Historical Trends: How the Stock Market Performs Around Budgets?
Every 5 years, the scope as well as the nature of the Budget undergoes a change. Over the years it has been witnessed that investor activity tends to increase around this time, generally leading to higher overall volatility during Budget periods. Additionally, it is intriguing that Budget Day reactions have generally been moderate, with gains or losses not exceeding 2% in 8 out of the last 10 years.
Here are some examples from the past to show you how the stock market behaves when the budget is around the corner.
- In the year 2013, when Finance Minister P. Chidambaram presented the Budget under the UPA government, it fell short of impressing the market. This resulted in what is said to be the worst Budget Day performance since 2009. Nifty ended lower, losing around 2%.
- In February 2015, Arun Jaitley the then-finance Minister presented his second Budget. The market reacted marginally positively, ending the session with a gain of 0.7%. However, following the Budget, the Nifty experienced a selloff, declining by about 4.6% over the next month.
- India’s first full-time female finance minister, Nirmala Sitharaman presented her first Union Budget in 2019. However, it did not impress the market much, as she failed to provide clarity on major announcements made by the acting finance minister in the interim budget. Nifty lost 8% in the month following the budget announcement, marking the worst monthly performance during that period.
- Budget 2021 marked a turnaround for Nirmala Sitharaman, following two consecutive disappointing budgets. In her third Budget, the market responded enthusiastically, with the Nifty delivering its best Budget Day gains since 1999. Budget saw the Nifty settle on a strong note, ending the day 4.7% higher.
Factors Influencing the Stock Market Before Budget 2024
A nation's budgetary decisions have far-reaching effects on economic indicators, investor sentiment, and stock market performance. Here are the factors that influence the stock market:
Government policies The financial budget allocates money to different areas like healthcare, roads, defence, and schools. When the government spends more in certain areas, it can help companies in those fields grow. So, stocks of companies that get government contracts or work on big projects might go up. For instance, railway stocks are picking up because more money is going towards railways. But if a sector gets less money in the budget, its stock prices might drop.
Tax policies The budget includes various tax rules that affect how much money companies make and how investors act. If the government cuts corporate taxes, companies keep more money, so their stock prices often go up. But if taxes go up, companies might earn less, and investors might rethink how much they think a company is worth.
LTCG/STCG rules Every budget brings expectations of changes to Long Term Capital Gain (LTCG) tax rules. Currently, equity investments held for over a year are taxed at 10% for LTCG. If the holding period is extended or the LTCG tax is removed, it could boost net returns for long-term investors, attracting more people to the market. This increased participation generally benefits the stock market overall.
Rates of interest Budget decisions can impact monetary policy, especially how central banks set interest rates. When governments borrow to cover budget shortfalls, it can push interest rates higher, affecting borrowing costs for businesses and individuals. These interest rate changes influence investment choices, borrowing habits, and the value of financial assets like stocks.
Investment Strategies Before and After Budget 2024
The stock market has entered a period of good performance after experiencing an initial setback following the announcement of the Lok Sabha election result. Simply put, after an initial decline, the market has now seen a positive trend or significant improvement in its performance.
Financial experts suggest that traders and investors should prioritise sectors such as infrastructure, defence, railways, energy (especially renewable energy), agriculture, electric vehicles (EV), and the expansion of the MSME sector. It is anticipated that the budget will emphasise reforms designed to attract foreign investment, streamline the tax system, and prioritise green energy and sustainability initiatives.
Leading up to the Union Budget, there has been notable interest in agriculture-related sectors like fertilisers, sugar, and agrochemicals, alongside defence. Banking has also seen renewed interest, with signs of a potential trend reversal in IT. Overall, maintaining a positive market outlook and aligning positions with these sectors and themes is recommended.
Before the Budget is announced, there's typically speculation and short-term trading based on market expectations. Traders may exit these trades on the actual Budget Day, reacting to the outcomes and announcements made during the Budget presentation. This reflects how market sentiment can shift quickly based on the Budget's impact on specific sectors and stocks.
Immediate Market Reactions After Interim Budget 2024
Here are some of the immediate reactions that came in once the interim budget was announced.
- Experts believe that the government is actively working to strengthen public sector undertakings, as evidenced by recent initiatives.
- The rupee strengthened by 8 paise, closing at 82.96 against the US dollar following indications from the government of expedited fiscal consolidation and reduced borrowing in the interim Budget for 2024-25.
- Benchmark equity indices closed lower on Budget Day as investors chose to book profits amidst mixed signals.
- India’s interim Budget for 2024-25 garnered mixed reactions from the Indian business community in the Gulf. While some praised it for being progressive, others expressed disappointment over the lack of tax benefits.
In conclusion
The interim budget marked the final budget of Modi Government 2.0 ahead of the general elections.
The BJP-led NDA government has returned to power and is anticipated to maintain the figures outlined in the Interim Budget in their upcoming announcement.
In the upcoming full budget, Sitharaman faces the dual challenge of stimulating economic growth while managing inflation and achieving fiscal consolidation. Additionally, she must navigate the expectations of key allies such as Chandrababu Naidu's Telugu Desam Party and Nitish Kumar's Janata Dal (United), pivotal in securing BJP's third consecutive government despite not winning a Lok Sabha majority in the recent elections.
Stay tuned for Budget highlights 2024 with Bajaj Broking!
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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