such as deferment of implementation of modified General Anti Avoidance Rule (GAAR) to April 2016 and allowing FIIs to participate in the exchange-traded currency derivative segment. The proposed freight hike announced in the Railway Budget that would add to the costs of manufacturing companies also dragged down markets. The negative growth of domestic industrial production of 0.6% in December, GDP growth to a 15-quarter low of 4.5% in October-December from 5.3% a quarter ago and dismal October-December earnings by few index heavyweights, including SBI and Ranbaxy also dented the sentiments.
Some losses were, however, capped after Economic Survey for 2012-13 projected 6.1% to 6.7% growth in the next financial year and made a strong call for reducing the subsidy level. Markets saw some gains as soon after the Union Budget, the Ministry of Finance clarified that income tax officials will not question Tax Residency Certificate (TRC) holders. Markets were supported by comments of US Federal Reserve Chairman Ben Bernanke in defence of the Fed’s bond buying program and strong German economic sentiment data. Sporadic bargain buying also limited the losses. Meanwhile, continuing strong buying by foreign institutional investors (FIIs) supported the market. FIIs were net buyers of equities worth Rs 22,122 cr in February 2013, closely matching net purchases of Rs 22,230 cr in January 2013.
S&P BSE sectoral indices ended lower, except S&P BSE IT, in February. The S&P BSE Metal Index emerged as the topmost loser among all the indices analysed, down 14.50% due to weak Q3FY13 earnings of index heavyweights. The S&P BSE Capital Goods Index was down 12.50% due to profit booking in index heavyweights. The S&P BSE Bankex fell 9.44% due to lower-than-expected results of SBI and concerns over high target set by the government in the budget for farmer loans, which have low yields and high NPAs. The S&P BSE IT Index was the only gainer, up 5.64%, as IT shares got support from better-than-expected earnings from Cognizant Technology Solutions.
We expect the market to be driven by policy announcements related to subsidies, clarity on spending cuts in the US and the FII inflows.