What is the impact of the Union Budget on the Indian Stock Markets

Introduction

Indian stock markets are dynamic prone to ups and downs depending on a host of factors. Every year, one major event that impacts the equities and bond markets is the announcement of the Union Budget.

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The Union Budget summarises the Indian government’s receipts and expenditures for a given year. The Budget announcement impacts the country’s economy, interest rate and stock markets. Here’s how the Budget may impact stock market movements:

1. Tax Exemption Limit

Taxpayers in India fall into different taxation brackets. When presenting the Budget, the Finance Minister announces different tax brackets every year. If the exemption limit is increased, individuals will have more disposable income. That could potentially be channelled into the stock market, meaning an increase in exemption limits bodes well for equities and bond markets alike.

2. Corporate Taxation

Just as individual tax impacts stock markets, corporate taxation also affects stock markets. If the government decreases corporate tax rates, companies can expect higher profit margins. That can then be utilized for growth and expansion purposes or dividends to shareholders. Usually, a decrease in corporate tax will positively impact stock markets. An increase will have the opposite effect.

3. Short-term and Long-term Capital Gains

The gains on stock market investments are liable to be taxed. Depending on how long they are held, a short-term capital gains tax or a long-term capital gains tax will be levied. Changes in these can impact investors’ perception of investing in the stock market. A reduction in taxes could entice more investors to invest in equities.

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4. Fiscal Deficit

The difference in a government’s revenues versus expenditures constitutes the country’s fiscal deficit. When government expenditures are more than revenues, it leads to a wider fiscal deficit. A sizeable budgetary deficit could make borrowing more expensive for companies and reduce their ability to make a high profit or undertake growth activities. That could negatively impact the stock markets.

5. Sectoral Announcements

While making the Budget announcement, the Finance Minister can make specific allocations or exemptions for certain sectors in the economy. For instance, in the Union Budget 2022, experts expect the Finance Minister to roll out supportive schemes for the agricultural sector, rural economy, and micro, small and medium enterprises. If such measures go through, these sectors will see an uptick and more interest in the stock market. As a stock market investor, you should watch other sectoral announcements and their potential impact on equities and bond prices.

Who Should Look Out for Budget Announcements?

Typically, Budget announcements have a short-term impact on stock markets. Day traders and technical investors are more likely to be impacted by Union Budget announcements. They will have to keep a hawk’s eye out on pre-budget predictions and the Budget announcements themselves. For long-term investors, the Budget is unlikely to have a lasting impact on stock market investments.

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