Budget 2024 Analysis: Fiscal Prudence Fuels PSU Banks

This time around, the market approached the Budget with modest expectations, minimizing the chance for disappointment. This sentiment was clearly reflected in the market’s limited trading range for the day, a rare occurrence on Budget days. At close, the Sensex was down 107 points or 0.15% at 71,645, while the Nifty was down 28 points or 0.13% at 21,697.

Interim budgets typically avoid bold moves, focusing instead on practicality. In contrast to the interim budget of 2019, Finance Minister Nirmala Sitharaman opted for a concise and measured approach this time. A key feature was the government's commitment to fiscal responsibility, targeting a fiscal deficit of 5.1% of GDP in the upcoming fiscal year, further aiming for 4.5% in FY26. While the immediate impact may be subtle, this approach is poised to offer long-term benefits, potentially enhancing the nation's sovereign ratings by global agencies.

This commitment is expected to lessen the government's need for additional borrowing to balance its budget, which in turn could positively influence interest rates, possibly leading to a reduction even before any formal rate cuts by the central bank.

Public Sector Banks on the Rise

In her announcement, Finance Minister Nirmala Sitharaman revealed that the expected gross and net market borrowings through dated securities for the fiscal year 2024-25 are projected to be Rs 14.13 lakh crore and Rs 11.75 lakh crore, respectively. The government accomplished dual objectives with a single act of deficit reduction. This pleased the bond market, resulting in reduced borrowing expenses for corporations and boosting banking profits.

This news prompted a significant upswing in the Nifty PSU Bank index, which climbed over 3%. Key public sector banks saw notable increases, with Indian Overseas Bank enjoying a 6% jump. Similarly, UCO Bank's shares increased by 5%, Canara Bank by 4%, Union Bank of India and Bank of Baroda by 3%, and State Bank of India by more than 1%.

Following this announcement, the yield on the 10-year bond dropped by 7 basis points to 7.07%, down from 7.14% the previous day. Public sector banks, holding a larger share of government bonds than their private counterparts, benefited from increased Mark-to-Market (MTM) gains as bond yields decreased and prices went up. 

Electric Vehicle Sector Gets a Boost

Stocks of electric vehicle (EV) companies, such as Olectra Greentech and JBM Auto, surged up to 6% following the announcement by FM of the government's intention to bolster the EV ecosystem within the nation. 

"We aim to enhance the EV ecosystem by promoting the use of electric mobility in public transportation," stated the minister during the presentation of the interim Budget. 

Additionally, firms engaged in the EV charging sector saw an increase in their share value post-announcement, with Servotech Power Systems jumping 5% and Samvardhana Motherson International rising by 1%.

Capital Expenditure Expansion

The planned capital expenditure (capex) for the upcoming year has been boosted by 11.1%, reaching just over Rs 11 trillion, aligning closely with market predictions of an 11-15% rise. This increase in capex is expected to impact sectors such as Capital Goods, Engineering, Defence, Railways, Steel, and Cement, though the market has shown a neutral response.

Steady Tax Rates

Markets expressed relief as the government decided to keep securities transaction tax (STT) and long-term capital gains tax rates unchanged. Additionally, the absence of any surprise handouts or populist policies, which were a potential concern due to the budget's political undertones, was noted with approval.

Nevertheless, there is an underlying optimism among market participants. Tax revenues have surpassed initial government forecasts this fiscal year, and this positive trend is anticipated to continue into the next year. Coupled with a favourable inflation outlook—barring any geopolitical events that might escalate crude oil prices—there's a growing expectation that the government might adopt a more assertive fiscal stance in the comprehensive budget announcement slated for July.

Conclusion: A Comprehensive Win for All

The 2024 interim Budget stands out remarkably, offering benefits across the board while showcasing fiscal prudence with an 11% hike in capital expenditure and aiming for a deficit target of 5.1% in FY25, reducing further to 4.5% in FY26. 

The Budget also champions sustainable growth, introducing one crore solar units to decrease household expenses and promote environmental care. The GYAN initiative is set to elevate the economically vulnerable groups, including the poor, youth, farmers, and women. The budget's expansion of Ayushman Bharat to include frontline health workers, coupled with the consolidation of health programs, marks a crucial step towards tackling rural health issues and enhancing the economic vitality of Healthcare MSMEs. 

In a nutshell, the interim Budget ensures strong fiscal discipline and continuity of policies, making it an overall beneficial proposition for the market. It is likely to attract foreign investments as global liquidity returns to emerging markets.

Discover our comprehensive analysis of the 2024 Budget on the Liquide App and Website, where we meticulously break down the announcements by sector and spotlight the stocks likely to be impacted.

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