ksaxena csc com Kanchan Saxena Effect of budget on sensex by 8oCYZ393


									                   Pre and Post effect of Budget on Sensex

                                  By: Kanchan Saxena


In the modern economic environment, the stock market index of a country is said to act as a
barometer of its economic health. This happens because with the improvement in the economic
climate of a country, capital expenditure of companies goes up in tandem with industry demand
leading to rise in consumption of various types of goods. This leads to increase in net profit for the
respective companies and hence the rise in their share prices which in turn is reflected through the
index (refer to The ICFAI Journal of Applied Finance, Vol. 12, No. 10, pp. 65).

At present there are 21 stock exchanges in India (excluding NSE and OTCEI), the largest among
them being the Bombay Stock Exchange (BSE). BSE alone accounts for over 80% of the total
volume of transactions in shares. Bombay Stock Exchange is the oldest stock exchange in Asia with
a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly
known as BSE was established as "The Native Share & Stock Brokers' Association" in 1875.

1.1 Bombay Stock Exchange:-

BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from
the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and
pre-eminent role in the development of the Indian capital market is widely recognized. It migrated
from the open outcry system to an online screen-based order driven trading system in 1995. Earlier
an Association of Persons (AOP), BSE is now a corporatized and demutualised entity incorporated
under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and
Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).
With demutualisation, BSE has two of world's best exchanges, Deutsche Börse and Singapore
Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it
with an efficient access to resources. There is perhaps no major corporate in India which has not
sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the
world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD
1.79 trillion. An investor can choose from more than 4,700 listed companies, which for easy
reference, are classified into A, B, S, T and Z groups.

SENSEX is not only scientifically designed but also based on globally accepted construction and
review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies. The base year of SENSEX is
1978-79 and the base value is 100. The index is widely reported in both domestic and international
markets through print as well as electronic media.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was
shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market
Capitalization" methodology of index construction is regarded as an industry best practice globally.
All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float

Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the
Indian stock market. As the oldest index in the country, it provides the time series data over a fairly
long period of time (From 1979 onwards). Small wonder, the SENSEX has over the years become
one of the most prominent brands in the country. The growth of equity markets in India has been
phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened
activity in terms of various bull and bear runs. The SENSEX captured all these events in the most
judicial manner. One can identify the booms and busts of the Indian stock market through SENSEX.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and is
tracked worldwide. It is an index of 30 stocks representing 12 major sectors.

Table 1.1 Sensex Constituents:-

BSE SENSEX Constituents:                        Composition revised from 14/03/2008
                                                Free-Float Adjustment Factor revised
                                                from 12/05/2008
Code     Name                                   Sector                       Factor

500410   ACC Ltd.                               Housing Related                       0.60
500425   Ambuja Cements Ltd.                    Housing Related                       0.55
500103   Bharat Heavy Electricals Ltd.          Capital Goods                         0.35
532454   Bharti Airtel Ltd.                     Telecom                               0.35
500087   Cipla Ltd.                             Healthcare                            0.65
532868   DLF Ltd.                               Housing Related                       0.15
500300   Grasim Industries Ltd.                 Diversified                           0.75
500010   HDFC                                   Finance                               0.85
500180   HDFC Bank Ltd.                         Finance                               0.80
500440   Hindalco Industries Ltd.               Metal, Metal Products & Mining        0.70
500696   Hindustan Unilever Ltd.                FMCG                                  0.50
532174   ICICI Bank Ltd.                        Finance                               1.00
500209   Infosys Technologies Ltd.              Information Technology                0.85
500875   ITC Ltd.                               FMCG                                  0.70
532532   Jaiprakash Associates Ltd.             Housing Related                       0.60
500510   Larsen & Toubro Limited                Capital Goods                         0.90
500520   Mahindra & Mahindra Ltd.               Transport Equipments                  0.80
532500   Maruti Suzuki India Ltd.               Transport Equipments                  0.50
532555   NTPC Ltd.                              Power                                 0.15
500312   ONGC Ltd.                              Oil & Gas                             0.20
500359   Ranbaxy Laboratories Ltd.              Healthcare                            0.70
532712   Reliance Communications Limited        Telecom                               0.35
500325   Reliance Industries Ltd.               Oil & Gas                             0.50
500390   Reliance Infrastructure Ltd.           Power                                 0.65
500376   Satyam Computer Services Ltd.          Information Technology                0.95
500112   State Bank of India                    Finance                               0.45
532540   Tata Consultancy Services Limited      Information Technology                0.25
500570   Tata Motors Ltd.                       Transport Equipments                  0.60
500470   Tata Steel Ltd.                        Metal, Metal Products & Mining        0.70
507685   Wipro Ltd.                             Information Technology                0.20

Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices. BSE has entered into
an index cooperation agreement with Deutsche Börse. This agreement has made SENSEX and other
BSE indices available to investors in Europe and America. Moreover, Barclays Global Investors
(BGI), the global leader in ETFs through its iShares® brand, has created the 'iShares® BSE
SENSEX India Tracker' which tracks the SENSEX. The ETF enables investors in Hong Kong to take
an exposure to the Indian equity market. The SENSEX is constructed on a 'free-float' methodology,
and is sensitive to market sentiments and market realities. Stock prices and as an extension the
indices are known to be extremely sensitive to external events. All the Indian stock exchanges have
been found to react one way or the other to such events.

1.2 Factors Affecting Sensex:-

There are macroeconomic events which have impact on the indices. Some of these events are Rupee
Depreciation, Announcement of New industrial Policy, Changes in Lending Rates, Changes in Bank
Rates, Budgets, and Earthquake etc. Again there are some political events which happened in the
past and had an effect on the stock market, such as Rajeev Gandhi assassination on 10/12/92,
Mumbai bomb blasts, kargil war, terrorist attack on World Trade Centre on 11/09/01, Tsunami hits
South and South-East Asia on 26/12/04 etc.

The impact of such events that surely occur cannot be predicted by the stock market with certainty
because of their nature. The annual Budget tabled in the parliament of India, usually in the month of
February is one of such event. A Budget is a powerful tool in the hand of the government to control
the economic resources of the country. It contains proposals regarding changes in direct and indirect
taxes, industrial policy, trade policy, exchange rate policy and financial sector reforms which may
have favourable or adverse impact on the stock market. This happens because there is the build up of
expectations from the budget across the classes and masses, industries and sectors, segments and
sections, with every one expecting some kind of sops, reliefs, concessions, reductions, subsidies and
incentives. If there is some market-friendly or some specific industry-friendly announcement in the
budget, then the market raises a toast as if to thank the Finance Minister. Such positive developments
lift the sentiments in the market leading to a sharp spurt in the prices of the shares of companies
which stand to benefit from the budget proposals. So depending on the kind of impact the budget
proposals have on the fortunes of various sectors, industries and businesses, the market sentiments
turn positive or negative for the respective counters.

There are a direct impact of increased or decreased taxes, levies and duties on products and services.
Increase in the levies may result in reducing the demand for the products and services and vice versa,
thereby impacting the bottom-lines of the companies negatively or positively. The effect of the
increase or decrease in duties is immediately felt in the sharp upward or downward movement of the
stock prices of the concerned companies.

Initially, if one goes by fundamental analysis, such impact is to be generally seen over the long term
performance of the shares. But surprisingly as an instantaneous impact of the declaration, shares
react in the market depending on how the investors interpret the budget. It has been observed in the
past that the market goes down after the budget. The movement of Sensex after one month of the
budget is shown below:

Table 1.2: Movement of Sensex After Budget Declaration:-

Budget year and Date      Sensex     close    a Points gain/loss           Percentage
                          month later                                      gain/loss
1998(June 1)              3250.69                 -435.69                  -11.82
1999(Feb. 27)             3739.96                 506.10                   15.65
2000(Feb. 29)             5001.28                 -739.41                  -12.88
2001(Feb.28)              3604.38                 -465.30                  -11.43
2002(Feb.28)              3469.35                 -236.31                  -6.38
2003(March 28)            2959.79                 -157.00                  -5.04
2004(July 8)              5196.99                 241.02                   4.86
2005(Feb. 28)             6492.82                 -76.90                   -1.17
2006(Feb. 28)             11279.96                997.87                   9.70
2007(Feb. 28)             12884.34                -939.98                  -7.16

There have been ten budgets (excluding interim budget in 2004) in the last ten years. Out of these ten
budgets, seven budgets have been presented in February. Out of these seven budgets, as many as six
budgets saw the Sensex declining by 5 to almost 13 percentage points, while only in 1999 the Sensex
gained about 16 percent after the budget. Also the movement of Sensex just on or a day after the
budget is as follows:

1.3 Movement of Sensex on the budget day:-

Sensex in Feb 2007

On Feb 28, 2007 the Sensex shed 541 points to wind up the day at 12,938.09. It was the biggest fall
since the May 18, 2006, and it was the lowest close since December 12, 2006.

                            Figure 1.1: Budget Impact on Sensex

Sensex in Feb 2006

The Sensex was settled above the 10,000 point-mark -- at 10,370 -- a gain of 88 points, on February
28, after moving in a wide range of 10,206 to 10,423.

