Why stock market soared by 600 pts on FM's speech!

Terming the Budget 2011-2012 as 'progressive' and 'balanced', stock market experts said it had positive surprises like encouraging FII inflow, a roadmap for reforms and checking fiscal deficit, all of which have perked up investor mood.

The Bombay Stock Exchange benchmark Sensex, which had plummeted by 13.69 per cent in the year so far, saw an impressive rebound minutes into the Budget presentation.

Intra-day, the key index zoomed up by 595.62 points to hit a high of 18,296.53, driven by buying across sectors.

"Quantum increase in the limit for FII investment in infrastructure bonds and allowing foreign investors to invest in domestic mutual funds are bold moves towards liberalising the capital account," said SBI MF CIO Navneet Munot.

The markets wiped off a major component of the post-Budget gains as the market participants made sense of the finer print after giving an initial thumbs-up to Pranab Mukherjee's proposals.

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The Sensex, which had soared by around 600 points in the aftermath of the FM's speech, surrendered more than 400 points from intra-day highs and slipped below the 18k mark to end up a mere 131 points at 17832 and the Nifty ended up 29 points at 5333.

The midcap index ended at 6377, higher by 23 points and the smallcap index shut shop at 7820, up 30 points.

There was a short-covering rally in noon trades, with the event risk and accompanying nervousness behind us.

The rally was triggered by lower fiscal deficit target set by the government for the year ended March 2012 despite the subsidy burden accruing from the oil and fertiliser spaces.

The finance minister projected a lower fiscal deficit target of 4.6% for the year ended March 2012 as against 5.1% for FY11.

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However, the benchmark indices shed a major component of their gains in the last hour of trade following selling pressure at higher levels.

Whether the budget would change the trajectory of the markets, which have been in a bear grip since the last three months, will be clear in the next few trading sessions.

Investors who have been extremely nervous so far this year were positively surprised as the Budget exceeded street expectations.

'The FM has managed to announce a growth-oriented Budget, where he has hinted at taking progressive policy actions in the key areas of delivery of subsidies, attracting FDI, boosting infra development during the course of the year.

Overall, it is a budget that has exceeded expectations that were rather low anyways,' Sharekhan head research Gaurav Dua said.

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Analysts said investors have given thumbs-up to the efforts of Finance Minister Pranab Mukherjee to address the major concerns of inflation and fiscal deficit, which were haunting the market.

'Thanks to the additional collection in 3G spectrum, that the government could achieve 5.1 per cent fiscal deficit for the current financial year, which is a great performance.

The  road map for the Fiscal Deficit reduction in the coming 2-3 years is very encouraging for the global investors and capital market,' SMC Strategist & Head of Research Jagannadham Thunuguntla said.

However, credit rating agency Fitch said that the government's fiscal deficit target of 4.6 per cent of GDP in the fiscal year 2012, compared to an estimate of 5.1 per cent of GDP in the fiscal year 2011, will not be easy to meet.

It said the government will not have the benefit of one-off revenue proceeds from 3G and broadband wireless access auctions as it did in the fiscal year 2011.

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Analysts said the government's decision of not increasing the excise duty is a very bold move, and shows that the finance ministry is betting clearly on growth.

'The market was extremely nervous prior to the announcement of the Budget, and was fearing a tough budget. The finance minister did not announce any new tax or duty, which along with plan to contain rising inflation and fiscal deficit, gave a breather to the market,' said Bonanza Portfolio head equity Avinash Gupta.

The finance minister began his budget speech by praising the remarkable resilience of the economy and predicted a decline in the average inflation and economic growth rate of 9% next year.

He highlighted the fact that preparations for GST rollout were in the final stages and DTC would come into force in April 2012. He also pointed out that exports were up 9.4% in 2010-11, agricultural growth stood at 5.4% and industry was 8.1% in 2010-11.

Moreover, we now have a   divestment target at Rs 40,000 crore for FY12 and a cut in the state-level fiscal deficit to 3%  of gross state GDP by 2014.

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Among the major budget proposals, the finance minister promised the introduction of a food security bill to tackle hunger and malnutrition, a comprehensive national policy to control the trafficking of narcotic drugs and a task force to deal with the problem of black money.

The FM also assured steps to simplify the tax and tariff procedures and simplify the service tax refunds process. He also announced infra status for the fertiliser sector investments and infra status to cold storage chains, besides a 3% interest subsidy to farmers in FY12.

Meanwhile, the GDP rose by 8.2% for the December 2010 quarter as against 7.3% in the corresponding period of the previous year, but slowed down from the previous quarter's figures of 8.9%.

The mining sector growth stood at 6% vs 5.2% on a y-o-y basis and the farm sector growth shot up to 8.9% vs -1.6% during the period, while the construction sector declined marginally to 8% from 8.3%.