Everyone knows the basics of finance. Spending must be in line with earnings. Aligning income and expense is important to maintain a state of credit-worthiness. The past three decades have seen Nations moving away from this basic principle.
India has an old habit of not running her finances prudently. Inevitably, bad financial management of a country’s finances leads to a crisis. The world will see through the risks and this will reflect on the currency. The last crisis India faced in 1991 forced us to pledge gold to buy oil. We devalued our currency, reforms were forced upon us.
Yet, we have repeatedly moved away from the path of prudent financial management and run ourselves into trouble. We are well into another crisis now and the rupee showed it in December 2011. We are now battling to correct the course. This budget may be our last chance to change course. The options are too limited to be passed over.
Liquidity took the markets up in 2012. FII’s poured money into Indian equities and the indices briskly trotted their way up from the lows. The FII inflows continue to be brisk and show little signs of abatement. But, the lack of domestic liquidity seems to be getting more acute and could trigger heavy domestic selling in the coming week.
The last installment of advance taxes are coming up and corporates may be forced to sell their investments if they are not finding cheap money through the debt route. The budget is to be presented just after the tax deadline and edgy investors may only add to the selling pressure. The central bank is likely to ease the liquidity pressure only after the budget and this should keep the markets well within a range.
A decisive direction is likely to emerge once the budget is presented and RBI policy announcements will give clarity. Disinvestment plans of the government may slow down given the poor show of ONGC ‘s auction. Overall, the coming week should see a pause while domestic investors wait for the big events. The FII’s continue to hold the key.