Impact of union budget on Indian stock market

The stock market is a dynamic environment where a variety of factors affect stock values. The government's budget is among the most important. The success of the stock market, investor confidence, and economic indicators may all be significantly impacted by a country's budgeting policies. On February 1, 2024, the Finance Minister will make the interim budget announcement. This article examines the intricate link between fiscal decisions and market dynamics, with a focus on investors and stock market dynamics.

How Does the Budget Impact Stock Markets?

Here is how the budget tends to impact the stock market:

Government Spending and Sector Performance

Budgets from the government frequently allot large sums of money to a number of industries, including infrastructure, healthcare, education, and defence. Government expenditure increases in particular industries might present growth prospects for businesses involved in such areas. As a result, the stocks of businesses that gain from government contracts or infrastructure projects can rise. As an illustration, the railway stocks are rising once more as it is anticipated that they would profit from increased resource allocation to the railway industry. On the other hand, industries that are subject to budget cuts or lower expenditure allocations can see a decrease in stock values.

Tax Policies and Corporate Profits

The budget also includes several tax schemes, as was previously noted. They are detailed in the budget and have a significant impact on investor behaviour and business earnings. Higher stock prices result from corporations keeping a larger portion of their income in the event that the government agrees to lower corporate taxes in the budget. Tax increases, on the other hand, can reduce business profitability and cause investors to reevaluate the company's value. In a similar vein, adjustments to personal income tax rates have an effect on consumer purchasing trends. The individual could now be able to purchase a nicer car (thanks to the automobile sector), eat at his favourite restaurant (thanks to the food industry), and much more. This advantage is not direct. As an alternative, individuals may use their larger savings to make direct stock market investments. If enough people do this, the market might rise as a result.

Changes in LTCG/StCG

It is anticipated that the government would alter the Long Term Capital Gains (LTCG) taxation system with each budget. Equity investments that are taxed at a rate of 10% and have a holding duration longer than a year are eligible for LTCG. In the event that the LTCG taxes are entirely eliminated or the holding period definition is expanded, long-term investors' net profits on equity investments will rise. Consequently, an increasing number of individuals will begin to enter the market. The stock market will eventually affect more individuals, which is always good for the market.

Interest Rates and Monetary Policy

Monetary policy, especially changes in central banks' interest rates, can be influenced by budgetary decisions. The use of public borrowing to fund budget deficits by the government may drive up interest rates, affecting both consumer and commercial borrowing costs. Interest rate fluctuations have an impact on borrowing patterns, investment choices, and the value of financial assets, such as stocks. As a result, changes in interest rates brought about by budgetary measures have a big effect on the volatility and returns of the stock market.

Fiscal Deficits and Market Confidence

Long-term fiscal deficits brought on by a government's overspending in comparison to its revenue can erode investor confidence and raise questions about the creditworthiness of the country. To offset the increased credit risk, investors would demand higher rates on government bonds, which might discourage investing in shares. Investor perception of budgetary policies aimed at decreasing fiscal deficits through revenue-raising or austerity measures may be favourable, boosting market confidence and supporting stock prices.

Conclusion 
The stock market is significantly impacted by the government's budgetary policies, which also have an influence on business profitability, inflation forecasts, interest rates, and market mood. You have to keep a careful eye on budgetary changes and evaluate how they affect the dynamics of the stock market and investing plans. Comprehending the complex relationship between fiscal policies and the stock market is crucial for managing unstable market circumstances and arriving at well-informed investing choices in a constantly evolving economic environment.