Sensex in Feb 2005

The Sensex swing on February 28, 2005 was interesting. The index touches a low of 6,546 in early
noon trades. The Sensex, after exhibiting extreme volatility during the intra-day trades, finally
wrapped up the session with an all-time closing high of 144 points at 6,714.

Sensex in July 2004

In 2004-05 the index crossed the 5,000-mark during early noon deals to hit a high of 5,004. It
dropped more than 100 points after that to touch a low of 4,809. The Sensex finally ended the day
with a loss of 112 points at 4,844.

Sensex in Feb 2003

The Sensex hit the day's high of 3,317 and closed up by just 6 points. The BSE IT index zoomed by
62 points (4.29 per cent).

Sensex in Feb 2002

On February 28, 2002, the index closed down 3.87 per cent at 3,562 points.

Sensex in Feb 2001

In 2001, the Sensex shot up 177 points on Budget day.

Sensex in Feb 2000

The Sensex saw its second biggest fall on a Budget day on February 29, 2000. The Sensex shed over
350 points during intra-day trading but recovered to close with a loss of 294 points.

Sensex in Feb 1999

In 1999 the Sensex had an increase of 506.10 points which is about 16 percent gain after the budget.

Sensex in June 1998

The Sensex saw a downfall of 435.69 points in the year 1998.

The behaviour of the market after February budgets has been influenced by the tax planning exercise
of the investors. The month of March being the end of fiscal year, most of the people try to reduce
their tax liabilities by investing in tax saving instruments. This probably accounts for the
sluggishness in the market, especially after the budget.

The Sensex movement has been identical when budgets were presented in months other than
February. When the budget was presented in June 1998 and March 2003, the Sensex shed about 12
percent and 5 percent respectively, while it gained about 5 percent when it was presented in July
2004. The market crashed in 1998 due to political uncertainty unleashed by the fall of the Vajpayee
government, while the 5 percent gain in 2004 was a vote of confidence in the Manmohan Singh
government after the kneejerk reaction in May to the leftist sloganeering.

                              Literature Review

Sometimes the market tends to react irrationally to economic news, even if that news has no real
affect on the technical value of securities itself. Therefore, the stock market can be swayed
tremendously in either direction by press releases, rumours, euphoria and mass panic.

Over the short-term, stocks and other securities can be battered or buoyed by any       number of fast
market-changing events, making the stock market difficult to predict. A stock market crash is often
defined as a sharp dip in share prices of equities listed on the stock exchanges. In parallel with
various economic factors, a reason for stock market crashes is also due to panic. Often, stock market
crashes end up with speculative economic bubbles.

                   Figure 2.1: S&P Composite Real Price Index

Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest
Rates, from Irrational Exuberance, 2d ed.[6] In the preface to this edition, Shiller warns that "[t]he
stock market has not come down to historical levels: the price-earnings ratio as I define it in this
book is still, at this writing [2005], in the mid-20s, far higher than the historical average. … People
still place too much confidence in the markets and have too strong a belief that paying attention to
the gyrations in their investments will someday make them rich, and so they do not make
conservative preparations for possible bad outcomes."

2.1: Reviews of Article:-

  1. Firth M. (1979)

     ”The Relationship between Stock Market Returns and Rates of Inflation.” The study was
     done for a period of 1955 to 1976.The monthly index of retail prices and WPI of UK were
     used. The study proved that in UK, superior stock returns could not be earned from models
     using publicly available inflation indices.

  2. Schwert G. W. (1981)

     ”The Adjustment of Stock Prices to Information about Inflation”. The study found that
     market reacts timidly around the time when CPI was announced and not when price data was
     collected and collated. This indicated that there was information leak prior to the
     announcement date and the market, being apparently inefficient, reacted slowly to the
     unexpected announcement.

  3. Cohn R. A. and Lessard D. R. (1981)

     ”Effect of Inflation on Stock Prices: International Evidence”. The study was conducted in
     eight industrialized countries for a period from 1969 to 1979. The analysis indicated that
     stock prices were negatively related to nominal interest rates inflation in a no. of countries.

  4. Rao S. V. D. N. (1997)

     “Impact of Macroeconomic Events on Stock Price Behavior”. The study covered the period
     from 1991 to 1995 and studied the impact of macroeconomic events like union budgets and
     credit policy announcements on stock prices. It was found that budgets did contribute to the
     volatility in stock prices. It was observed that budget mostly affect negatively on sensex. It
     was also observed that the announcement of credit policies did not significantly contributes to
     the market to the market volatility.

