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The stock market gained after a wobbly start and bond yields spiked on Friday as investors weighed the impact of the fiscal stimulus proposed in the interim budget on the economy and interest rates.
The Nifty came close to the 11,000-mark on Friday for the first time in four months on hopes the government’s moves would boost rural economy but concerns in the bond market over the effect of the government’s social schemes and income tax relief on fiscal deficit put a lid on the gains.
Stock indices ended up 0.6 per cent after rising as much as 1.4 per cent soon after the budget announcement mid-way through the session.
The Nifty rose to a high of 10,983.45 in the session but pared gains to end at 10,893.65, to end up 62.70 points.
The Sensex ended up 212.74 points at 36,469.43.
The yield on government’s 10-year benchmark closed at 7.38 per cent Friday versus 7.28 per cent a day earlier, up 14 basis points from the day’s low.
“The relief to the rural population and the middle class in the form of a stimulus is expected to drive low-ticket consumption.
That has gone down well with the market, but there are slight worries about their impact on fiscal deficit,” said Mahesh Patil co-CIO, Aditya Birla Sun Life Mutual Fund.
“As long as the macroeconomic conditions are stable, such steps will not be taken negatively.”
The government has set a fiscal deficit target of 3.4 per cent for the financial year 2019-20, revising it from the budgeted fiscal deficit for FY19 of 3.3 per cent.
The volatility gauge — India VIX — fell 9 per cent to 15.5.
Foreign portfolio investors bought Rs 1,300 crore worth of shares, according to provisional data after pumping over Rs 3,000 crore into Indian stocks on Thursday.
Domestic institutional investors were net sellers of Rs 5 crore worth of shares.
The reaction to the interim budget proposals in the bond market was stronger as traders sold holdings fearing higher supply of papers due to additional market borrowings by the government to fund these schemes.
“Higher than expected gross borrowing marred market sentiment,” said Naveen Singh, head of fixed income trading at ICICI Securities PD.
“The government will also borrow more from the market in the current financial year to finance the fiscal deficit.
Overall it adds to the higher supply sending yields higher.”
Nomura expects the Reserve Bank of India to view the budget as inflationary and flags this as an upside risk to inflation.
“The expansionary fiscal impulse, at the margin, negates the need for the RBI to consider monetary easing at this stage,” said Nomura’s economists in a client note.
The RBI’s rate-setting meeting is scheduled for February 7.
Market participants said technical hurdles also led to the indices coming off highs.
The market had gained nearly 2 per cent in the previous session on the back of dovish commentary on rates by the US Federal Reserve.
Majority of the top gainers on the Sensex were stocks that will benefit from the boost to consumption, with Hero MotoCorp surging 7 per cent.
“They have done a lot for the middle-income group and the farm sector, taking into consideration that election is two months away.
These sops could boost consumption, which is 60 per cent of the economy,” said Vinit Sambre, head of equities at DSP Mutual Fund.
“The sentiment may continue to weigh on the market unless RBI delivers something unexpected in its bi-monthly monetary policy meeting,” said Vijay Sharma, head of fixed-income at PNB Gilts.
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