Indian market completely lacks direction at the moment. Its dramatic fall off the day's high is a sufficient proof of it. Verdict on the government's renewed borrowing plan has been rather mixed from the investor community.
Intraday, headline indices lost all the gains due to the intense selling pressure in the second half. Sensex closed 0.26% down at 31,561.22 while Nifty lost 0.13% to close at 9,239.20. HeroMoto (up 6.42%), Tata Motors (up 6.23%) and Maruti Suzuki (up 6.09%) were the major gainers of the day while ICICI Bank (down 5.20%), BPCL (down 3.06%) and Dr Reddy's (down 3.06%) were the major laggards of the day.
In the meanwhile, global brokerage house Morgan Stanley has shortlisted five stocks- Tata Consumer, Indraprastha Gas, Torrent Pharma, Biocon and Muthoot Finance- for possible inclusion to its MSCI index.
Bharat Forge, Tata Power and M&M financial services are likely to be excluded from the MSCI India index while it could increase the weight of HDFC Life Insurance in its India index.
New borrowing plan: Not sufficient at first glance!
India has started preparing for life beyond lockdown as the economy opens up. With redundant tax collection the task of economic revival is daunting one.
In its response, the government has announced to increase its market borrowing program for FY21 by Rs 4.2 lakh crore. It is 54% more than the budgeted estimate. The move is expected to raise India's fiscal deficit to 5.8% of the GDP in FY21 as against 3.5% budgetary provision. It is, however, seen as a necessary evil by the corporates and got surprise backing of the major opposition party of the country.
A back of the envelope calculation suggests that even this increased borrowing may not be sufficient. It will merely fill the gap of lower tax collection and revenue deficit. The general consensus so far suggests that the government will have to borrow more to deliver the promised fiscal package.
Following the fundraising plan, The yield on the benchmark 10-year bond surged 20 basis points to close at 6.17%. The market expects RBI to support the borrowing plan immediately with its open market operations. In absence of RBI's action, bond yields are expected to spike above 7% in the near term.
For a common man, rising bond yields could be inflationary in nature as loan rates are unlikely to fall. In fact, loan rates could only shoot up.
Rising bond yields are negative even for equity markets. As bond yields go up, investors would prefer investing in higher-yield bonds and investing in equities becomes a less attractive proposition.
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