The market has slid 2.4% in the past week, making it the second Budget presented by finance minister Nirmala Sitharaman where equities are in the red in the run-up to the big day. The market has faced greater volatility in only two of the last 10 Budgets.

Volatility in shares of Adani Group companies spooked the market last week as the group market capitalisation fell over `4 trillion in two sessions after a report by US-based Hindenburg Research triggered a selloff. Foreign portfolio investors sold shares worth `9,350 crore in the past week as funds turned to other emerging markets owing to relatively better valuations, taking the year to date selling to over $2 billion.

The market has given negative returns after three of Sitharaman’s last four Budgets (if a three-month period is considered). The Nifty, however, gave positive post-Budget returns of 2.5% in 2021.

There seems to be no correlation between pre- and post-Budget performance, with the market swinging in opposite directions in four of the last 10 Budgets if a three-month period is considered.

The upcoming Union Budget will be the last full-year Budget from the Modi government ahead of the Lok Sabha election due in 2024. The Budget comes at a time when the government is trying to weigh spending priorities, without compromising on fiscal prudence and the inflation target.

A populist Budget may be be viewed negatively by the markets. The post-Budget performance this year will also depend on Fed action, the RBI policy meet, macro numbers, swing in commodity prices amid China opening up, and the earnings season.

“The key things for investors to look out for are the government’s commitment to the medium-term fiscal consolidation path, weighing spending priorities on capex, manufacturing incentives, subsidies and welfare, and the supply of government bonds that the market may be able to absorb,” said Goldman Sachs analysts Santanu Sengupta, Deepak Narendranath and Andrew Tilton.

India’s fiscal deficit surged in the aftermath of the Covid pandemic. The current year’s fiscal deficit target is pegged at 6.4% and the aim is to bring it to 4.5% of GDP by 2025-26.

“Market movement will depend on the fiscal deficit and borrowing programme projections. The fiscal deficit is likely to stay within the target of 6.4% given the buoyant tax revenues this year. If the Budget goes overboard on spending and the deficit target shifts a notch higher to 6.5% or 6.6%, the markets may react negatively,” said UR Bhat, director, Alphaniti Fintech.

According to Bhat, the Adani issue, the Fed meeting, the RBI policy and the earnings season results may weigh on the market more than the Budget. “Unless the Budget is hugely surprising on either side, I don’t think it will move the market so much given the other events that will transpire,” he said.

The Fed is expected to raise rates by 25 bps twice in the coming months and pause after that. The markets will also look to commentary by Fed chair Jerome Powell for the trajectory of rate hikes in the year ahead.

Auto sales numbers, core sector data, S&P Global Manufacturing PMI, S&P Global Services PMI and India’s foreign exchange reserves figures will also be released next week.

“A fiscal policy concern that needs to be urgently addressed is the significant compression of capital expenditure in most states, despite the `1 trillion interest-free loan provision for capital expenditure by states, which is exacerbating the growth slowdown. Tackling a slowdown in growth and a rise in current account deficit could be the focus areas of the Union Budget,” Dhiraj Relli, CEO, HDFC Securities, said.

The Budget may continue its focus on infrastructure spending, especially in states due for elections, employment generation, expanding PLI to more sectors and ensuring that the growth momentum continues, said experts. There is also scope for bringing down the cost of tax administration.

“Our analysis of government spending patterns in pre-election years reveals an increase in capex allocation towards infrastructure, cut in defence spending, and increased allocation towards rural spending and welfare measures, mainly education and healthcare,” the Goldman Sachs report said.

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