Eqiuty Markets give a thumbs up to budget 2010-11

Of the past 19 budgets presented in India, bears were leading the bulls by a whisker 10-9 (i.e, the equity markets had fallen 10 out of 19 times immediately after the budget was presented). However, the response of the market to Pranab Mukherjee’s Budget 2010-11 has helped bulls draw level. Both Sensex and the Nifty made handsome gains immediately after presentation of the budget. The gains have continued to grow during the two weeks post budget presentation. The consistent run up since the budget, has some investors worried. How long can this bull run last?

Although, the long term trend for our equity markets is definitely up, because of the spectacular turn-around in the fortunes of the Indian economy after a brief slowdown. If the recent economic data is an indication, the economy is firing on all cylinders, and might surprise us with a GDP growth of well over 7% in 2009-10. The budget has given a booster dose to the India growth story with consumption oriented incentives. In the short run, some of the budgetary measures may seem to be inflationary, but removal of supply side bottlenecks will ensure easing of the inflationary pressures from the 2nd quarter of fiscal 2010-11.

The post budget bull run is driven by FII investments, FII's have pumped in over Rs.10,000 crores in the equity markets since presentation of the budget. But domestic institutions and retail investors have been booking profits in this bull run. Two major factors that need to be watched by investors for sustainance of the current bull run are:

• Strengthening Rupee: The rupee which was trading around 46.50 to a dollar before budget closed at 45.45 on Friday 12th March. Analysts expect the rupee to remain firm during the current month. January industrial growth at 16.7%, and the marked improvement in exports augers well for the stregthening rupee.
• Falling VIX: The Nifty VIX, which measures the immediate expected volatility of Nifty, closed at 19.73 on friday 12th March, its lowest closing since its launch on November 1, 2007. The VIX breaking down below 20 is likely to trigger a further upside in the NIfty.

Investors are cautioned to watch these two key indicators closely, and any reversal in any or both should be taken as a cue to trim your positions in the equity markets. After all, it is not a bad idea to take some profits home as the old proverb says 'Make hay while the sun is shining'.