“Look, with every trade, the profitability of a trade goes down. For example, if in a trade you spend $500 and you expect a profit of say Rs 1,000, so by spending Rs 500, now you might earn Rs 300 or Rs 200. Your cost itself will go up for the same trade. So how the markets react to this situation because as liquidity dries up, the cost of trading goes up further because the bid and ask prices go up further. The spread increases,” Agrawal said.He added that it is difficult to predict how speculators will react in this new environment, noting that even traders themselves may not immediately understand the full impact.
“So what the overall impact on the market will be and how the speculators will behave, I wouldn’t know, because in fact speculators themselves won’t know. We will see the activity as time goes on,” he said.
Agrawal pointed out that strong earnings growth could offset the impact of higher costs, but said the announcement came at a sensitive time for the markets.
“If there is too much of a boom in the market – see earnings growth is like 15%, 20%, 25% – then of course it doesn’t matter that much what these specific incremental costs are. But it was not well timed and it was not expected. More importantly, it was not expected at this point because the markets have become very important,” he said. He emphasized that markets were already facing multiple pressures, including slower earnings growth, concerns about global trade and a weaker currency.
“The market has been a bit jittery because of the earnings slowdown and the trade fronts – whatever happens – and the currency is also weak. So in that situation where this happens, it is an additional blow to the market. But the market has weathered it well and the impact is hopefully limited as we move forward,” Agrawal added.
On broader market prospects, including the upcoming NSE IPO and continued outflow of foreign portfolio investors (FPI), Agrawal downplayed the long-term impact of tax-related hurdles, calling them a short-term distraction.
“No, the tax hurdle is only for today. I mean, you’ll forget about it tomorrow, I’m sure. Maybe it will even be done by 4:30 because the budget is so brilliant in every other aspect,” he said.
Agrawal praised the budget for its focus on fiscal consolidation, capital expenditure and technology initiatives, including artificial intelligence, and expressed optimism about India’s trade deals.
“It’s very balanced in terms of fiscal consolidation, in terms of a lot of capital investment initiatives, and as I talked about AI and technology, which could be very big. We just met the minister here and his confidence and commitment that the trade deals – I mean, the EU trade deal and many other countries have already been concluded,” he said.
He added that markets appear well positioned for a recovery in economic activity, citing encouraging high-frequency indicators.
“Look at the car sales for January coming in. I think PV has done more than 40%, 45%. TVS has done 27-28%. M&M has done 25%. So the economy is picking up. The credit flow is about 13-14%. GST collection has gone up 6% despite the fact that they have cut GST by 10%. So the economy is picking up,” Agrawal said.
He expects earnings momentum to strengthen in the coming quarters and business performance to ultimately determine the direction of the market.
“Earnings will rise as we move into the fourth quarter. Earnings this quarter will be good too. Next quarter will be even better. So finally the markets will do what the earnings do,” he said.
“If profits grow at 15% next year, I don’t see any reason why the index won’t go to 30,000 or something like that or 15-17%. So profits are the most powerful thing and that has actually only helped and not deterred this Budget,” Agrawal concluded.
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