Market may not tap dance to interim budget tunes

If history is any indication then market movement during today’s interim budget is expected to be muted. During last interim budget in February 2019, Nifty moved up from 10,830.9, a previous day close to 10,893.65, budget day close, a mere 0.58% rise, while in February 2014 interim budget, Nifty scaled up from 6,048.35 to 6,073.30, a mere 0.41% rise.

Since this is an interim budget, that seeks budget only for the first quarter of FY25, and focuses on a breakdown of the union government’s expected income and expenses until the formation of new government, the elections may be the bigger market mover in coming days. On the other hand, on occasion of full-fledged budget, the market has usually shown wild swings. In February 2020, Feb 2021 and Feb 2022, market moved minus 2.4%, up 5%, and up 1.5% respectively, movement much higher than the interim budget.

Last year was an exception when prior to the 2023 budget, Nifty moved merely 1.5% in ten trading sessions and showed a lethargic movement of just 0.3% on the budget day. This year as well, Nifty gave a muted performance by moving a mere 0.09% since January 01.  

Volatility Reign Supreme Pre & Post Budget

Market movements before and after the budget in India are frequently characterised by high volatility, primarily driven by sentiments and expectations.  

Market participants attribute the high volatility preceding the Budget to expectations surrounding proposed measures. A failure of the Budget to meet these expectations often triggers a sell-off. Notably, volatility in the Indian market undergoes significant shifts in the pre and post-budget periods. For instance, seven days before Budget 2020, the Volatility Index (VIX) rose by 8.2%, whereas seven days after, it fell by 15.6%. This underscores the market's susceptibility to sentiments and the noise of expectations during budgetary periods. Interestingly, in the past 29 years, the market has seldom been euphoric before and after the budget. Since 2013, the VIX has been above 20 in three months prior to Budget, before inching closer to 15. This indicates there is huge volatility before the budget that starts normalising afterwards. The year 2021 was the most volatile since 2013, with VIX remaining in the 23 range for six months before and three months after the budget.

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But do current times justify hype around the budget?

As per budget estimate in 2023-24, India’s nominal GDP was projected to reach ₹301.75 lakh crore, while government of India’s receipt (excluding borrowing) is estimated at ₹26.28 lakh crore. This means the centre's earnings are less than 9% of India’s nominal GDP. To meet the total expenditure of ₹45.03 lakh crore, the government borrowed ₹18.74 lakh crore, or 41.66% of India’s budget. Thus, FY24 union government budget was just 15% of the nominal GDP. In light of such data, the stock market should ideally be impervious to the budget as the government's expenditure is just 15% of our GDP and it’s earning just 9%. The daily derivative trading volume in the stock market is crossing Rs 300 lakh crore or over India’s nominal GDP. It would seem out of place for a market that trades more than the country’s nominal GDP to react to the Budget, which is miniscule in comparision.  Of late, in India, a large part of the indirect tax system has been replaced by GST. This means the country is moving towards uniformity of taxation. Apart from changes in direct taxes, which have been rationalised to a large extent, there is not much that is affected by the budget.