5. Fair R. C. (2002)

   ”Events that Shook the Market”. The study focussed on the reaction of NYSE Stocks over
   the period from April 1982 to October 1999. It was concluded that determining the extent and
   direction of stock prices changes in response to a particular event is a highly complicated
   exercise, as it was found that 69 events led to significant price changes. But a large no. of
   changes had no obvious reasons at all. Also many events were found not to have any impact
   at all.

6. Al Khazali O. M. (2003)

   ” Stock Prices, Inflation and Output: Evidence from the Emerging Markets”. The study was
   carried out for a period from 1980 to 2001. The study found all the four variables (i.e.
   expected real stock returns, expected inflation, expected real economic activity and inflation
   variability) to be stationary for all the countries. It was conducted from the study that stocks
   act as an inflation-hedge in long term but not in the short term.

7. Brooks R. M., Patel A. and Su T. (2003)

   ”How the Equity Market Responds to Unanticipated Events”. The study is based on intraday
   trading data obtained from NYSE and AMEX during the period of 1989 to 1992. All the
   unanticipated events contained negative news for the firms. The study looked at news during
   trading hours and also that come in during non trading hours. The study found out that the
   response time of stock prices to unanticipated news lasted about two hours after which they
   tended to reverse. It also found out that the impact of overnight events are about 15 minute
   faster than that of daytime events. However the reaction time in Forex and Interest rate
   markets were found to be much faster(about one minute) than that of the equity market.

8. Gunasekarage A., Pisedtsalasai A. and Power D. M. (2004)

   ”Macroeconomic Influence on the Stock Market: Evidence from an Emerging Market in
   South Asia”. The study was conducted over a period from 1985 to 2001 and CPI, money
   supply and T-Bills rate announcements were taken as macroeconomic variables. Among the
   variables, it was found that only T-Bill rate had the maximum effect on share prices. The

   trading activities of speculators were found to have more effect than the economic events
   considered for the study.

9. Kaur H. (2004)

   ”Stock Market Volatility in India Stock”. The study was conducted over the period 1990 to
   2000. This was a purely descriptive study of volatile movements in BSE’s sensex and NSE’s
   nifty. A total of three types of volatility of Indian stock prices were looked into- Volatility of
   daily returns in a year, Volatility of monthly returns in a year and Volatility of daily returns in
   a month. It was found that 1992 was the most volatile year and April was the most volatile
   month during the research period.

10. Sabnavis M. (2005)

   ”Irrational, and Remarkably Resilient”. This study measured the effect of economic events
   and political disturbances on sensex over the period from 1991 to 2005.The study also
   captured the turnaround time for each of the events in case of negative impact. It was
   observed that political events had much more effect on the sensex as compared to economic

11. Philipose M. and Mathur A. (2005)

   ” Stock Market and Economic growth”. The study covered the popular market indices of 11
   countries during the period from 1991 to 2005. It was observed that faster economic growth
   leads to rise in stock market indices for sensex (India), Dow Jones (USA) and FTSE
   (England).But in the cases of Bovespa (Brazil), Jakarta (Indonesia) and the Argentine indices,
   the market was seen to move in the opposite direction to the rate of economic growth.

12. Gupta A. and Kundu D. (2005)

   ”Reaction of Indian Stock Prices to Economic and Political Events”. This study analysed the
   impact of selected macroeconomic and political events on two popular Indian stock market
   indices-the Sensex and the BSE 200.A total of 55 economic and 44 political events were
   identified from 1991 to 2005. Both economic and political events were found to exert
   influence on the proxy market portfolios, the sensex and the BSE 200. However the economic
   events were found to have much more influence on both sensex and BSE 200 than the
   political events.
13. Gupta A. And Kundu D. (2006)

   ”A Study on the impact of Union Budgets on Stock Prices in India ”.This study measured the
   impact of budgets on the stock market considering the returns and volatility in sensex over 15
   years and over 17 budgets. It observed that a budget exerts the maximum impact, in terms of
   absolute return immediately on and around the budget day which gradually gets reduced as
   one moves further away from the budget day. Volatility does not generally increase in a post
   budget situation as the time period increases.

14. CRISIL Research(2007-03-01)

  A study on “Budget impact on sector”

 CRISIL Research comes out with report on budget impact on sector

 Marginal positive on media and entertainment, textile sector.

 Neutral on non-ferrous metals, paper, power, roads, sugar and telecom sector.

 Positive on oil and gas, paints, pharmaceuticals.

Marginal negative on petrochemicals.

Negative on steel.

