It is budget time again. Over the years, budgets have become boring. There is nothing to look forward to. Reform expectations run low and subsidy fears loom large. Political populism has always prevailed over sound economics under successive UPA regimes.
Even parliament has started passing budgets with little or no debate. With electoral debacles staring at the ruling alliance, the hopes of a reform oriented budget seem to be receding very fast. The street expectation is that this government will not have the political will to take tough economic decisions.
Ironically, it is here that the stock markets have a silver lining. When expectations are minimal, meeting them is a lesser challenge. In fact, the stock markets often break into euphoria when they get more than they expected. And, the finance minister is actually faced with an interesting opportunity to positively surprise. We need to wait till the next weekend to know if he can pull it off. But, there is no reason to be overtly pessimistic.
Liquidity driven rallies do hit their air pockets. All they need is a slowing down in fund flows. The last time we saw one was in January 2011 when FII’s reversed direction and sold. The rally of 2012 has not seen slowing FII fund flows yet and that explains the buoyancy in the indices. How FII’s view this budget will decide the long term trend for the Indian markets and set the market direction for the year.
Predicting investment patterns of FII’s can be treacherous to the most seasoned of investment strategists. For how long the FII’s will keep pumping money one-way into a market depends on several factors. To name a few – the relative attractiveness of one market over another, the scalability of a country as a favoured investment destination, their readiness to change investment weightages allocated to a country are factors which dramatically impact emerging markets like India.
There is little doubt that the FII’s will significantly impact investment returns from the Indian equity market this year. The budget is a time when they make their definitive assessments and that should set the tone for further fund flows for the year. For the moment, the FII’s are still buying.