Mumbai: It has been a volatile week for the stock markets, thanks to the reality of inflation and the expectations of the next Union budget. But you might not want to read too much into the long-term trend based on the next seven trading days ahead of the 28 February Budget.
A look at how Sensex, the benchmark index of the Bombay Stock Exchange, has behaved in the run-up to the last six budgets throws up an interesting trend. Two-thirds of the time, or four of six budgets, the market went one way in the week before the budget and made a surprising about-turn in the week after that major government financial ritual.
Only twice did the market stick to same direction pre- and post-budget, including last year, when Sensex rose 1.59% in the seven trading sessions before the budget and continued going up after the budget, rising 3.8% in the post- budget week. Something similar happened in July 2004, the first budget presented by finance minister P. Chidambaram under the United Progressive Alliance government. At the time though, Sensex fell 2.16% in seven trading days before the budget and another 4.46% after the unveiling of the budget.
Barring these two occasions, the market always moved in opposite directions before and after each budget, over the last five years. Six budgets were presented between 2002 and 2006, including an interim budget in 2004.
In February 2002, the market moved ahead of the budget, but fell later and the same pattern was repeated in 2003. In 2004 and 2005, the market fell before the budget only to rise later.
This time around, seven trading days away from the Budget, Sensex is still 306 points away from its historic high of 14,652.09 points that it reached on 8 February. Most traders don’t expect any major domestic jerks ahead of the Budget and even after.
Two crucial factors that can have a bearing on the market in such periods have been any changes in the short-term capital gains, tax on earnings from stock market and relaxation of rules governing foreign financial institutions (FIIs) having to register to operate in Indian market. Short-term capital gains from stock market investments now attract 10% tax and investors do not pay any tax on long-term capital gains. Market sources believe Chidambaram has a proposal on his table to raise this to 15%, but is unlikely to go ahead with it, as any rise in short-term capital gains will pull down the market.
FIIs are currently required to register with the capital market regulator. The benchmark index will zoom if there is any move to do away with this.
“Market expectations from the Budget is muted and I think the sideway movements will continue this week and even after the Budget,” says U.R. Bhat, managing director, Dalton Capital Advisors that advises FIIs on their investments in India.
There are others too, who feel that the Budget has lost the market-moving power that it had earlier. “The Budget exercise have become much more transparent and structured now. One does not expect the finance minister to pull a rabbit out of his hat. Of course, there could be surprises, but nothing that would change the course of the market in a major way,” says stock broker Alok Churiwala of Churiwala Securities.
Over at Geojit Securities, Satish Menon feels the valuations of Indian stocks are already over-stretched, even though he continues to be bullish in the long term. He cites concerns over rising inflation, interest rates and overheating of certain quarters of Asia’s second-fastest growing economy.
“What we are seeing now ahead of the Budget is a tug-of-war between the bulls and bears,” adds Churiwala. According to him, even if the bulls prevail, Sensex can go up another 500-700 points at most.
“Global markets have been very strong for the past couple of weeks and Indian market had not taken the cue because of interest rate worries. It was high time Indian market too rallied,” says Sanju Verma, head institutional equities, HDFC Securities.
Biju Mathew contributed to this story