>INDIA BUDGET: Muted expectations!!!! (HSBC)

We expect that the budget for the fiscal year ending March 2011 is unlikely to represent a major shift in government policy. A gradual winding down of fiscal stimulus, a 15-20% rise in government expenditure, and building in robust economic growth of 8.5-9% is likely to lead the government to project a lower deficit (of 5.5%). However, given that most of the lower deficit number is on account of cyclical rather than structural factors, our economist, Robert Prior-Wandesforde, believes the RBI may raise rates at or shortly before the next policy on 20 April 2010, given the combination of this modest budget disappointment and more inflation upside surprises. Risk of this may blunt any budget related enthusiasm for stocks.

■ FY2010/11 budget unlikely to unfold any major stock catalysts other than higher spending plans in key areas

■ Sectors likely to benefit: Infrastructure, Construction & Engineering, Banks on higher spend

■ Stocks impact: Positive – L&T, BHEL, IRB, Voltas, Banks, HCL Tech; Negative – BPCL, HPCL, ACC

Notwithstanding our expectation of a muted market impact, there may be select sectors that could benefit from higher spending (construction & engineering, infrastructure) and higher growth + rates (banks), but oil marketing and cement companies (in the South) run the risk of a negative market reaction given the sharing of subsidy burden and lack of pricing power.

Key downside risks are 1) likely optimistic revenue projections in case economic growth fails to pick up, and 2) large borrowing by the government to fund the deficit potentially crowding out private borrowers.

Please refer our summary of macro and sector related impacts of the budget inside.

To read the full report: INDIA BUDGET