Markets Before, After and During Budget

The Union Budget of India is the annual financial statement presented by the Finance Minister in the Parliament. The Union Budget outlines the government’s revenue and expenditure for the fiscal year, which typically runs from April 1 to March 31. It is a comprehensive document that provides details about the government’s fiscal policies, proposed expenditures on various sectors, and revenue generation plans. 

One cannot overlook the budget’s influence on the stock market. Interest rates for government-linked investment alternatives, taxation, industry-specific policy ups and downs, and a plethora of other factors can impact stock values beyond just budget day fluctuations.

So, what can we expect for the 2024 budget? Well, truth be told, there’s no way for anyone to make a sure-shot guess on the market’s response to budget 2024. In fact, that is one of the reasons why the budget printing zone is guarded so heavily. The reason for shrouding the budget documents in such a high level of security is to avoid one person, or a handful of people, being able to manipulate the market because they have some budget information. 

What we can do, however, is glance at how markets have performed in the past two decades around the budget. We can also try and see if any patterns are emerging based on how market volatility at present. In this article, we are going to be looking at the market reaction in terms of the percentage points reaction of the Nifty 50. 

How Does the Budget Impact Stock Markets?

India’s Union Budget has a significant impact on the stock markets, interest rates, and economy of the nation. Generally speaking, the state of the economy is reflected in the performance of the stock market. Moreover, interest rates and stock prices have a historical relationship. The country’s fiscal imbalance is impacted by the expected amounts that the finance minister announces for expenditure and investment. This affects India’s economy, money supply, and interest rates.

High-interest rates typically result in an increase in the industry’s capital costs, which hurts profitability and, ultimately, drives down stock prices. When interest rates are low, the situation is the opposite.

Generally,  long-term interest rates are said to be negative for stock markets, while short-term interest rates impact stocks positively. A lower long-term interest rate motivates further investments, while on the other hand, higher rates discourage it. These investments are vital for economic growth. Higher bond yields further lead to discomfort in stock markets.

For instance, if there is an increase in direct taxes, this will lead to a decrease in disposable income, which will further pull back the demand for various goods. With the decrease in demand, there would also be a drop in production, which would impact economic growth. 

Investors anticipate changes to the tax structures pertaining to stock markets. They probably anticipate the government’s decision regarding, among other things, security tax transactions, short-term capital gains tax, and long-term capital gains tax.

Stock Market and Previous Union Budgets 

The table below showcases the performance of Nifty 50 on Budget Day.

Early Steps (2013-2016)

• Focus on Infrastructure: Subsequent budgets prioritised infrastructure development, with allocations to roads, railways, and energy attracting investor interest in related sectors.
• GST Hiccups: The 2017 rollout of the Goods and Services Tax (GST) initially caused temporary jitters due to implementation complexities, but long-term benefits fueled optimism later.

Consolidation and Reforms (2017-2020)

• Focus on Banking and NBFCs: The government’s efforts to revive the banking sector and address NPAs brought relief to lenders, impacting their stock prices.
• Corporate Tax Cuts: The 2019 Budget’s corporate tax cuts aimed at boosting investment and competitiveness, initially lifting sentiment. However, global slowdown and macroeconomic concerns muted the long-term impact.
• Regulatory Tightening: Crackdowns on shadow banking and stricter SEBI regulations brought short-term volatility but provided greater market stability in the long run.

Pandemic Pivot and Beyond (2020-2023):

• COVID Response: The 2020 and 2021 budgets grappled with the pandemic’s economic fallout, prioritising healthcare and social welfare. Market reactions were mixed, reflecting the evolving crisis.
• Atmanirbhar Bharat Push: The focus on self-reliance in key sectors like manufacturing and technology attracted investor interest in domestic-oriented companies.
• Cryptocurrency Regulations: The introduction of a 30% tax on crypto gains and losses brought uncertainty to the nascent market, impacting related players.

Conclusion

As India navigates the post-pandemic landscape and strives for its $5 trillion dream, the Union Budget remains a key driver of economic direction. Investors, armed with insights from past trends and a keen understanding of the current context, will continue to decipher the budget’s message, anticipating its impact on the ever-evolving Indian stock market.

This article merely scratches the surface of a complex relationship. An in-depth analysis of specific budget provisions, sectoral responses, and long-term trends can offer further nuance and understanding. The next Union Budget awaits, and the dance between policy and the market resumes, promising a new chapter in the ever-fascinating saga of the Indian economy. If the above information interests you, open a demat account with Angel One today for a hassle-free process.

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Disclaimer: This article is written for educational purposes only. The securities quoted are only examples and not recommendations.