More than 30 years ago, on 27 February 1982, Pranab Mukherjee presented his first Union Budget as FM in Indira Gandhi?s Cabinet. Much has changed in the financial markets in these last 30 years. The National Stock Exchange did not exist then, while futures and options were unheard of. Regional stock exchanges, of which the pillars were Calcutta, Delhi and Madras are relics of the past. Open outcry trading is now part of a ritual to be preserved, rather than a way of conducting business in the exchange, and trading floor hand signals have forever joined the list of dead languages. Thirty years ago, the Union Budget used to be announced at 5 pm on the last working day of February, a practice inherited from the colonial era because the Budget was first presented in London at 11 am and it was then presented here at 5 pm. The practice has, since 2001, been changed to presenting the Budget in Parliament at 11 am instead of 5 pm. In the 1990s and 1980s, the reaction to the Budget was observed the next trading day as the markets were closed by the time the Budget was presented. In the new millennium, since the Budget is presented during trading hours, as soon as the finance minister starts his Budget speech, the stock markets react within seconds to each sentence that is read out. Each announcement tends to have a direct impact on stock prices of firms and industries that are either positively or negatively affected. Such an instantaneous response was unheard of 30 years ago, as the exchange was an actual trading pit, rather than a virtual market, as it is now in the internet age.

Yet, some things have remained the same. The Union Budget has remained the most-awaited event in India?s economic calendar. Unlike other countries, the annual Budget presentation hasn?t become just a statement of accounts but has remained an event that signals the broad policy intent of the government. Governments of all political hues in the last 30 years have chosen to use this occasion to announce important new policy initiatives, and for outlining economic plans and policies for the coming financial year. Consequently, Budget day has become easily the most volatile day of the year at the exchange, especially around the 2-hour period when the FM reads his speech. The day invariably records the highest number of trades. Further, volatility as measured by the intra-day high-low of the Sensex remains the maximum on this day (see chart).

Yesterday was no different, especially when the FM was delivering his speech from 11am to 12:50pm. The Sensex opened at 17,657. It reached a high of 17,871 at about 11:40am, as the FM mentioned the beefing up of revenues in the next financial year. The rally was led by banking and finance stocks, which comprise the largest portion (24.72%) of the Sensex, on the back of the FM announcing an infusion of R15,888 crore in public sector banks. Shares of State Bank of India, Bank of India, Canara Bank and Punjab National Bank were up 1-3%. Additionally, there was a sop for banks, as R10,000 of interest earned from banks will be tax-free. Banks needed the sop badly given that tax-free bonds and high interest on post-office schemes were taking away their customers. However, by 12:30pm, the Sensex shaved off all its gains after the minister hiked the standard excise duty rate from 10% to 12%. The Sensex remained extremely choppy as the minister was moving towards the end of his speech, with the Budget falling short of expectations for many sectors. For instance, the pharma sector expected the government to exempt all life-saving drugs from GST, which did not happen. Not surprisingly, the biggest loser yesterday was Sun Pharma, which tanked 9% during the Budget speech. Commodity markets, too, were quite volatile, with bullion prices going down as soon as the FM announced an increase in excise duties on precious metals. Even stocks related to precious metals were affected, with Manappuram Gold Finance down 4% after the minister doubled the excise duty on refined gold.

Even the bond markets responded sharply to the Budget speech. At 12:20pm, the minister announced that he has set a fiscal deficit target of 5.1% of GDP for the next fiscal year, down from an expected 5.9% in the current year. He acknowledged, however, that this year?s figure ended up far above the 4.6% he had originally targeted in his budget a year ago?a large slippage of 1.3%. Bond prices declined as a result of a higher-than-expected fiscal deficit and a possible persisting slippage, which means that the supply of government debt is slated to increase in the next fiscal year. As the bond supply was expected to increase, prices went down with a resulting increase in yields, as price and yields have an inverse relationship. The 10-year benchmark bond yield increased to 8.42%, up 9 basis points before the Budget deficit estimate was announced. The benchmark five-year swap rate rose 6 bps to 7.61% and the one-year rate rose 7 bps to 8.22%. Given the policy direction this year and with general elections set for 2014, next year?s Budget is expected to be laden with populist spending measures. So, next year?s fiscal gap is expected to widen further and a higher supply of government bonds can be expected in future. This expectation, too, contributed to a decrease in prices in the bond markets. The fiscal deficit expectation saw a similar reaction in the foreign exchange market. The USD/INR opened at 50.2025 before the Budget speech and was at 50.2950 at 1pm, a depreciation of more than 9 paisa. All in all, the prices of equity, bond, commodity and foreign exchange markets were down.

The financial markets response to a budget is often viewed as an important summary statistic of the ?quality? of a budget in terms of the broad policy intent of the government. Going by price movements during this year?s Budget speech, the financial markets seem to convey that it is not as good a Budget as the market had hoped for.