Budget 2013

Converting Structural problem into cyclical Problem

In the last 3 years we have seen a tight monetary policy and loose fiscal policy. In the last 3-4 months of fiscal 2012-13 we have seen that the government has tightened its belt on fiscal side by curtailing expenditure and reducing subsidies. In Budget 2013 the government is trying to move in the same direction. This will result in a very tight fiscal policy if they are able to achieve 4.80% fiscal deficit. We would like to put our thoughts on various key concerns for the economy –

1.      Inflation –

As per RBI & IMF estimate, WPI for March 2014 is targeted at 7.0% to 7.20%. We would like to go with that estimate as we think reducing subsidy in oil will increase inflation. Also high current account deficit will put pressure on rupee and eventually keep inflation slightly elevated in the 7.0% range.

2.      Interest Rates –

In our opinion we don’t expect a sharp fall in borrowing cost for fiscal 2013 -14 as RBI will be more worried about current account deficit and currency. We expect a cut of around 50 BPS to 75 BPS for the fiscal. Also RBI will find it difficult to transmit cut in interest rate into the real economy.

3.      GDP Growth –

As per CSO estimate and budget estimate GDP is expected to be at 6.10% to 6.70%. Our house view is that in a period of fiscal consolidation it is challenging to spur growth. In our opinion we may undershoot growth numbers for the fiscal.

4.      CAD –

Current Account Deficit (CAD) is at a historical high and may remain at an elevated level due to a very high import bill. Gold imports may come down due to lackluster price movement and fall in investment demand of gold. High CAD will keep currency vulnerable and volatile.

5.      Fiscal Deficit –

The government is focusing on controlling fiscal deficit at 4.80% of GDP level. There are certain moving parts in this budget. For example spectrum auction and disinvestment together are expected to garner almost 90000 Crores. This may be difficult to achieve. Also revenue growth of around 18% may be difficult if growth decelerates. But there is certain flexibility in planned expenditure which can be curtailed to achieve a 4.80% fiscal deficit.

Asset Market View

1.      Equity Market –

In a period of reasonably high inflation and low growth – high quality stocks that can protect margin will outperform. We would advise clients to stick to high quality stocks in this period. In the next 2-3 quarters we expect cyclical slowdown and deep cyclical stocks may disappoint investors. This will make strong bottom for these stocks. We would advise our clients to finally look at these stocks in the next 2-3 quarters and start loading them up in their portfolios.

2.      Debt Market –

Currently we have an inverted yield curve. Short term rates are in the range of 9% plus and long term rates are at 8%. In our opinion yield curve will start flattening out after April. We would advise our clients to split their debt book between short term and long term bond funds.

(Imp – In the entire hypothesis commodity prices including OIL can act as beta. Any fall in OIL & commodity prices can change the whole equation)