2.2: Major Findings of Literature Review:-

From the above literature reviews it has been observed that:

      The stock market is very volatile and reacts to the environmental factors very quickly.
      There are various factors which affect the stock market directly or indirectly.
      The effect of the events can be seen over a long period of time i.e. the effect can be short term
       as well as long term.
      It has also been observed that stocks act as inflation-hedgers.
      It is observed that a budget exerts the maximum impact, in terms of absolute return
       immediately on and around the budget day which gradually gets reduced as one move further
       away from the budget day.
      It is observed that determining the extent and direction of stock prices changes in response to
       a particular event is a highly complicated exercise because a large no. of changes had no
       obvious reasons at all.
      The economic events were found to have much more influence on sensex.

2.3: Research Gap:-

While there are several studies that proved the impact of budgets on share prices, they keep the field
wide open for related studies. Study can be done for finding the most volatile period for Sensex
before and after budget. It may also be studied that for how long the budget leaves its impact on
Sensex. Also it may be studied that whether all the industries are affected by the budget in the same
way or not.

2.4: References:-

  1. Firth M (1979),”The Relationship between Stock Market Returns and Rates of Inflation”,
     Journal of Finance, Vol. 34, pp.743-749.
  2. Schwert G W (1981),”The Adjustment of Stock Prices to Information about Inflation”,
     Journal of Finance, Vol. 36, pp. 15-29.
  3. Cohn R A and Lessard D R (1981),” Effect of Inflation on Stock Prices: International
     Evidence”, Journal of Finance, Vol. 36, pp.277-289.
  4. Rao S V D N (1997), “Impact of Macroeconomic Events on Stock Price Behaviour”,
     Management & Accounting Research, July-September, pp. 46-67.
  5. Fair R C (2002),”Events that Shook the Market”, Journal of Business, Vol. 75, pp. 713-731.
  6. Al Khazali O M (2003),” Stock Prices, Inflation and Output: Evidence from the Emerging
     Markets”, Journal of Emerging Finance, Vol. 2, pp. 287-314.
  7. Brooks R M, Patel A and Su T (2003),”How the Equity Market Responds to Unanticipated
     Events”, Journal of Business, Vol. 76, pp. 109-133.
  8. Gunasekarage A, Pisedtsalasai A and Power D M (2004),”Macroeconomic Influence on the
     Stock Market: Evidence from an Emerging Market in South Asia”, Journal of Emerging
     Market Finance, Vol. 3, pp. 285-304.
  9. Kaur H (2004),”Stock Market Volatility in India Stock”, Indian Journal of Commerce,
     Vol.57, pp. 55-70.
  10. Sabnavis M (2005),”Irrational, and Remarkably Resilent”, Business Standard, August 22, p.
  11. Philipose M and Mathur A (2005),” Stock Market and Economic growth”, Business
     Standard, May 5, p. 9.
  12. Gupta A. and Kundu D. (2005),”Reaction of Indian Stock Prices to Economic and Political
     Events”, The ICFAI Journal of Applied Finance, Vol. 12, No. 12, pp. 5-25.
  13. Gupta A. And Kundu D. (2006),”A Study on the impact of Union Budgets on Stock Prices in
     India”, The ICFAI Journal of Applied Finance, Vol. 12, No. 10, pp. 65-75.

                         Research Methodology

The objective of this study is to examine the impact of various Union Budgets, from 2003 to 2007,
on Sensex group of stocks. In particular it is being examined that whether the budgets have any
impact on Sensex at all and whether the budgets tend to induce volatility in Sensex.

This paper has selected BSE as it has been one of the premier stock exchanges in India throughout
the history of stock exchanges in India. Sensex (BSE’s flagship 30-share index) has been chosen as
the proxy market portfolio. Sensex is calculated using the “free float market capitalization”
methodology as per international convention. The base period of Sensex is 1978-79 and the base
value is 100 index points. The Sensex on an average account for 52% of the trading volumes on daily
basis and 35% of total trades executed on the exchange. Thus, the Sensex can be said adequately
represent market sentiments during important economic events.

In this research, a total of 36 days before and after the budget has been considered to study the
impact of budgets. This has been done on the assumption that an impact of budget on share prices
can be identified on its own for 18 days before and after the budget beyond which many other causes
may distort the said effect.

3.1 Data Sources:-

Information used in this study has been taken from various sources. While the budget dates have
been gathered from yahoo finance website, the daily stock prices have been collected from NSE
India website. The database contains opening, high, low and close values of the index for every
trading day from 28th Feb. 2003 to 30th March 2007. The closing figures of each day have only been
used for this study. The daily closing value of sensex is generally computed taking the weighted
average of all the trades of sensex constituents in the last 15 minutes of the trading session. This
study considers only the trading days and leaves out any holiday or other days when the market
remains closed. A total of 180 closing values of sensex have been considered for this analysis.

