With the Growth Boost, How the Markets Will Play Out

Equity benchmark indices, Sensex and Nifty, settled flat in a special trading session on Saturday, as investors found little to excite them in the Union Budget. Finance Minister Nirmala Sitharaman did not announce significant measures for retail investors or the broader markets.

However, buying in consumption-related sectors, after the Finance Minister exempted annual income of up to Rs 12 lakh from income tax and rejigged tax slabs, prevented any major market fall. This decision is expected to provide a boost to sectors linked to consumer spending, such as FMCG (Fast-Moving Consumer Goods), automobiles, and consumer durables. The reasoning behind this is that with more disposable income in the hands of taxpayers, people are likely to spend more, driving growth in these sectors.

"While the Budget failed to cheer the markets, sectoral stocks from consumer durables, FMCG, and the automobile space attracted significant buying interest after the government announced major income tax relief for the salaried class,” said Prashanth Tapse, Senior VP (Research) at Mehta Equities Ltd.

Impact on Consumption-Driven Sectors

Stocks from consumption-focused sectors saw a positive reaction after the announcement. Sectors like FMCG, automobiles, and capital goods rose by as much as 3%.

In the last one year, Nifty FMCG index gained just over 6% compared to the 8% rise in benchmark Nifty 50.

Tapse explained that with salaried income up to Rs 12 lakh per annum exempted from any tax, consumption is expected to get a major boost which is reflected positively across most of the consumption-related sectors.

Another major aspect was that the government didn’t make any changes to capital gains taxes or Securities Transaction Tax (STT). This was in line with expectations, which meant no immediate shock for investors in the capital markets.

Deepak Ramaraju, Senior Fund Manager at Shriram AMC, pointed out that although the budget did not introduce any negative changes to capital gains, the markets may remain buoyant in the medium term.

“Cutting personal taxes may lead to higher savings, which could result in increased SIP flows, potentially supporting the markets further. Capital market-related sectors, such as AMCs and brokerage houses, may see higher retail participation,” Ramaraju added.

What’s Next for the Markets?

While the Budget didn’t deliver any major surprises, there’s a sense of cautious optimism in the air. The immediate market reaction showed some volatility, but experts believe that the focus on tax relief and infrastructure spending could support growth in key sectors.

For the markets in February, corporate earnings will likely play a significant role. As companies report their results, investors will be looking for signs of strong performance, especially in sectors benefiting from the budget’s tax relief measures.

Pranav Haridasan, MD and CEO of Axis Securities, believes the Budget is particularly positive for consumer stocks, which have underperformed recently. These stocks may now see a revival as demand picks up. Additionally, the financial sector could perform well as it benefits from overall economic growth.

While the Union Budget may not have been a major game-changer for the markets, it has provided some key catalysts for growth, particularly in consumption-related sectors. The medium-term market outlook will likely depend on how corporate earnings shape up, along with continued growth in the economy.