India Budget 2016: Making Strides in the Right Direction

Indian Stocks Post Largest Single-Day Rally Since 2009

TORONTO, March 1, 2016 /CNW/ - Indian stocks posted their largest single-day point gain, in local currency terms, over the past seven years, on the back of news that the government will stay the course of fiscal consolidation and take the necessary steps to invest in development across several sectors, as detailed in the 2016-17 Union Budget. 

The BSE Sensex Index surged 777 points, in local currency terms, to close at a level of 23,779, while the NSE Nifty 50 Index added 235 points, also in local terms, to settle at 7,222.¹ Shortly after digesting the noteworthy points from the budget, market participants were seemingly optimistic that the Indian central bank will instate further rate cuts in the near future.

Key takeaways from the 2016-17 Union Budget include:

• Strong emphasis on fiscal discipline, targeting a lower deficit of 3.5 percent of GDP for the current fiscal year, versus 3.9 percent in fiscal year 2016²
• A government pledge to double the income of farmers by 2020, allocating 360 billion rupees (US$5.3 billion) to the agricultural sector³
• State-run banks to receive 250 billion rupees (US$3.6 billion) to help with recapitalization, part of a larger plan to revamp public sector banks⁴
• Allocation of 2.21 trillion rupees (US$32 billion) in total public spending on roads, railways and ports, an estimated 24 percent year over year increase¹
• Corporate income tax for small to medium sized businesses in fiscal year 2017 unchanged at 29 percent, although new manufacturing companies will be taxed at 25 percent⁵

The government's commitment to fiscal consolidation is a major positive for India's macro stability and has been a key reason for India's outperformance since 2013. Indian government bonds rallied on the news that a lower deficit would be targeted. A lower deficit means a lower net supply of debt, which increases the possibility of further rate cuts from the Reserve Bank of India (RBI). Indian 10-year government bonds currently yield around 7.6 percent and returned 8.1 percent in 2015 and 16.5 percent in 2014, the highest in Asia for both periods.⁶

Notably, RBI Governor, Ragharum Rajan, stated in February, 2016 that he would be keeping a watchful eye on the outcome of the budget, using it to decide if further easing was needed. "Our market view is that, the RBI will cut India's benchmark rate by as much as 50 basis points, from a current rate of 6.75 percent, over the course of the year. Lowering interest rates will have a stimulative impact on the economy," notes Christine Tan, Chief Investment Officer with Excel Investment Counsel Inc.

"Overall, this budget signals that the government continues to maintain its two main policy objectives of increasing capital investment while maintaining fiscal restraint. With the 2016-17 budget clarity, investors should focus on growth opportunities in Indian equities and the attractive yields offered by Indian fixed-income," Ms. Tan, surmised.

Bhim D. Asdhir, President and Chief Executive Officer at Excel Funds Management Inc. echoed the positive sentiment saying, "Given that markets are currently undervalued, the fiscal deficit is under control, foreign direct investments are at record high levels, and the government continues to progress with its projects, we strongly believe that the Indian market will rally this year." The rupee also edged higher as details of the budget filtered through to the market.

The 2016-17 budget is expected to benefit a wide range of industries from infrastructure and farm equipment manufacturers to developers of affordable housing and state-owned banks. "We view the union budget positively given the fact that the Finance Minister [Arun Jaitley] has not resorted to any retrograde steps, like tweaking the capital gain tax benefit and at the same time he has adhered to fiscal prudence," Atul Penkar, Fund Manger at Birla Sun Life AMC Limited, points out. Birla Sun Life AMC Limited is the sub-adviser of the Excel India Fund, the largest and longest-running mutual fund in Canada, focused solely on investing in India. Concluding, Mr. Penkar says, "The focus on rural India and infrastructure is very welcomed and will help negate the effects of two back-to-back poor monsoons and help stoke rural demand…we believe the Finance Minister has done a good job."

About Excel Funds

Founded in 1998, Excel Funds Management Inc. offers an award-winning suite of emerging market strategies, catering to a broad range of investor profiles and objectives. Leveraging a global network of over 500 portfolio managers and 200 research analysts, our team has firsthand knowledge of the markets in which they invest – providing us with a true competitive advantage over our peers.

Our investment philosophy is grounded in disciplined fundamental research and continuously seeks out new growth opportunities in the emerging markets and beyond. Our on-the-ground sub-advisers and proprietary asset allocation models contribute to the firm being recognized as "The Authority in Emerging Markets."

¹ New Delhi Television Limited, NDTV, Sensex Posts Biggest Gain in 29 Months, Nifty Settles Above 7,200.
² Morgan Stanley, India Economics and Strategy, F2017 Budget: Par for the Course, March 1, 2016.
³ Bloomberg Business, India Budget: Winners and Losers, February 29, 2016.
⁴ The Indian Express, Budget 2016: Arun Jaitley tables pro-rural budget, tax sops for small income Indians, February 29, 2016.
⁵ Birla Sun Life AMC Limited, data accessed on February 29, 2016.
⁶ Bloomberg Business, Modi Finds Missing Piece in Bond, Rupee Jigsaw: Fiscal Prudence, February 29, 2016.

SOURCE Excel Funds Management Inc.

Image with caption: "Bhim D. Asdhir, President and Chief Executive Officer, Excel Funds Management Inc. (CNW Group/Excel Funds Management Inc.)". Image available at: http://photos.newswire.ca/images/download/20160301_C2499_PHOTO_EN_632750.jpg

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