What was the cause of the markets falling sharply in the previous week? Was it the quarterly numbers or budget expectations?

To be fair, the fall in the Sensex was a combination of below target earnings and also worries over the tightness in the Union Budget. Let us look at both of these individually.

Firstly, it has surely been a worrying quarter in more ways than one. The results are coming in thick and fast and there were some real concerns in a number of heavyweights. HDFC bank and Kotak Bank reported larger than expected NPAs. TCS had growth issues and RIL saw GRMs and petchem margin falling. Of course, there were smaller banks like RBL which saw a sharp fall in profits but the macro worry appears to be that the consumption slowdown is beginning to hit the private banks. Now PSU banks will be closely watched.

Secondly, the markets are also concerned that are some serious riddles and challenges in the Union budget if you break up the numbers. In the midst of the pre-budget euphoria that is common each year, the markets are worried about some larger macro challenges. Direct tax and GST revenues are expected to fall substantially short of target. The government is already hinting at an expansion of 50 bps in the fiscal deficit and that could impact the global ratings of Indian debt as well as the nature and color of FPI flows into India. The government has a lot of steep demands to contend with. There are expectations of personal income tax cuts after the government cut corporate taxes aggressively. That will be an additional cost to handle on top of Rs.145,000 crore for corporate tax cuts. These are the big budget concerns.