Indian equities jumped the most in 30 months on optimism over the government’s budget, with investors betting on consumer stocks most likely to benefit from measures to boost rural demand.
ITC, the biggest cigarette company, surged the most in more than six years after Credit Suisse Group and CLSA Asia- Pacific Markets raised their recommendations on the stock. Hero MotoCorp and Maruti Suzuki India paced advances among automakers. ICICI Bank, the largest private lender, surged the most in 10 months.
The S&P BSE Sensex soared 3.4% to 23,779.35 at the close in Mumbai, the steepest gain since September 2013. Prime Minister Narendra Modi’s budget on Monday proposed to spend Rs877.7bn ($12.9bn) on rural programmes including expanding irrigation projects, crop insurance and village roads. He also stuck with the fiscal deficit target and cut net borrowings, opening up space for private companies to access credit markets.
“The key thing investors were looking for is whether the government is able to get the resources for kick-starting the investment cycle, and the budget has gone about doing it by keeping the fiscal target intact and without setting some ambitious revenue targets,” Vikas Khemani, chief executive officer for wholesale capital markets at Mumbai-based Edelweiss Financial Services, said in an interview with Bloomberg TV India. “The budget is being viewed as credible by investors.”
The government retained its target of bringing the shortfall to 3.5% of the gross domestic product in the year that starts April 1, the least since 2008. The deficit will be 3.9% of GDP in the current fiscal year, as projected, Finance Minister Arun Jaitley told lawmakers on Monday.
Jaitley is under pressure to bolster state finances without curbing stimulus spending amid mixed signs of economic strength. While India is forecast to overtake a slowing China as the world’s fastest-growing big economy, back-to-back years of poor rainfall have eroded incomes of the bulk of the nation’s population. Indian stocks, bonds and the rupee are among the world’s worst performers this year.
“The economy on the ground is reviving and there’s no necessity to substantially boost the fiscal stimulus,” Neelkanth Mishra, managing director for equity research at Credit Suisse Securities (India), said in an interview with Bloomberg TV India. “All high-frequency indicators - oil-product demand, cement volumes, retail consumption, credit growth – are suggesting that the economy is recovering.”
The move to stick with the budget deficit target may help Modi win another rate cut from Reserve Bank of India Governor Raghuram Rajan, who warned in January that sovereign debt could lose favour among investors if the fiscal targets are missed.
“The government has done its job and it is up to the Reserve Bank to narrow the gap on real interest rates,” said Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments in Hong Kong. “We expect a 50-basis point reduction in the next six to nine months.”
ITC jumped 10%, the steepest climb since May 2009. Hero MotoCorp rallied 6.7%, the most since September 2013. Maruti Suzuki surged 8%, the biggest advance since October 2013.
ICICI Bank increased the most since April, paring this year’s decline to 22%. Axis Bank added 4.3% and State Bank of India gained 2.1%.
“ICICI Bank and other lenders with exposure to Jaiprakash Associates gained after they decided to sell their cement business to UltraTech,” Rethish Varma, head of research at Bangalore-based Aditya Trading Solutions, said by phone. “Investors are assured by the fact that the loans that UltraTech Cement takes over will be serviced on time.”
Jaiprakash Associates said over the weekend it plans to sell its cement units to Indian billionaire Kumar Mangalam Birla’s UltraTech Cement at an enterprise value of $2.4bn. UltraTech will take on the Jaiprakash cement operations’ debt while paying little or no equity, people with knowledge of the matter said, asking not to be identified as the information is private.
The Sensex tumbled 7.5% in February, the most since November 2011, as overseas investors pulled $921mn of the nation’s shares amid a selloff in emerging markets. The gauge, which has been trading below its 50-day moving mean for almost two months, is priced at 14.8 times projected 12-month profits.
The index’s 14-day relative strength index slid to 37 on Monday, near the 30 level that some analysts say signals a rebound is imminent.