The paper has the following scheme of investigation:

First, the daily closing prices before the budget are found during the entire 5-year period. So a total
of 90 values are found.

Second, the daily closing prices on and after the budgets are found during the entire 5-year period.
So a total of 90 values are found.

Then the average return during the previous and next 18 days of the budget is calculated. It is done
simply by dividing the total of 18 days closing returns by 18.

After this, Z-test is carried out comparing periods around pre and post budget day. This test is carried
on the basis of hypothesis already formed.

3.2 Methodology:-

The Study: The study is based on a hypothesis that there is a difference between the pre and post
budget returns.

The Sample: The study is based on BSE daily closing market prices pre and post budget for a period
of five years namely, 2003-2007.

Tools for data collection: The study uses secondary data from the NSE website (nseindia.com).

For Data Analysis: The daily closing BSE prices for five years from 2003-2007 are classified into
disturbed period prices. Disturbed period is taken to be 18 days prior to budget announcement and 18
days post budget announcements. The return on stock prices is calculated for both these periods. The
study also classifies the daily closing BSE prices for five years from 2003-2007 into prices 18 days
pre budget and 18 days post budget prices and standard deviation and z- test are used to study
whether the volatility differ pre and post budget to establish market efficiency.

The period of study has been segregated into pre 18 days of budget and post 18 days of budget.
These period can be pictorially represented as in figure x.

                           Figure 3.1: Period of Study

 Previous 18 days                        Budget                                     Next 18
 days                                     Day

The test has compared the average returns during the pre and post budget days and also the budget
impact with average returns from previous periods.

3.3: Formula Used:-

The Z-test is applied using following formula:

                                Z=(X1-Y1) / sqrt [(σ 12/n1+ (σ22/n2)]


                               Standard Error (S.E.) =1/sqrt (N-3)

Where r = Standard deviation/ [18*(X-X1)*(Y-Y1)]

Standard deviation (σ) = sqrt [sum(X2)/N]

X = Pre budget prices
Y = Post budget prices
X1 = average of Pre budget prices
Y1 = average of Post budget prices
N = number of observation

4.1: Objective 1: -

The first objective of our study is to find the difference in the average returns in pre and post budget
period. For this first the average returns in various periods have been calculated. Table 4.1 presents
the average daily returns given by Sensex during pre and post periods around the budget.

      Table4.1:Average Returns in pre and post budget period

                                              Average Return

             Years                      Pre                         Post

      2003                        3,167.48                    3,051.30

      2004                        4,805.02                    5,007.38

      2005                        6,732.73                    6,601.02

      2006                        10,777.67                   10,102.90

      2007                        12,837.58                   14,135.79

Also a graph is plotted between the average returns in the pre and post budget day periods. The graph
is presented in Fig. 4.1. The graph clearly indicates that the average returns in the post budget period
are generally higher as compared to that in the pre budget period (except in year 2003 & 2006).

Figure 4.1: Average Returns Pre and Post Budget:

4.2: Objective 2: -

The second objective of the study is to calculate the standard deviation for both pre and post budget
period. This will help in verifying the first objective of our study. Table 4.2 represent the standard
deviation in the pre and post budget period.

Table 4.2: Standard Deviation in pre and post budget period
                                               Standard Deviation
                                       Pre                              Post

                                57.57842                         93.34518

2004                            76.07388                         104.7479

2005                            143.0574                         47.42984

2006                            150.8222                         147.0136

2007                            274.961                          443.8485

From table 2 it is clear that the deviation of returns is more in post budget period as compared to that
of in pre budget period (except in 2005). This indicated that fluctuation is more in the post budget
period than in pre budget period.

4.3: Objective 3: -

The third objective of the study is to calculate the Z-values for the pre and post budget period so as
to justify the hypothesis assumed before. Table 4.3 represent the values of Z-test obtained over the
period. Also the table represents that whether the values of Z-test are accepted at 5% of level of
significance. In this table Z-values are compared with standard error and if it is less than standard
error it is accepted otherwise rejected.

Table 4.3: Values of Z-test at 5% of level of significance
Years               Z Values                               5 % of level of significance
2003                -0.34539                               Accepted

2004                -0.595902                              Accepted

2005                -0.02485                               Accepted

2006                0.771464                               Rejected

2007                -0.672                                 Accepted

The results shows that the hypothesis stands accepted i.e. there is a significant difference between
pre and post budget returns as z value was found to be significant at 0.05 level of significance.

