How will the market react to budget day?

The Union Budget will be unveiled tomorrow by our Finance Minister. As investors you must be worried about the market reaction on budget day. In this blog, let’s dive into the historic data on how markets reacted to the budget. We have put data from February 26, 2010 to 2024. Check the image below.

Note: The average return of Nifty one week before the budget is minus 4%, while one week after the budget is 1.3%, out of the last 18 budgets since 2010, Nifty has ended up on positive notes on 12 budgets.

Should you over react to the budget?

No. We should not be very overreacting to the budget. It's just one of the events which tells us where the government is spending and where the government is getting the money from. And we want the government to be prudent to control the fiscal deficit and spend on capital expenditure. These factors have a significant impact on the economy but they are not the only drivers of market performance. 

If we look at the data of the last 18 budget sessions, 12 locations after the budget, the Nifty has ended positive. And on most of the occasions of the week before the budget, the market has always been negative. But a week afterwards, it has gone positive. So we are not saying that the market will become positive. Even after this budget, there were six sessions where the market was negative. We don't know if now this year is one out of, you know, out of the 18, that six, which were negative. 

What Drives Market Performance?

So, what drives market performance in the long run? The answer is simple: GDP growth. If the economy is growing, companies' earnings will grow, and the market will follow. The budget may have a short-term impact on the market, but it's the underlying economic fundamentals that will ultimately drive performance.

In the short run, the market may react to the budget if the fiscal deficit is high, if the government is making more revenue expenditure, spending more on freebies, spending more on subsidies and not really doing much on the capital expenditure, or if the government is taxing us more. If these points come in the budget, that means the market did not like the budget and the market can go down reacting to the budget in the short run.

But in the long run, what will make the markets move is the GDP growth. At the end of the day, the only thing that will drive the market is GDP growth. If GDP grows, companies' earnings grow. If companies' earnings grow, the market grows. Eventually the budget will become one of the events after a month or two and people will be back on looking at what is the GDP growth and how is the GDP moving and how is the company's earnings moving?

Will Indian stock exchanges remain open for trading on budget day, Feb 1?

The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have announced that the stock markets will be open on the day of the budget and trading will be done like normal days.

How was the market on budget day last year?

The stock market declined after the 2024 budget announcement. This was majorly due to the government's decision to increase capital gains tax and impose higher taxes on trading derivatives, which led to a 0.13 per cent drop in the Nifty. The Indian rupee also dropped to a record low against the US dollar to Rs.83.69.