Equity markets have usually been ‘nervous’ ahead of budget but a relief rally is likely post budget, say analysts

• Indian equity markets have mostly been ‘nervous’ ahead of the budget announcement.
  
• Overall, in only one year out of 15 has the Nifty50 index given positive returns during all the three periods – pre-budget, post-budget and on budget day.
  
• The pre-budget month has also been relatively more volatile compared to the market movement on the budget day.
  
• The market movement in the month following the budget announcement has been the most volatile, but has delivered positive returns on average, according to data from NSE.
  

Finance Minister Nirmala Sitharaman is scheduled to announce the Union Budget 2023-24 on February 1. While the budget impacts India’s economic growth and sets the direction for different sectors of the economy for the next year, it also has an immediate impact on the equity markets in the run-up, as well as after the budget is announced.

“In the month prior to the Union Budget, the market usually remains nervous and delivers a muted return, though the market would take cues for further directional trade post the budget outcome. We expect the upcoming budget to remain focused on pro-growth policies along with balancing the fiscal consolidation agenda,” Sanjeev Hota, vice president, head of research at Sharekhan BNP Paribas, told Business Insider India.

For context, the Nifty50 index has declined 0.43% in 2023 so far, in line with the trend of negative returns in the month prior to the budget.

Overall, only one year out of 15 has seen the Nifty50 index give positive returns during all the three periods – pre-budget, post-budget and on budget day.

Budget-day movements have been the least volatile

Over the last 15 years, Indian equity markets have demonstrated volatility in the run-up to the Union Budget every year, with the benchmark Nifty50 index declining by an average of 0.79% in this period. Since 2008, only four times has the Nifty50 delivered positive returns in the month leading up to the budget.

The pre-budget month has also been relatively more volatile when compared to the market movement on the budget day, with the movement ranging between -6.96% to 5.67%.

This year, other factors like a global economic slowdown could add to the volatility ahead of the budget announcement, according to Deepak Jasani, head of retail research at HDFC Securities.

“However, prior to the budget [this year], markets could react not just to the budget expectations but also global markets trajectory, earnings etc,” said Jasani.

In comparison, the Nifty50 index has been the least volatile on the budget day when compared to both one month pre- and post-budget periods, with the index moving between -5.84% to 4.74% on the budget day. On an average, the Nifty50 index has declined only 0.28% on the budget day in the last 15 years.

Market volatility higher post-budget, but relief rally delivers positive returns

On the other hand, the market movement in the month following the budget announcement has been the most volatile, moving in the range of -6.89% to 12.67%. On an average, the post-budget relief rally has benefited investors, with the Nifty50 index gaining 0.68% since 2008.

“Markets typically react positively post budget for a couple of days as expected negatives do not materialise resulting in a small relief rally. However, no big rally is expected this year post budget as FY24 might not see much growth on a high base and talks of recession across the globe. Expected negatives on the capital gains front may not materialise,” Jasani added.

All eyes on changes in long-term capital gains tax on equity

Every year, markets await decisions on investment in defense, infrastructure, banking system, tax-related changes and so on. On the budget day, market movements usually track announcements along these expectations.

This year, key expectations are with respect to changes in the long-term capital gains tax on equity.

“Going by the market buzz, the government might bring some changes to long- term capital gains tax on equity or bring uniformity in tax structure vis-à-vis other asset class – for other asset classes like real estate, debt instruments and sovereign gold LTCG is at 20%, but with indexation benefits. So the market is expecting to increase LTCG on equity from 10% to 20% with indexation benefit,” added Hota.

Apart from this, there have been growing calls for increasing the basic exemption limit and enhancing the tax slabs and deductions, on the personal tax front. We will have to wait for February 1 to see how many of these demands are accepted by the government.

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