How Often Have Markets Really Cared About Budget 2013?

Even as India’s domestic growth has deteriorated, fiscal deficit spirals out of control and investments have slacked, many analysts say that budgets have become a non-event for the markets.

While markets may look forward to the Union Budget, over the years, they have shown less volatility and more stability in its aftermath. Also, while the budget’s implications matter for sectors and companies, they too have diminished over the years. “Over the last few years, the Budget has increasingly become a non-event for the markets and market volatility on and after the budget-day has been dipping,” a HDFC securities report on pre-budget expectations noted.

The government of late has seen immense pressure from international credit rating agencies and the RBI to check the fiscal deficit and prune unproductive public expenditure, markets have increasingly been seen as moving on global cues. “While the markets may look forward to the Budget proposals with bated breath, we feel that the markets will be driven more by changes in global risk appetite and liquidity conditions than anything else,” HDFC stated.

While the market usually falls post-Budget, with India on average, down by 2.3% in the month after the Budget (with the first 15 days accounting for most of it and underperforming EM by 1.5%), comparing the market volatility of the 90s to what we see now, there has been considerable stability and we no longer see a double digit fall or rise in market like we did in the decade of the 1990s.

Not once since 2001 has the market seen a double digit volatility. In that sense, the markets have seen a decline in influence that the Budget has had on it from the 1990s, when the Budget was also used as a platform to announce reforms.

According to Morgan Stanley, the market’s performance pre-Budget (i.e., expectations from the budget) is also an important factor that has a bearing on its post Budget reaction. “If the market is up in the month before the Budget, it has an 80% prospect of falling post the Budget, higher than the overall probability of 60%. A market that is down before the Budget still holds an even chance of slipping further in the month after,” Morgan Stanley stated in a report titled ‘Union Budget ‘13: Will it be a Spring Clean?’.

According to the market movements may also have to do with the March effect, which is traditionally the worst month of the calendar year, partly to do with the Budget itself and also to do with fatigue from the performance of the winter months.