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Quake fallout: A harsher budget, and impact on stocks & economy

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The stock markets will continue to feel the aftershocks of the Gujarat crisis for quite some time to come with even the rupee slated to fall further should the quake situation worsen, say marketmen.

The market fears that rehabilitation of the quake-hit areas will add to the fiscal deficit burden of the Centre prompting it to introduce harsh monetary policies in the forthcoming budget. This, in turn, will adversely impact the stock markets.

The Gujarat quake which erupted on Friday last brought an abrupt end to the euphoria witnessed in the stock markets over the previous ten days. From 4027.13 on January 11, the Bombay Stock Exchange Sensitive Index had risen to 4330.22 on January 25.

The first day of trading after the quake saw the Bombay Stock Exchange plunging 95.65 points to 4234.47 on Monday, over the previous close of 4330.22 on Thursday.

"Rehabilitation costs could further widen the fiscal deficit and thus prompt tough policy measures," said Manish Prasad, vice president-equity capital markets of DSP-Merrill Lynch. "A harsher budget cannot be ruled out," he added.

"Reconstruction activity in Gujarat will take two months. The economy will be hit directly and indirectly. Investors will prefer to invest only a month later,'' said Chandresh Kampani, director of brokerage firm Jamnadas Morarjee Securities. Value investing will take place in software and old economy stocks, where a correction is happening now, he added.

However, some analysts and dealers feel that the Sensex fall was merely a technical correction waiting to happen, with the quake providing the trigger. "A technical correction was due; news of the quake merely triggered it off," said Prasad.

Deepak Agrawal, associate vice-president of Kotak Securities, holds a similar view. "The overall markets will remain positive and tend towards the 5000 levels," he said.

However, analysts and dealers feel that the Sensex will remain rangebound at the 4000-4300 levels.

The rupee will depreciate should the quakes continue, say forex dealers. "The immediate impact of the quake is over. But, if the situation worsens, the rupee will depreciate," said the chief dealer at a leading brokerage firm.

Forex dealers expect the rupee to remain range bound, and expect it to move in the Rs 46.45-51 band. However, they expect dollar inflows from foreign institutional investors to continue and the slide in rupee to be gradual.

The rupee opened weaker on Monday at Rs 46.51/52 per dollar compared to Thursday's closing of Rs 46.48/49. It touched a high of Rs 46.54 and consolidated in the second half of the day to close at Rs 46.4850/4950.

Dealers said that despite negative sentiments and the month-end dollar demand from corporates, the unwinding of long positions by banks and the consistent supply from FIIs stemmed the slide in the rupee.

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