Key Expectations For The Different Sectors From The Union Budget

7 Feb 2025 , 05:58 PM

The run-up to the month of February may see the first US Fed policy decision after Donald Trump takes office as the President of the United States. The core CPI in the US rose by 3.2% Y-o-Y in December, lower than the previous month and better than the expected 3.3% figure. Although the Fed is expected to keep the rates unchanged at the January meeting, however, a series of soft inflation readings could reignite rate cut hopes in the first half of 20251. Post the US FED policy decision,

India’s Headline CPI inflation for Dec came in at 5.2% Y-o-Y (IIFLe 5.4%) v/s 5.5% in Nov. On Y-o-Y basis, Food & Beverage inflation fell to 7.7% (v/s 8.2% in Nov), while core CPI (exFood, Fuel, Energy, Gold) stayed constant at 3.3%. Higher cereal & edible oil prices also contributed meaningfully to Dec inflation. Our full year FY25 inflation forecast remains at 4.9%. We do not expect RBI to cut rate in Feb MPC meeting, given the steep fall in rupee over the past few weeks and rising US bond yields. At the same time, macro indicators are showing signs of weakness (GST collections, vehicle sales, credit growth, MNREGA job demand), making RBI’s job a lot more difficult. Although inflation trajectory is favourable, the fall in rupee and spike in crude do not augur well for inflation going forward. However, weak growth will offset these inflationary impulses to some extent.

Since the Interim Budget 2024 (1st February 2024), the Nifty 50 index has given a return of 6.1% as on 21st of January 2025, while it has given a return of -5.9% since the Union Budget held on 23rd July 2024. There has been a sharp increase in volatility in the Indian market, with the India Vix rising to 17.055, an 18% MTD move. According to the provisional cash market data, FII have been net sellers in the month of January (upto 21st January) and have sold stock worth Rs 56,833cr, and Rs 2,34,235cr since October 2023. Fii Index Long short ratio stood at 0.21x. Hence, the buildup to the budget has been on the negative side. However, any key positive announcement in the budget can help improve the market sentiment going forward.

Below are some of the key expectations for the different sectors from the Union Budget:

Financials: Privatisation of PSBs had been announced in FY22, however only IDBI has moved forward and is expected to be completed soon. Any announcement on privatisation of PSBs would thus be monitorable. Increasing the FDI limits on banks (currently 49% and 20% on PVBs and PSBs) is also one of the market expectations.

Any tax relief on deposits currently taxed at normal slab rates (savings interest up to Rs10K is exempt) vs concessional special rates for equities can provide the required impetus to deposit growth, which has been weak due to increase in leakages (outward remittances and increase in GOI cash balance with the RBI) and falling HH savings.

Infrastructure: Y-o-Y stable allocation to infrastructure spends across highways, railways, metros etc. Increased focus on monetisation of completed projects in highways to boost fund availability.

Metals: Easing of import duties on key RM for steel-making – coking coal, refractories.

Capital Goods & Defence: Expect sustenance in capital expenditure (10-15% Y-o-Y growth) to maintain growth momentum with focus on infrastructure, defence and renewables. Expect measures and incentives to boost defence self-reliance by prioritising domestic procurement.

Consumer: With consumption under pressure and personal income tax collections growing at a healthy rate, there is an expectation of reduction in taxes for individuals earning up to Rs1.5mn per annum, which represented 92% of the tax filers in AY24. If the quantum is meaningful, it could provide a boost to consumption, especially in urban areas.

Oil and Gas: Government may consider reducing excise duty on CNG from the current 14% to 7% to boost natural gas consumption in India. Announcements may also come regarding the mandatory phased blending of compressed biogas (CBG) in CNG for transport and D-PNG.

Utilities: Increase in subsidy allocation for PM Surya Ghar Rooftop Solar Scheme to rise from Rs62.5bn last year to Rs120-135bn in FY26, as execution begins picking up. Allocation under GOBARdhan scheme to be ramped up as the country moves towards its target of establishing 5000 CBG plants.

Insurance: There could potentially be some changes related to the direct tax provisions pertaining to the life insurance sector, either through modifying deductions under Section 80C or further changes in the new tax regime.

In conclusion, we believe that the month of February is likely to be a pivotal month for the Indian financial market with key events that could significantly influence market dynamics and investor sentiment. The Union Budget provides for  potential measures to boost the economy while RBI policy  provides clarity on the interest rates and liquidity measures to fight inflation. Taken together, these developments can create a highly charged atmosphere for the Indian Financial markets.

Jayesh Bhanushali

Fund Manager – Equities