Govt Hard-Talk Makes Pre-Budget Rally Unlikely

The temporary blip witnessed at the major bourses has posed serious doubts on whether a pre-budget rally, which has become an annual feature on the domestic stock markets, will be repeated this year.

Historically, the market has shown significant gains just prior to the announcement of the budget proposals. Market sources indicate that operators generally build up huge positions in anticipation of some good measures in the budget.

However, this time around, there is a feeling among the market players that major indices will remain in the trading zone since the government has already indicated about some harsh measures in the forthcoming budget.

There won't be any surprise element in the budget this year. Thus, activity at the bourses have remained subdued, says Kapil Krishan, head of research, Prabhudas Lilladher.

Also, the fact that the interim budget was presented earlier by the government has dampened the sentiment at the bourses.

The interim budget has given enough indications about the things that will be there in the full budget. Thus, I doubt whether there will be an across-the-board rally this year. All I can see is a sector-specific rally, Krishan said.

However, not everybody believes that the markets will look down prior to the budget. According to B G Daga, chief general manager, UTI, the end result of a harsh budget will be good for the economy.

The budget creates expectation among various market players, and expectations will be there even this year. Thus, irrespective of whether the measures are harsh or not, market players will have expectations based on which they will take huge positions, said Daga.

A look at the previous year's data indicate that the Sensex actually witnessed a sharp upward movement in the run up to the budget.

In 1994, the Sensex gained over 339 points in a month prior to the budget. The Sensex was quoting at 3947 on February 1, 1994, and the day on which the budget was presented, the Sensex was quoting at 4286 points.

A similar trend was witnessed next year as well when the Sensex gained over 273 points in one month prior to the announcement of budget.

Daga further says that the current blip witnessed in the stock indices is more of a technical correction. The market was moving in only one direction since the past couple of months, and a correction was imminent, he said.

The fact that FIIs had turned net sellers in April has worried the market players.

Unlike the previous years, FIIs have turned net sellers in the market in the run up to the budget which has put the operators, who have built up position, in a fix. Normally, the stocks offloaded by the operators are absorbed by the FIIs at higher levels which gives an excellent exit route to them. However, since the FIIs have remained sellers in April, the operators are not able to sell the stock at higher levels, says a BSE broker.

Nikesh Shah, head of research, Triumph Securities, is of the view that since the government has indicated tough measures in the budget, the chances are that the operators will refrain from taking fresh positions.

I feel the market will remain in the range of 3850-4250 points. BJP has given indications about giving protection to some sectors like steel and cement. Though the government has indicated that it wants to protect the domestic industry, it has not mentioned how it plans to implement it. Unless a clear policy on this issue is announced by the government, there will not be any fresh buying by foreign institutions, Shah said.