The last interim budget before the term of Modi government coming to an end is creating a lot of buzz among all the sections. Lok Sabha elections are scheduled in the next quarter as the incumbent government will complete its five-year tenure in May. The budget before the upcoming elections is all set to be presented by the Finance Minister Mr. Arun Jaitley on February 1, 2019. Investors are expecting certain big announcements from the interim budget. With the next elections due in coming months, the present government will definitely try to come up with strong announcements that can significantly impact the strong vote bank. The budget speech will include a vision plan for the next three to five years.
In a recent speech, Finance Minister Mr. Arun Jaitley clearly gave a hint that the Interim Budget of 2019 would encompass several big–ticket reforms. Some of the key expectations from the interim budget 2019 are:
Income Tax Exemption Threshold Expected to Double
One of the biggest expectation from the budget is the Income Tax (IT) exemption limit. As per the report published by the news agency IANS, the IT exemption threshold is expected to double from INR. 2.5 Lakhs to INR. 5 Lakhs. Decision pertaining to the reinstatement of the tax free-status for medical expenses and the travel allowances is well on card for this budget. A decision may also be taken to lower the highest personal IT rate from the existing 30% to 25%.
Strong Focus on Healthcare
With the Modi government's strong focus on introducing new healthcare projects for the poor segment, some strong announcements are well expected from this budget in this line. The government may offer increased tax exemptions towards healthcare and preventive checkups under Section 80D of the Income Tax Act.
Focus on Rural Economy with Focus on Farm Loan Waiver
It will be no surprise if we say this interim budget will be more of a farmer–oriented budget. Ever since the Congress party announced a series of loan waivers in Madhya Pradesh, Chhattisgarh, and Rajasthan after coming to power, the segment continues to remain the main focus for the BJP-led NDA government. The government is expected to increase agricultural credit flow by 10% or INR. 1 Lakh Cr., increasing the total credit target to INR. 12 Lakhs Cr. The budget is expected to provide quick loans to farmers at lower interest rates. The government is also expected to announce monetary benefits and concessions for small and marginal farmers.
Boosting Real Estate
The expectation of the real estate sector in India from the Union Budget 2019 is extremely high this time. There are expectations that the government may give the infrastructure status to the real estate sector as this will be extremely beneficial in many ways. This will go a long way in bringing down the interest rates on home loans, project and development costs, and most importantly make affordable housing for everyone. With strong focus on Housing For All by 2022 (Pradhan Mantri Awas Yojana), the government may come up with some extreme measures to get the real estate sector in India back on track.
In our point of view, this Interim Budget will be more focused on the above points with the rural segment catching the most attention along with Income Tax slab revision. However, there will be some other expectations from this interim budget.
Ever since the inception of the derivative segment, SEBI has come up with new changes and updates to the segment and implemented them well on time. NSE which accounts for approximately 99% of the trades in the F&O segment comprises of 200 stocks in the derivatives segments and trades involved in these segments prefer to roll over their positions and avoid physical delivery.
On March 28, 2018, SEBI came up with the new set of regulations for retail traders in the derivative segments. SEBI has given directions to the exchanges to implement the physical settlement mechanism of the stock derivatives in a phased pattern. The selection of the stocks to be included for the physical settlement mechanism will be done based on the respective daily market capitalization averaged for December 2018.
All the stock derivatives that are cash settled will be arranged in descending order based on the daily market capitalization criteria and then the bottom 50 stock derivative with the smaller market capitalization will be shifted to physical settlement from the month of April 2019 expiry. The next 50 stocks standing in the list from the bottom will move to the physical settlement from July 2019 expiry onwards and the remaining stocks will be the part of the physical settlement from October 2019 expiry onwards.
The effective measure for the stock derivatives to move to the physical settlement process has been initiated by SEBI and the sole purpose is to curb abrupt market volatility and speculation and promote borrowing and lending. The retail investors and players like LIC will gain the most from such initiative.
Year 2019 will witness the shift of stock equity derivative markets to delivery trading in the first nine months, and this will definitely bring a change on their pricing. With the approach of the expiry period, speculators might start square off their positions at an exorbitant price to avoid auctions and hence any instruments and contracts having high open interest that are not supported by huge free float market capitalization will face heavy volatility in price levels near the expiry period, such volatility will definitely be reflected in the spot equity segment too.
Initiatives taken by SEBI in this direction will definitely put strict limits to volatility and excessive speculation and help retail investors and other participants in the market to benefit. However such system still needs further amendments and new strategies to make the system more efficient in future.
Volatility has severely impacted the capital markets in recent times. Varied measures have been adopted in this direction in the past. Capital market regulator, Securities and Exchange Board of India (SEBI) is all set to take measures in this direction very soon. SEBI is planning to put an imposition on the investments made in liquid mutual funds. Short lock-in period for investments in liquid mutual funds with an assets of over INR. 8 Lakh Cr. will be imposed by the market regulator in coming times.
The need for such step arose as a result of the continuous liquidity encountered by the finance companies in recent times. Series of defaults by Infrastructure Leasing & Financial Services (IL&FS) and some of its group companies led to liquidity crisis.
The step to initiate a lock-in period in liquid funds will impact their popularity and this will end up with investors showing less interest towards them. Liquid funds are mostly used by large companies to park their surplus cash. In order to satisfy the capital adequacy norms, banks sell the securities they hold immediately before the end of the quarter. These type of instruments are purchased back within a span of 1 week. Such kind of methods of selling and then repurchasing the securities leads to unnecessary volatility. There have been instances in the past where debt MFs have seen redemption of INR. 60000-70000 Cr. even as net flows were at record high.
The main reason for the institutional investors to keep their attention towards liquid funds is the restriction-free entry and exit from the funds. The investors might not get good returns but they park their funds on account of liquidity they get from liquid funds.
Liquid funds only invest in debt securities with a maturity of 90 days or less, and most corporate debt securities are not publicly traded. Even in the ones that are, trading activity tends to be muted and quoted prices are often not at fair value. These funds calculate their net asset value (NAV) based on prices provided by rating agencies for securities that have maturities of less than 60 days, and mark-to-market their investments in others. SEBI may also make separate mandate for liquid funds to mark-to-market their investments in securities with maturities of 30 days or more. It may also give guidelines to separate debt instruments of defaulting companies from those of good ones in the portfolio.
As per the senior officials of the mid-sized fund, if the 30 day rule is brought in and implemented, a considerable increment in the proportion of securities that are marked to market will be noticed giving a clear idea about the portfolio to investors. However, some of the funds might face fall in the NAVs on account of change in the valuation mechanism.
SEBI is all set to implement the short lock in period on liquid funds and move away from a simple accrual method to a more market–linked valuation method.