Trends show post-budget market rally in the offing

Data largely from the time when the Narendra Modi-led government took charge suggest that stock markets have rallied strongly post the Union Budget announcement and this time could be no different, experts told BusinessLine. India’s budget announcements have often been key catalysts for market trends and data show that if markets fell sharply a few days ahead of the Finance Minister’s budget speech, they rally strongly in the days that follow the event. 

An over 1,000 points crash in the Nifty and over 3,500 points fall in the Sensex in the last 4-5 trading sessions has led to fear and panic among investors. Everybody in the market has now set their eyes on the February 1 budget announcement.

LTCG conundrum

In 2021, the Sensex and Nifty declined by 7 per cent just seven days ahead of the budget, but rallied 9.6 per cent in the seven days that followed. Markets mainly heaved a sigh of relief since there were no taxes levied on the stock markets. For the past few weeks in 2022, markets have been agog with speculation about a hike in long-term capital gains tax.

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Experts opined that the market may rally sharply if there is no such announcement. 

Market behaviour

Between 2013 and 2021, Sensex and Nifty have rallied on six occasions in days after the budget announcement since they were falling ahead of the budget. On three occasions, the markets have declined post-budget announcements for they had rallied ahead of the budget speech. It simply means that if markets are falling ahead of the budget then the probability of a rally post-budget announcement is higher and vice-e-versa. 

Only on one occasion in the past nine years, Sensex and Nifty fell by 0.82 per cent ahead of the budget and declined 2.21 per cent post-budget. One time in 2017, markets were up 0.28 per cent ahead of the budget and 1.89 per cent ahead of the budget.

‘Rally on cards’

“Every parameter in the derivative markets and cash markets like the relative strength index put call ratio or the open interest suggests that markets are highly oversold and ripe for a sharp reversal on the upside. Markets and traders just need a push and the Union Budget could be a catalyst. As usual, there is too much fear in the markets ahead of the budget, but after the FM has read her speech, it may seem there is nothing much to worry and markets rally. This time, the government revenues, tax collections and corporate results, market internals to fundamentals, are robust. Hence, a rally is on the cards,” said Kishor Ostwal, MD, CNI Global Research.

This year, the market crash was the worst ahead of the budget since the indices fell by over 8 per cent in the past few days on the back of heavy selling by foreign portfolio investors (FPIs). As per stock exchange data, the FPIs have sold stocks worth ₹19,315 crore in the cash segment in January so far. In the derivatives, the FPIs have sold index futures worth ₹7,515 crore and stock futures worth ₹9,424 crore in January so far, which has hurt investor sentiment.

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