Budget - Reforms and market expectations

As the UPA government prepares to present its first budget after its landslide victory in the general elections, there is growing expectation in the capital markets, experts and economists that this is going to be the biggest budget ever. Everyone of us will be watching the budget closely because this will clarify the policy and reform stance of the government.

Expectations are high in sectors like infrastructure, insurance etc however in general it takes 2-3 years to fully reflect the impact of a policy. Mr. Montek Singh Ahluwalia commented recently that real impact of a policy change is usually visible in 2-3 years however one also needs to understand the market expectations in near term. What we can conclude from his statement is that the government may present the budget keeping an eye on the market expectations and giving signals that it is committed to bring the economy back on track.

However when we analyze the monthly sensex returns pre and post budget then sensex gave negative returns 13 times since 1991 (which means sensex gave positive returns only 5 times). Admittedly, reasons for post-budget negative performance may be different (if not market expectations from budget) but one possibility may be market's factoring in the expectations too early and then falling.