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A Mixed Reaction

Sensex gained 74 points over the week. This was despite a loss of 143 points on the budget day. But it's difficult to predict a clear trend for the market. As lot will depend on the pace of disinvestment in the current fiscal.

The BSE Sensex went up by 74 points and the NSE Nifty gained 14 points over the week. This despite the poor showing of BJP in the UP elections, pre-budget nervousness, the budget day panic and regional riots. Domestic mutual funds turned net buyers after a gap of three weeks. FIIs remained net buyers with net purchases to the tune of Rs 540 crore. The average turnover at both the exchanges went up by about 29 percent over the week as against the downtrend witnessed in the last two weeks.

Low budget expectations on account of the poor performance of BJP in UP elections held back the bullish sentiments in the first trading session. A minimal increase in freight rates in the Railway Budget backed by selective buying in tech and PSU stocks lifted the Sensex by 99 points in the second round.

The budget turned the market mood negative. The important reasons being-a surcharge of 5% on income tax, introduction of slabs to avail rebate u/s 88 and the abolition of the dividend distribution tax on the dividends paid by companies and mutual funds. The dividend received by the investor would henceforth be taxed at the individual rate of taxation. This along with the violence in Gujarat pulled the sensex down 167 points from its intra day high of 3711 on the budget day. In the last trading session, the key-banking, old-economy, technology and PSU stocks responded well to the respective sops given in the budget. As a result, amidst thin volumes, the Sensex rebounded by 116 points.

A less than expected 50 basis points cut in the small savings disillusioned the banking sector stocks. Later, the banking sector reforms proposed in the budget invited buying activity. On the tech side, as a part of first reaction to the introduction of an export profit tax and reduction in custom duty on hardwares, the BSE IT Index shed 115 points. But it recovered with a marginal gain of 48 points in the last leg. The PSU stocks went down initially as the government pegged the disinvestment target at last year's level of Rs 12,000 cr. But, bounced back with the government sticking to its scheduled dismantling of APM.

The budget mutely mentioned about capital market reforms. But the removal of existing sector-wise cap on FII investments, permission to foreign banks to operate as branches or subsidiaries of parent bank and the reduction in corporate tax for MNCs from 48 percent to 40 percent is expected to attract FDI and FII. In the current year through Feb 28, 02, FIIs have poured in Rs 2839 crore in Indian bourses as against Rs 5863 crore during the same time last year.

Apart from the sector sops offered in the budget, markets see nothing concrete on the reform front, to cheer about. As the dividend income in the hands of investors will become unattractive from April 1, 2002, Nestle India, Reliance Industries, Cipla, Hero Honda have lined up interim dividends for March. The equity as well as debt mutual funds are expected to follow suit. With the changes in the tax treatment, it would make sense for investors to choose the growth plan of a fund.

Outlook
The one-month post budget market movements during the past ten budgets reflect that the Sensex has fallen by more than 8 percent on six occasions. The past behavior is not a perfect barometer of future trends and it is difficult to predict a clear trend. A lot will depend on the pace of disinvestment in the current fiscal.