4.4: Conclusion:-

From the findings it is clear that the there is an impact of budget on Sensex in pre and post periods. It
has been observed that with the announcement of budget there start fluctuations in the prices due to
changes in the sentiments of the investors. This fluctuation is maximum in the period of 18 days and
starts decreasing further. From the Z-test it is clear that there is a difference in the prices in pre and
post budget periods. Also it is clear from the graphs that in the post budget period it has been
observed that the prices fluctuate according to the budget declaration as positive budget turn to
increase in the prices and vice versa.


The research measured the impact of budgets on the stock market considering the returns and
volatility in Sensex, over 5 years. The hypothesis test has thrown up some interesting facts. From the
test it is clear that the budget definitely affect the sensex accordingly. The hypothesis is being
accepted 4 out of five times in the five years, which means there is a difference in sensex in the pre
and post budget period. The average returns in the pre budget period are more than in the post budget
period. This shows that the volatility is more in the pre budget period. This can be considered due to
the expectations of investors with the budget. If the investor think that there will be a favourable
budget prices goes up and vice versa. Thus pre budget period can be considered as the period of
fundamental analysis as the market react purely on the assumptions. In this period the investors
invest their money by analysing the position of companies in the market and their future prospects.

In the post budget period the market works on technical analysis. The investors look for the
advantages the company can have by the declaration of budget. For example if the import duty of
coking coal decreases, steel manufacturers are benefited as it is largely used by them. Similarly if
custom duty decreases on machineries, it can be imported at cheaper rate and the company’s growth
can increase.

On the other side budget also has a negative impact on the sensex. For example in 2007 there is
increase in the custom duty on import of aircrafts and helicopters by scheduled airline operators, but
the government airlines have been exempted from the same. These results in the decrease in the
prices of aviation sector in the year 2007.The fluctuations in the prices of various sectors before and
after budget are presented with the help of graphs below. These graphs reflect how the market moves
a day before the budget, on the budget day and a day after the budget.

                  Figure 5.1: Fluctuations in I.T. Prices during



                            2003          2004            2005            2006             2007
      pre budget day       1406.5        1827.06        2636.91          3728.1           5172.4
      budget day           1387.01       1795.05        2699.27          3706.3           4869.99
      post budget day      1311.08       1810.58        2629.94          3811.11          5071.35

From the graph it is clear that there is a decrease in the prices of IT sector on the budget day (except
year 2005). But the prices increased in the post budget period (except year 2003 & 2005). This may
happen because of excise duty exemption allowed and extended on all flash memories and DVD
writers etc. The Fringe Benefit Tax (BFT) on tour and travel expenses are reduced from 20 % to 5 %
which have positive impact on BPO players.

In the metal sector there is a decrease in the prices on the budget day (except year 2005 & 2006). But
on the next day of budget there is increase in the prices (except in year 2003 & 2005). This is
because the custom duty has been decreased in respective years. Also there is reduction and then
exemption of import duty on all type of coking coal. Washed coking coal is largely used by the steel

It is clear from the graph that there is a decrease in the prices of oil & gases on and after the budget
day (except the year 2003 & 2005). But there is increase in prices on post budget day in the year
2004 & 2007. This is considered to happen because of reduction in custom duty, import duty and
excise duty on petroleum and its product. In 2006 an additional cess of Rs. 700 per tonne on cash
rich exploration companies like ONGC and Oil India has been imposed. This is over and above the
existing subsidy burden and would dent into the profitability of these two companies. This additional
burden of cess is clearly a negative for upstream players, thus resulting into decrease in price in post
budget period.

From the graph it is clear that except in 2003 & 2004 there is an increase in the prices of FMCG
products on and after the declaration of budget. This seems to happen because from 2005 the budget
started being agricultural oriented which is good for FMCG sector as well. There is a decrease in
excise duty on all kind of food products. Also the budget has reduced the custom duty on the food
processing machinery, thus all companies would be able to import the latest machinery at
comparatively low cost, thereby promoting growth in this industry.

From the graph it has been observed that out of 5 budgets 3 times the prices of PSU sectors decrease
in the pre budget period and 3 times there is increase in the prices in the post budget period. This
likely to happens due to the incursion of Dividend Distribution tax on dividends paying mutual fund
entities up to 25 % on money market mutual funds. This will indirectly help the banking industry.
Also the incursion of 2 % interest subsidy on farm credit will improve the asset quality of farm loans.

                      Suggestions for Investors

It has been observed that the budget leaves an impact on the Sensex before and after the budget
declaration. Also this effect is decreases with time and finally loses its effectiveness on Sensex. The
impact of budget increases as we come near the day of budget declaration maximum on the budget
day and then starts decreasing with time. The results have thrown some suggestions for the investors.

