India budget and the liquidity supercycle

SPONSORED BY : Neptune

By Kunal Desai, Head of Indian Equities, Neptune

Added 2nd February 2017

Kunal Desai, manager of the Neptune India Fund, comments on how India’s 2017 budget will impact the Indian economy and equity market.

India budget and the liquidity supercycle

The significance of the Indian budget has been reducing over the past few years - major reforms such as the Goods and Services Tax bill and demonetisation have taken place outside the annual event. Nevertheless, the Indian government tabled a strong and responsible budget that focused on continued fiscal responsibility, whilst tilting spending towards social expenditure. The longstanding fiscal deficit target of 3% by March 2019 was kept in place, which relieved both equity and debt markets as fears of fiscal spending indulgence proved unfounded. This will likely keep bond yields at a lower level, whilst this will afford the central bank room to resume its rate cutting cycle. The equity market cheered the announcements, rallying 1.8 in response.

As we've argued before, the economic fallout from the government's demonetisation drive will likely be less severe than market expectations. The temporary liquidity squeeze from a lack of currency in circulation is abating, with caps on ATM disbursements now being removed. At the same time, the worry of a negative wealth shock from consumers writing off their cash holdings has not played out. Around 97% of the demonetised cash has found its way back into the formal banking system which will result in a sharper revival in consumption than was initially expected. Indians, it seems, are canny people and have deftly innovated their way around this temporary disruption.

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The Neptune India Fund may have a high volatility rating and past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the original amount invested. Investments in emerging markets are higher risk and potentially more volatile than those in established markets. A majority of investments made by the Fund may be in smaller and medium sized companies which can be higher risk than those in larger companies. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. The content of this document is formed from Neptune’s views as at the date of issue. We do not undertake to advise you as to any change of our views. Neptune does not give investment advice and only provides information on Neptune products. Please refer to the Prospectus for further details.

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