Markets During and After Budget

 

Introduction

Stock market reactions to the budget have varied in the past, depending on the overall impact that the budgets have had on the economy. A major reason for presenting budgets during market hours is to get a real-time response from the industry with respect to budgetary allocations and policy announcements.

Although stock movements are inherently volatile and deviations ensue in anticipation much before the actual announcement, some specific policy expectations set the tone of budget worthiness. In the last eleven years, stock markets have moved up on the budget day to the extent of four times, while they have witnessed a downturn or mixed reaction to the tune of seven times, including interim budget days from the underlying market index values. If we focus specifically on the last decade, the 2020 stock market can be identified as having seen the steepest Budget-day fall since 2009.

Budget Day Reactions in the Past Decade

The impact of the pandemic has been mixed for the markets. Many also see the growth in retail investments as leading up to a bubble formation. The bursting of this bubble has been the focus of discussion since the end of 2020. But the markets have largely held grounds. The market correction was quickly recovered, and the markets witnessed an increase of 5% on the day of the 2021 budget announcements.

Let us go through the specifics of Budget-day volatility in the past years.

2011 – A positive reaction was seen to the budget presented by Mr. Pranab Mukherjee, owing to his experience in offering a multitude of budgets over his career.

2012 – The last budget of Mr. Pranab Mukherjee proved to be amiss the expectations. The track record set around unrealistic estimates presented in the Union Budget had frustrated industrialists, and investors were also wary of the underperforming economy.

2013 – The budget presented by FM Chidambaram was also negatively received by the markets despite a decent and populist budget for the year. This is owed to the weak macroeconomic framework the country had been treading for many years, coupled with a debilitating slowdown.

2014 – The first Modi government budget presented by Mr. Arun Jaitley saw a mixed reaction from the market. With a dismissive interim budget in the background and a new incumbent in the office, there had to be drastic overhauls for the budget to draw any positive reactions from the market.

2015 – As already discussed, the importance of presenting the budget during the market session led to keeping the markets open on a Saturday for this budget. The budget response was balanced with a marginal loss for the day due to periodic profit booking.

2016 – This budget again saw a negative response from the markets.

2017 – This budget can be seen as the most successful budget since 2010, given the markets registered huge intra-day gains. The then FM Arun Jaitley changed the budget presentation day to 1^st Feb, which has since been followed.

 

2018 – The budget didn’t do much for the markets. The market reacted negatively initially, but the day ended with minor losses.

2019 – The interim budget presented by Mr. Piyush Goyal was received well by the markets. However, there was some major volatility in the exchanges due to the speculated high corporate tax rates and inflation caused by fuel prices before the final budget was presented by Ms. Nirmala Sitharaman.

2020 – This budget witnessed the steepest crash in the eleven years preceding it. The threat of a widespread pandemic was one of the reasons, and the others were escalated inflation and the effect of alternate tax mechanisms on investments.

2021 – The budget saw a pan-market cheer due to relaxed lending features and industry support amid the pandemic scare. India’s one of its kind digital budgets attracted significant gains for the day.

Current Budget – The reactions are mixed, with benefits for many industries and silence on a few others. But the overall outlook is positive. The budget is largely neutral for the markets. It could be attributed to the fact that the stock markets did not anticipate a populist budget in the wake of the Covid-19 pandemic. Furthermore, the future movements shall be largely dependent on how quickly the US Fed moves on tapering and rate hikes in 2022.  In the wake of the Covid-19 crisis, the US Fed had pumped in a record amount of liquidity in the system while keeping interest rates near zero levels which had supported the markets. However, the Fed has clearly indicated that they will be winding down their quantitative easing(QE) by March and raise rates by at least 75 bps in 2022, given very high levels of inflation. This will lead to some pullback in liquidity during 2022 and hence some caution is recommended.

Conclusion

The budget does help in deciding the market stance for the mid-term, but the external factors play a crucial role in giving direction to that stance. Expectations of a quicker than expected monetary policy tightening by the US Fed has led to some depreciation of the Indian rupee and pullout by FIIs from Indian equities.

With so many industries in the market, it’s practically impossible that the Budget has something positive for all the industries. Some relevant tweaks are what the budget can do at best. With an impressive GDP growth of 9.5% in the previous year, that too coming from a 7.5% slippage of the past, the prospects of Asia’s third-largest economy seem quite bright. More planning and foresight, such as the focus on CAPEX in the current budget, will surely take India a long way.

 

By Mr. Jyoti Roy, DVP- Equity Strategist, Angel One Ltd