Foreign portfolio investors (FPIs), key drivers of the bourses, have lightened their holdings ahead of the Budget to be presented on Saturday. In the previous five sessions, they had liquidated shares worth nearly Rs 6,000 crore. A large part of the sell-off can be attributed to the outbreak of the Coronavirus.
Market players say the possibility of savvy investors taking money off the table ahead of the Budget cannot be ruled out.
On Friday, FPIs sold shares worth Rs 4,179 crore, the highest single-day selloff in more than two years.
The India VIX, a barometer for market volatility, shot up 12 per cent during the week. This signals that the markets could see huge gyrations following the Budget.
The equity markets will remain open on Saturday. Experts say traders have positioned themselves for a volatile day of trade.
Going by past data, the Sensex typically witnesses huge swings and ends the Budget session lower. The Sensex has swung an average 3 per cent in the past 15 Budget-day sessions. It ended 10 of the last 15 Budget sessions lower.
Market players said that the government has to strike the right balance between keeping the fiscal deficit in control and announcing measures to revive growth.
This will keep the markets on the tenterhooks.
“The Budget is always important from a market point of view. More so this year because it will give investors a sense about what the government is thinking about the slowdown,” said Abhiram Eleswarapu, head of India equity research, BNP Paribas.
“The fiscal deficit is the critical piece. The government may be thinking of maintaining the fiscal deficit targets. In that case, it will need to cut expenditure as revenue collections have been below expectations. This will help achieve fiscal deficit target but end up prolonging the slowdown.
The other alternative is to not cut back on expenditure. This could mean that you miss the fiscal deficit target but that will be a solution to alleviate consumer stress,” he added.
Eleswarapu said the market could see a correction if the Budget disappoints.
On the last three Budget days, market swing has been below the long-term average of 3 per cent.
Ridham Desai, head of India equity research at Morgan Stanley, said impact of the Budget on the market has declined over the years. However, it still remains a key event from the markets’ point of view.
“The impact of the Budget on the market has been on a secular decline. Nevertheless, market participants still need to negotiate volatility,” he said.
The government’s spending plan on infrastructure and farmers, a credible fiscal deficit target and re-alignment of direct taxes (including long-term capital gains or LTCG tax) are some key factors that will impact investor sentiment, according to Desai.
Some investors are hoping that the government will offer some relaxations when it comes to stock market-oriented taxes such as dividend distribution tax, buyback tax, and LTCG.
Sanjay Mookim, India equity strategist, Bank of America Merrill Lynch, said if some of these expectations are met, it will be a positive for stocks. However, it “may not result in any significant de-coupling of India from emerging markets.”