The financial market is the mirror of a country’s economic health. Each economic activity, that takes place in a country or outside it, affects the behaviour of markets. Investors predict the course of the market with regards to financial events and their future outcomes. When it comes to such economic events, the budget has always topped the list. The budget comes with the announcements regarding important changes in Government policies and asserts the economic health of a country. That is also the reason that it creates volatility in the financial markets.

India and the Budget

The Finance Minister Arun Jaitley announced the budget on 1st February. There were many important schemes in the budget for various sectors, along with some vital taxation provisions, which were not in favour of market sentiments. The stock market was already feeble after Public Sector Banks’ negative reaction to the recapitalisation measures, and the budget provisions added to it.

Along with the expected broadening of the fiscal deficit target, the further news of the government imposing the Long-Term Capital Gain (LTCG) tax after 13 years discouraged the financial market and encouraged the selloff.

As a result, on the budget day, Sensex slumped by 839.91 points and ended at 36,066, and Nifty dropped by 256.30 points and closed at 10,760.60 points. In addition to that, the realty index fell by 6.28 percent accompanied by a fall in many other indexes. Apart from this, as per the data by CNBC, around 300 stocks closed lower a day after the budget announcement.

As per an article in The Economic Times, on the budget day, the Nifty 50 index formed a ‘Long Black Day’ candle on the daily chart and ‘Bearish Engulfing’ pattern on the weekly chart which suggested more bad news for the coming week’s trading sessions.

The reason behind the fall

Regarding the bloodbath of Friday (after the budget day), there were multiple reasons, and most of them are quite common during budget time in general. Generally as per the trends seen in the past, investors postpone their buying decisions on budget’s unpredictability. That results in a fall in the market a few days or a month before the budget. However, the scenario was opposite this time. The market was at an all-time high and breaking and making records with Sensex touching 36,000 and Nifty touching 11,000 a month before the budget.

The change in this budget was the announcement of a higher fiscal deficit and inflation rate. The Long Term Capital Gains Tax was announced at ten percent without any scope of indexation, to the dismay of investors. Also, their expectation of a change in the definition of “long-term” from one year to two or three years was not met.

Adding to the trend was the volatility in the foreign markets. As stated by the Finance Secretary Hasmukh Adhia, “There is a strong connection of all global equity markets now. In MSCI, all country index in equity market went down by 3.4 percent in last week and particularly in the last two days. Naturally, it will have its ripple effect in Indian stock exchange also.”

Is all bleak?

Global markets are falling, oil prices are soaring up, and the rate hike by the Fed is also potential factors that can create turmoil for our economy. Additionally, the fiscal deficit and the measures announced by the Government could hit India hard. As per an article published by The LiveMint, according to Morgan Stanley, the target of fiscal deficit means it can take the expectation of a rate cut out of the consideration with the risk of rising inflation. It also has the potential for a further rise in long-term bond yield, which can hurt the economic growth.

Contrasting to that view, the International Monetary Fund (IMF) has appreciated the target set by India. It has also increased its forecast for Indian Gross Domestic Product at 7.4 percent, which is, of course, positive for the economy. These all make it interesting and worth anticipating how Indian economy performs in the coming financial year, and how the Indian markets react with a lot of challenges on its way forward.

P.S- This article was originally published in The Qrius (Formally The Indian Economist.)

By Devanshee Dave

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