How markets behave around the budget

Pradeep Rane
25 February 2005

For the Indian market, the union budget is a major event where expectations of fortunes in the new financial year are either built or dashed. Amid all the hype and hoopla, the budget triggers either bulls to go on a rampage or bears to hammer down stocks. Investors closely await signals on economic policy from the government to decide whether they should call on the market.

Sometimes very high expectations are built-up leading to a sharp run up in stock prices before the budget. In other cases, markets remain subdued fearing a harsh budget. Nevertheless it is a time when investors take big bets.

For instance, there are a lot of expectations from the forthcoming budget as the markets expec a sequel to the two earlier "dream budgets" presented by the finance minister P Chidambaram.

A study by Dimensional Securities (Demystifying markets: Pre- and post-budget), a leading broking firm based in Mumbai on how stock markets behaved during the periods leading up to the budget in the last 15 years since the economic reforms were initiated, provides interesting insights into market trends.

During seven of the 15 budgets, the study notes, the markets have seen a rally before the budget if one takes the 31 trading days as the beginning of the budget rally. Even if 16 trading days of the budget rally just before the budget day are taken into consideration, the statistics remain more or less the same — eight occasions out of 15 have yielded a positive return, the report says. However, whenever there is a massive pre-budget rally there is invariably a fall after the budget.

Statistics show that except for two of the Manmohan Singh budgets, all the other five occasions when the markets have gone up prior to the budget, have given negative returns post-budget. "It seems that there is an inverse relationship between the pre-budget and post-budget behaviour," says an analyst with the Dimensional Securities.