The Union Budget 2025 has been unveiled, leaving many investors pondering: What lies ahead for the markets? Will the recent fiscal policies bolster economic growth or introduce new challenges? Let’s delve into the key aspects of the budget and analyze their potential impact on various sectors.
Personal Income Tax Reforms
A significant highlight of the budget is the reduction in personal income tax rates, aiming to enhance the spending capacity of the middle class. The tax exemption threshold has been raised from ₹6 lakh to ₹12 lakh, and tax rates for higher income brackets have been reduced. This move is expected to boost household consumption, savings, and investment.
Capital Expenditure and Infrastructure Development
The government has allocated ₹11.1 lakh crore for infrastructure projects, marking an 11% increase from the previous year. This investment will be directed toward improving roads, railways, airports, and other critical infrastructure across the country. The goal is to boost economic growth by enhancing connectivity and providing better facilities.
Sectoral Impacts
- Consumer Goods and FMCG: The increase in disposable incomes due to tax cuts is anticipated to drive demand in the Fast-Moving Consumer Goods (FMCG) sector. Companies like Hindustan Unilever and ITC may experience heightened sales as consumers have more spending power.
- Banking and Financial Services: The government’s plans to recapitalize public-sector banks and promote financial inclusion have made the banking sector a key area of focus. Institutions such as HDFC Bank and State Bank of India could see increased activity due to enhanced lending capacities and a broader customer base.
- Green Energy and Electric Vehicles (EVs): With a renewed focus on sustainability, the government has proposed new green energy and EV adoption incentives. Solar power, wind energy, and EV manufacturing companies will likely benefit. Prominent stocks in this space include Tata Power and Adani Green Energy.
Higher Credit Availability to Agriculture and MSME Sectors
The budget emphasizes increased credit availability to the agriculture and Micro, Small, and Medium Enterprises (MSME) sectors, which fall under Priority Sector Lending (PSL) regulations. Banks are mandated to allocate at least 40% of their loan portfolios to the PSL segment.
However, this segment has historically exhibited a higher-than-average delinquency ratio and is politically sensitive. Consequently, markets may express concerns regarding the prospects of banking and financial sector stocks.
Notably, these stocks command a 34.60% weightage in the broad-based Nifty50 index. Therefore, any negative sentiment in this sector could significantly influence broader market movements. Source: Mint
Government Borrowing and Fiscal Implications
The government has outlined gross borrowings of ₹14.82 trillion, with ₹11.54 trillion to be raised through dated securities. Some of these borrowings will be met through small and public savings schemes. Given the substantial amount the government intends to raise from the money market, questions arise about the Reserve Bank of India’s (RBI) capacity to implement aggressive rate cuts in the upcoming monetary policy meeting.
Maintaining elevated interest rates while increasing market borrowings could lead to a weakening rupee and “imported inflation,” potentially impacting banking and financial stocks, which are significant components of market indices.
Change in Asset Prices
Security | 24 Jan’25 | 31 Jan’25 | % Change |
Nifty 50 (Spot) | 23092.2 | 23508.4 | 1.80% |
Bank Nifty (Spot) | 48367.8 | 49587.2 | 2.52% |
Gold (MCX) | 79601 | 82100 | 3.14% |
Silver (MCX) | 91189 | 93465 | 2.50% |
Crude Oil (MCX) | 6476 | 6335 | -2.18% |
Natural Gas (MCX) | 339.5 | 268 | -21.06% |
DXY | 107.465 | 108.501 | 1.036 |
USDINR (NSE) | 86.265 | 86.7725 | 0.5075 |
10 year Bond Yield | 6.72 | 6.7 | -0.02 |
NSE Market Cap | 41677614 | 42122796 | 1.07% |
MWPL | 38.98 | 8.2 | -30.79 |
DJIA | 44424.25 | 44544.66 | 0.27% |
Nasdaq | 21774.01 | 21478.05 | -1.36% |
S&P 500 | 6101.25 | 6040.52 | -1.00% |
Know More: SEBI registered investment advisory | Stock investment advisory
Market Sentiment and Investor Behavior
Statistical data indicates that retail investors are optimistic, while institutional investors, or “smart money,” have not significantly increased their exposure. Post-budget periods typically involve a few days of detailed analysis before markets stabilize. In this instance, the specifics of the new Income Tax Act are pending, and the RBI’s interest rate decision is awaited.
Public Sector Undertakings (PSUs) and Key Sectors Volatility:
- Public sector banks, power, infrastructure, defense, logistics, and energy stocks are expected to witness heightened volatility in the coming days.
- Market participants will closely monitor these sectors as they react to budget allocations and policy changes.
Industrial Metals and Mining Sector:
- Signs of profit-taking are emerging in industrial metals, which could lead to a decline in stock prices for metal and mining companies.
- Investors may see short-term corrections in these stocks due to shifting commodity market trends.
Bullion Market Dynamics:
- Safe-haven buying in bullion is evident due to capital flight, driving increased demand for gold and silver.
- Investors will likely buy on price dips, further stabilizing the bullion market.
Futures Market Trends:
- The capital-intensive and high-volatility futures segment saw increased turnover contribution.
- Most of this activity is attributed to traders rolling over positions from the expiring series to the upcoming monthly series. The presence of dual turnover suggests firm conviction among traders.
Options Market Activity:
- The lower-risk index options segment experienced a sharp decline in turnover, reflecting the lowest level of risk appetite in derivatives trading. In contrast, stock options turnover saw an uptick as traders rolled over their positions, indicating a preference for higher-risk trades.
Banking Sector Performance:
- Banking stocks led the recent market rally, driven by expectations of personal income tax cuts and a possible RBI rate cut. Indian 10-year bond yields eased, providing a boost to banking stocks.
- However, the rupee depreciated against the US dollar, limiting market gains.
Market-Wide Position Limit (MWPL) and NSE Trends:
- MWPL fell routinely on expiry, reflecting adjustments in market positioning.
- The increase in NSE’s market capitalization suggests strong retail participation and investor confidence in select sectors.
Global Economic Context
It is essential to consider the global economic environment when evaluating the budget’s impact. International trade tensions and potential slowdowns in significant economies could influence India’s export-driven sectors. Additionally, fluctuations in global commodity prices may affect domestic industries. Investors should remain vigilant about these external factors, which can significantly impact market dynamics.
Conclusion
The Union Budget 2025 introduces measures to stimulate economic growth through tax reforms and increased infrastructure spending. While specific sectors stand to benefit, the overall market trajectory will depend on effective implementation and external economic conditions. Investors should stay informed and consider domestic and global policies when making investment decisions.
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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.