Friday, September 22, 2023

Only twice in 30 years has the market increased both before and after budget

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History suggests that the budget of the Union‘s influence on short-term market performance is diminishing, foreign brokerage, Morgan Stanley said in a report.

Volatility has been rising since 2019, reaching an 11-year high in 2022. Expectations as measured by pre-budget stock market performance are important in determining what the market does immediately after budget.

The market falls two or three times in the 30 days following the budget. The probability of such a drop rises to 80 percent if the market has risen in the 30 days leading up to the budget. Only twice in 30 years has the market rise both before and after budget, Morgan Stanley said.

This year, India follows lower on an absolute basis

and relative basis to date in January and if this trend continues through budget day, the likelihood of a positive surprise is high.

An increase in the effective tax on long-term capital gains on shares, either through an extension of the holding period from 12 months to 2 or 3 years to qualify for long-term capital, or an increase in the tax rate of 10 percent to 15 percent could put a damper on stocks, especially in the broad market, the report said.

While post-budget performance is more difficult to predict, the one thing that seems more certain is that budget day volatility will be high, even though this volatility has declined over the past three decades.

Morgan Stanley expects the budget to focus on gradual fiscal consolidation, providing a credible path for budget deficit reduction in F24 and reiterating the medium-term roadmap to reduce the central government deficit to 4.5 percent of GDP; we continue to favor investment-driven growth with impetus to both public and private capex, and focus on improving ease of living, we expect the overall focus to be on improving job creation, access to infrastructure and availability of Services.

The impact of the budget on the market has declined secularly, although actual performance is a function of pre-budget expectations (measured by pre-budget market performance).

Market participants have yet to negotiate volatility.

Factors likely to have maximum impact include a credible budget deficit target, government spending plans versus fiscal consolidation, and long-term capital gains tax changes.

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