Thursday, February 28, 2008

BUDGET & MARKETS-3

Will the market move to Budget tunes?
28 Feb, 2008, 2007 hrs IST, INDIATIMES NEWS NETWORK

MUMBAI: As the nation looks forward to tax benefits by the finance minister in United Progressive Alliance government's last budget, market pundits feel that the capital market will have little to cheer as the budget is likely to be a populist one, focusing on inclusive growth.

Empirical data suggests that there is no thumb rule to conclude what course the market takes pre- and post-budget. On the eve of this year's Budget, equities erased most gains to end flat as positive economic data was overshadowed by poor global cues. Ahead of the Budget, investors were unwilling to take fresh bets waiting for some news to improve the mundane sentiment in the market. Bombay Stock Exchange's Sensex ended flat at 17,824.48, after rising to a high of 17,921.51 and slipping to a low of 17,690.16, intra day.

Let's see how the market has responded to the budget presented by the UPA government since it came into power.

Formation of UPA government in May 2004-05

The BJP lost the elections in May 2004 and the Indian stock market witnessed one of the worst day in its history termed as "Black Monday." Spooked that the new Congress government and its Left allies could reverse some of the market-friendly policies of the NDA, including disinvestment, foreign hedge funds began their exit early on May 17.

As a result, in just 22 minutes of trading, the Sensex managed to freefall 842 points or 17 per cent, its biggest intra-day fall then. By the time the new UPA government intervened, the Sensex had fallen an astronomical 565 points (11 per cent) to close at 4,505. The carnage had left investors poorer by Rs 1.33 lakh crore in just a few hours. The benchmarks had hit circuit filters twice that day.

First budget by Finance Minister P Chidambaram

July 8, 2004

A day before the Budget:

The indices ended flat ahead of the budget awaiting finance minister's proposal for the next year. The BSE Sensex ended 28 points or 0.55 per cent up at 4955.97.

Budget day:

Though no long term capital gain tax on investments in securities for over one year came as a positive move, 0.15 per cent transaction tax on purchases of securities on stock exchanges resulted in selling across the board. There were widespread protests by the broking community at various centres opposing the new levy. The Sensex shed 112 points or 2 per cent to close at 4,843.84.

A day after:

The market witnessed buying Friday led by foreign institutional investors and domestic financial institutions. The Sensex was up 102 points or 2 per cent to close at 4,945.48.

Year 2005:

A day before the Budget:

Investors were on a profit-booking spree, selling blue chip shares ahead of Union Budget '05-06. They, however, bought selectively, targeting shares of sectors/companies that were likely to gain from the government's liberal foreign direct investment (FDI) policy. The session just before the Budget, Friday 25 February, saw the Sensex settle at 6570, down 4.5 points. Over the weekend, the market also had to digest the Railway Budget was well as election results in the three state Assemblies on Sunday.

Budget day:

The Sensex ended at an all-time high of 6,714 as institutions and investors who were on a wait-and-watch mode bought stocks after the FM announced a slew of measures to boost investment in the capital market and a cut in corporate and personal income tax. Thought this Budget saw an uptick in securities transaction tax, it was inline with market expectations.

The FM also accepted the long-standing demand for keeping futures and options outside the purview of the taxes on speculative transactions. He also said that Sebi may allow FIIs to use shares as collateral for margin payments while trading in derivatives. Rough estimates show that the proposal could bring down trading rates by nearly 30% for FIIs.

A day after:

The euphoria over P Chidambaram's Budget proved short-lived as investors were quick to get into profit-booking mode. The Sensex ended at 6,651, down 63 points or 0.9%.


Year 2006

A day before the Budget:

Sentiment remained firm as investors chose to buy into the market a day before the Budget in anticipation of continuation of economic reforms and tax sops for routing small savings into the capital markets. The 30-share index closed 0.8 per cent or 81 points higher at 10,282.

Budget Day:

Soon after the FM announced the 25% hike in STT rates across the board, the market reacted sharply to plunge into the red but recovered smartly. Sensex swung wildly to finally end up 88 points or 0.8% at 10370.

Investors discovered benefits for FMCG, auto and some consumer sectors, but were miffed that he did not dismantle the Fringe Benefit Tax - and instead hiked Securities Transaction Tax.

A day after:

The 30-share Sensex surged to its biggest one-day rise on the back of huge infrastructure investments, which the finance minister announced in the Budget speech. The sensex rose 195.2 points or 1.8% to end at 10565.47 - an all-time high.

The finance minister announced major initiatives for the power and roads sectors in a bid to boost the country's infrastructure. He said the government plans to increase power generation by about 40,000 MW in three years.

Year 2007

A day before the Budget:

Poor performance of the Congress party in state polls, concerns that the budget may disappoint and weakness in Asian markets caused the BSE benchmark Sensex trip 170 points or 1.25 per cent to close at 13,478.83. The index was more prone to the overseas developments than domestic cues.

Budget day:

It was a "market neutral" budget according to stock market analysts. However jittery global markets and hike in dividend distribution tax and educational cess, spooked the market badly. The Sensex plunged 541 points or 4 per cent to close at 12,938.

A day after:

Benchmarks staged a comeback bucking the weak trend in Asian markets. The Sensex closed at 13,159.55, up 221.46 points, or 1.71 per cent. Both indices, which started on an uncertain note after the 4 per cent fall on Wednesday, rebounded sharply mid-way through the session on Thursday on short-covering in the derivatives segment.

For the market:

The finance minister showed the green light for delivery-based short-selling by institutions. Permitting institutions to short-sell was seen as paving the way for the development of a vibrant stock lending and borrowing mechanism.

The step to hike dividend distribution tax from 12.5 per cent to 15 per cent and the hike in the educational cess didn't go well with the traders who went on further liquidating their positions.

SOURCE: Economic Times

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