It is no secret that stock markets are driven by the quantum of FII investment or disinvestment. Investors have often been puzzled by the markets going down, even though the exchanges have reported net FII investments on some days. It now surfaces that there is some discrepancy in the information regarding FIIs' transactions published by the BSE, NSE and Sebi. But with Sebi planning to publish figures daily, this confusion will soon be over. Sebi's figures are collatedfrom the custodians and are therefore more authentic. Until then, investors have no choice but to go by contradictory figures that continue to emanate.

To understand the tenor of the market it is important to understand the slip in the market during the beginning of the week. The slide was triggered by the Brazilian development. Once the trigger was on, local punters rushed in to download warehoused stock on fears that FIIs will be forced to not only put breaks on their equity investments, but also book profits to compensate for their losses elsewhere. However, fund managers have now pointed out that the Brazilian crisis is unlikely to detract FIIs from their investment intentions in south-east Asia. These countries have nothing in common with the developments in Latin America.

The Sensex rebounded on Thursday by a whopping 111 points. It would appear that the market has already getting set for the run-up to the budget. But you must reckon that there are risks of the market overreacting in anticipationof a good budget. Actually, not only domestic investors but also global fund managers are keenly watching the formulation of the budget proposals. What do we have in store here?

This time round the primary focus of the budget is likely to be two-folded. First would be the concerns of the poor. Control of inflation would be high on the agenda. This is already clear in as much as the finance minister is reportedly restricting the additional budget outlay (allocation) to around Rs 8,000 crore. On the other hand, the PMO might end up forcing the finance minister to jack up the outlay to Rs 20,000 crore in trying to keep up with the targets set in the new five-year plan.

But any increase in outlay forced over and above what the finance minister feels comfortable with is likely to be counter-productive. First, demand for additional resources via taxes could distort the taxation proposal out of line with the ground realities. A higher budget allocation without feasible means of securing the resources is alsolikely to further worsen the fiscal deficit. Unfortunately, the PMO appears to be doing backseat driving for the finance ministry. Everyone has already seen how unrealistic Vajpayee had been in proposing a Rs 70,000-crore national highway project. One only hopes such irrational adventurism does not infiltrate itself into the budget-making process.

In any case, there is no escape from taking a firm stand on controlling inflation. This intention in itself can provide a trigger for the stock markets from RBI. The government's borrowing programme for the current fiscal has already exceeded the budgeted Rs 79,376 crore; the borrowings have touched Rs 82,202 crore. With small savings being buoyant and with the prospects for mobilising more than adequate disinvestment from public sector units (PSUs) via the crossholding route, further borrowing is likely to be restricted to treasury bills this fiscal.

This situation would make it easy for the government to prepare for the market borrowing for the nextfiscal. With inflation rate low, the time is ripe for RBI to reduce the interest rate. And that should help bring down the cost of government borrowing as well. And a reduction in interest rates would certainly help corporates. The demand for credit from the banks to the commercial sector has grown at a healthy clip at 17.9 per cent on a year-on-year basis as of December 1998. The total financial accommodation aggregated to Rs 367,000 crore.

Due to seasonal factors, the demand for credit from the industry is likely to be higher this quarter. This demand is likely to be well met as RBI can well accommodate this by cutting cash reserve ratio (CRR). A reduction in CRR and possibly a reduction in interest rate will provide a strong signal for the corporate sector as well as the stock markets. An early indication for the reduction in interest rate has already come from IDBI, which has just mobilised Rs 1,500 crore via its bond issue.

In fact, markets can look forward to further finetuning of themacroeconomic parameters. With the rupee having stabilised over the last five months, time is now ripe for the RBI to give a helping hand for depreciating the exchange rate of the rupee in a healthy fashion -- not a speculative attack. Pegging the value of the rupee down in turn will enable triggering the flow of export earnings being held abroad artificially, and promote exports as well. All these measures will improve India's sovereign rating, enabling further inflow of global funds.

The contents of the budget itself are unlikely to provide any surprises to the market. The finance ministry spokesperson has already said that the budget is likely to be more like a workman budget, nothing of the dreaming variety. Markets have reasons to feel elated, because the level of protection for the domestic players is set to be pushed forward to feasible level under the WTO stipulations. Sinha has also promised to give a push to the agricultural sector. A sustained push in agriculture can be expected to provide thepush to corporate growth by generating demand for goods. On the other hand, the intention to do away with tax concessions on a broad front coupled with the rationalisation of excise structure to just three levels should make the investor be choosy about his scrips henceforth. Pushed to the wall for its resources, this government might well end up jacking up excise duties on what are considered luxury goods. And investors must not miss Bill Clinton's proposal to channel sixty per cent of social security funds to the stock market. That, when it comes through, can be a great driver for the markets.

Putting everything together, it would be a good strategy to join the bull run now. But the intelligent thing would be to keep collecting your profits on the way, now that you know there could be surprises at the end of the lane. Prior to the budget, it would make sense to reduce your exposure. Get into the market again after you have seen what the game is all about.