Indian Stock Markets and 'Budget Blues'

Presentation of the Annual Budget, the fiscal document of the Central Govt., forms a very significant event for the Indian Stock Market. Ever since the Government of India embarked upon the liberalisation process in 1991, this annual event has become all the more important for the market participants. This year this historic event is going to fall on Monday the 6th July 2009. Historically stock markets have given a negative return post budget (returns for one month after budget announcement) in 14 of the 18 years since 1991. Will the markets be able to break the post budget jinx in 2009?

Fortunately, the markets have entered a new orbit with the installation of a stable Govt. at the Centre, so a significant downward risk is almost ruled out post budget. The initial pre-budget euphoria has almost peaked out at around 15600 on the Sensex and 4700 on the Nifty. At the moment markets are not expecting too much from the budget, given the limited options available with the Finance Minister. If the markets witness a reasonable correction in the run up to the budget, it will be good for the long term health of the markets, since the valuations seem stretched at these levels. The events that could cast a negative shadow over the markets in the short term are: Spread of the 'Swine Flu' epidemic and the unsatisfactory advance of 'Monsoon' during the month of June. These events have the potential to pull down the indices substantially (Sensex to around 13000 and Nifty to under 4000).

If the pre-Budget fall materialises, it will be a good buying opportunity for long term investors. The Budget is likely to spring some positive surprises, and if that happens markets can break the post-Budget jinx and head higher towards Sensex levels of 16000 and above. But the gains post budget will be selective and not across the Board. One can take calls on individual sectors after analysing the budget impact.