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The heavy election calendar will likely exert pressure on the government to boost social spending with schemes to boost annual transfers to farmers, expanding health insurance, and interest subsidy on home loans, foreign brokerage Jefferies said in a report.

State freebies have already started in a big way. The fiscal performance is weak year-to-date (YTD) with tax collections 3 per cent YoY (Apr-Jul), vs budgeted 10 per cent for FY24. A slowing nominal GDP (+8 per cent in Q1) and rising oil prices / potential populist pressures will restrict tax revenue surprise.

Meanwhile, expenditures in an election year will be tough to cut, partly as upfronting of spending (+23 per cent YTD vs +8 per cent budgeted) reduces the headroom. Sharp PSU rally though raises chances of government divestment in the near term, the report said.

Potential re-allocation towards social spending might drive incremental pressure on PSU disinvestments, the report said.

With Brent Crude Oil price at $90/barrel+, the headroom for a fuel price cut around Diwali (4Q23 festive season) is gone. Reverse may happen though with diesel prices already implying losses for PSU oil companies, the report said.

Rising oil prices have adverse implications for the rupee as well with every $10/barrel swing implying 0.4 per cent change in the CAD.

“Rich valuations, oil/fiscal worries & near term state elections could raise market volatility. Tactically we reduce portfolio beta somewhat and trim weight on midcap industrial and property OWTs and shift weight to laggards/cash," the report said