A look at how the Union Budget could affect equities, gold and fixed deposits

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A look at how the Union Budget could affect equities, gold and fixed deposits
The Union Budget 2014-15 tends to certainly have an impact on the various asset classes, including gold, equities and fixed deposits. Take a look at what could be the impact on the various classes of assets after the Union Budget is announced.


The Union Budget could have something for gold. The most probable decision could be a cut in the import duty on gold. Last year the government raised the import duty on gold to 10 per cent, to reduce the current account deficit and prevent the rupee from falling. Read more on current account deficit here

The current account deficit has now fallen to just 0.9 per cent of GDP, which is almost negligible. This means that the Union Budget could roll back import duty hikes, which means gold prices could fall after the Union Budget. There are hopes that the Union Budget would bring the import duty to 5 per cent to prevent smuggling. If that happens expect gold prices in India to fall.


Equities tend to be driven by sentiments. If the Union Budget 2014-15 announces some concrete measures to cut the fiscal deficit, push infrastructure growth and cut excise and corporate tax, be rest assured that equity markets would rally. However, cutting corporate tax is completely ruled out at the moment, though the government may cut excise duty in select sectors to boost demand. Equities from these sectors will rise should there be some benefits. Eagerly watched by the markets would also be freebies doled out by the government. In fact, if the Union Budget remains a populist one, the equity markets are unlikely to rally. All in all there are heavy expectations from the Union Budget this time around and if expectations are not matched, it could lead to a sell-off in equities.

Fixed deposits

The Union Budget does not directly affect interest rates and hence fixed income yielding securities. However, indirectly it does. For instance, if there are concrete measures with regards to bringing down inflation, which actually does fall, we could see interest rates on fixed deposits fall. Interest rates and inflation tend to move in the same direction. Elevated levels of inflation, means higher interest rates. However, interest rates are unlikely to go down anytime soon. Threat of a deficient monsoon could mean higher food inflation and crude oil is already on a boil on account of tensions in Iraq. This means that inflation would stay high on account of food inflation and crude oil. Clearly, interest rates are expected to stay high, no matter what the Budget does.


It's difficult to say which asset class would outperform once the Union Budget is delivered. Equities and gold remain risky, while fixed interest yielding securities remain the safest bet of all.


Read more about: gold, equities, fixed deposits
Story first published: Saturday, June 21, 2014, 9:39 [IST]
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