Chart: Why markets may fall post Union Budget 2013

The Indian equity markets have turned from optimistic to cautious ahead of Budget 2013 despite robust inflows from FIIs, which have pumped in over $8 billion into Indian equities till date, following the impetus generated by reform measures announced since September 2012.

While 2012 saw Indian markets surge by 26 percent, 2013 has seen the market consolidating. As of today, the market is up only 0.21 percent while Indian stocks are the worst performers globally. All analysts have pegged a strong reformist budget as the next big trigger for the markets.

But, according to a study by Morgan Stanley, the Union Budget has usually left a trail of underperformance in the month after. Based on past trends, the investment bank discovered that if the stock market is up in the month before the Budget, it has an 80 percent prospect of falling post the Budget, while a market that is down before the Budget still holds the possibility of slipping further in the month after. ( See table below)

On average, India is down 2.3% in the month after theBudget with the first 15 days accounting for most of it. Source: Morgan Stanley

On average, India is down 2.3% in the month after the
Budget with the first 15 days accounting for most of it. Source: Morgan Stanley

"That said, the influence of the budget itself has been declining from the 1990s, when it used to be also the platform to announce reforms," said Ridham Desai and Sheela Rathi of Morgan Stanley.

"Since meeting fiscal deficit target will also require higher disinvestment target and non-tax revenues the budget will attempt to provide some boosters for the market. But effectively the short term positive reaction could be dwarfed by sustained increase in supply of PSU papers. Taken into context of the developments happening now, it does not look to me that markets will be making new highs or getting into a buoyant mood," noted Dhananjay Sinha Co-Head Institutional Equities Research, Emkay Global Financial Services.

Dipen Shah, head of private clients group at Kotak Securities, said in a note that though the market may be assured of a "responsible budget", as indicated by the FM during his global roadshows, most of the positive sentiment is already priced in. So unless P Chidambaram lays out a credible outline for fiscal consolidation and boosting investment, the markets will continue to consolidate.

"For healthy growth of the economy, the health of the capital market is important.We expect the budget to spell out measures to improve the depth of the markets. This could lead to some rationalisation of STT and steps to deepen the corporate bond market and improve the regime for foreign capital flows," said Aditya Birla Money in a report.

And it is precisely for this reason the FM is planning a strong package for the capital and equity markets.

A report in The Economic Times says the finance ministry is planning to remove the cap on the amount foreign institutional investors can invest in rupee corporate debt and putting in place a simpler regime for foreign investors in stocks and bonds. The finance ministry is also looking to unify various regulatory regimes that govern investments in stocks and debt and may slash the securities transaction tax (STT), which is levied at the rate of 0.1 percent on sale or purchase value of shares transacted through stock exchanges.

Chidambaram has already promised that the Rajiv Gandhi Equity Scheme will be made simpler and will allow first-time investors to make investments easily. As of now the scheme allows a maximum rebate of Rs 25,000 for first-time investors in equities. But Chidambaram hinted the ministry will revisit the tax incentive section in the scheme to address investor concerns.

After launching the scheme, he said: "...have assured the regulators that we will take the opportunity of the next Budget and the next Finance Bill to revisit the section and in the light of experience gained in designing the RGESS, we will make changes to that section so that the scheme becomes attractive to retail investors."

The ET report quotes ministry officials as saying that the budget may increase "the annual investment allowed under the scheme or allow for 100 percent rebate, and throw it open to a broader category of investor."

Updated Date: Dec 21, 2014 04:42 AM

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