An investor has the chance to earn super-profits by investing during the period around the budget.
However he also faces the risk of abnormal losses if his expectations are not met from the budget.
This is also true in case of trading on the budget day. The investor must be careful and very swift
while investing just around and on the budget day.

The test-values however do not prove whether the market index will rise or fall in the post budget
period since it depends on the budget declaration and the analysis of budget by various investors and
technical analysts. So if an investor wants to make any gain from budget swings, he will have to
predict the budget announcements that will cause a rise or fall in post budget share prices.


1. Dalal Street, vol. XXII, No. 06, March 5-18, 2007

2. Dalal Street vol.XXI. No. 6, March 6-19, 2006

3. Outlook Money, 15 March 2007

4. Stock Exchanges and investments, Second Edition. Raghunathan

5. The Icfai Journal of Applied Finance, Vol.12 No.12,Dec. 2006

6. The Icfai Journal of Applied Finance, Vol.12 No.10,Oct. 2006

7. Business statistics, Gupta S.P., Gupta M.P.

8. Business Standard, May 2005


1.    www.monecontrol.com

2.    www.equitybulls.com

3.    www.thehindu.com

4.    www.yahoo.finance.com

5.    www.google.com

6.   www.indiatimes.com

7.   www.bseindia.com/histdata/hindices2.asp


BSE IT Index:

For the Year 2007

   27 February            5,269.58         5,275.19     5,133.22   5,172.40
   28 February            4,975.19         5,087.85     4,835.22   4,869.99
   1 March                4,909.00         5,115.17     4,894.12   5,071.35

For the Year 2006

   27 February            3,646.21         3,733.93     3,646.21   3,728.10
   28 February            3,739.91         3,757.51     3,683.87   3,706.30
   1 March                3,702.89         3,823.50     3,678.81   3,811.11

For the Year 2005

   25 February            2,628.93         2,652.12     2,623.45   2,636.91
   28 February            2,650.22         2,704.37     2,608.49   2,699.27
   1 March                2,699.01         2,699.01     2,624.27   2,629.94

For the Year 2004

   7 July           1,859.16         1,875.26         1,819.45     1,827.06
   8 July           1,837.44         1,863.05         1,774.11     1,795.05
   9 July           1,767.03         1,813.99         1,745.87     1,810.58

For the Year 2003

   27 March            1,410.21        1,421.76        1,403.41    1,406.50
   28 March            1,407.64        1,409.91        1,382.01    1,387.01
   31 March            1,368.65        1,368.65        1,300.09    1,311.08

BSE Metal Index:

For the Year 2003

   27 March                     --      --        --                  1,606.72
   28 March                     --      --        --                  1,592.17
   31 March                     --      --        --                  1,561.47

For the Year 2004

   7 July              --         --         --                       3,794.38
   8 July              --         --         --                       3,520.38
   9 July              --         --         --                       3,644.99

For the Year 2005

  25 February               6,532.42          6,553.93     6,458.85    6,481.65
  28 February               6,489.97          6,693.41     6,416.09    6,630.02
  1 March                   6,661.52          6,661.52     6,496.97    6,545.86

For the Year 2006

   27 February         7,212.81             7,221.85     7,152.94     7,179.44
   28 February         7,191.02             7,291.83     7,050.67     7,234.22
   1 March             7,225.56             7,471.74     7,176.15     7,429.91

For the Year 2007

   27 February         9,050.30             9,115.23     8,906.28     8,927.98
   28 February         8,671.49             8,830.21     8,432.51     8,513.55
   1 March             8,514.52             8,626.36     8,375.94     8,526.13

BSE Oil & Gas Index:

For the Year 2007

   27 February      6,520.38             6,545.23   6,452.09   6,483.67
   28 February      6,357.64             6,410.39   6,244.71   6,297.64
   1 March          6,335.74             6,375.89   6,181.09   6,338.82

For the Year 2006

   27 February      4,489.54             4,504.72   4,471.44   4,482.11
   28 February      4,484.18             4,537.37   4,396.99   4,435.95
   1 March          4,430.12             4,440.74   4,398.35   4,425.01

For the Year 2005

   25 February      3,122.04             3,146.17   3,099.73   3,106.69
   28 February      3,113.92             3,184.99   3,094.74   3,172.67
   1 March          3,175.87             3,175.87   3,109.70   3,129.05

For the Year 2004

   7 July           --         --         --                   2,552.23
   8 July           --         --         --                   2,426.04
   9 July           --         --         --                   2,453.10

For the Year 2003

   27 March                --        --        --              1,377.05
   28 March                --        --        --              1,385.91
   31 March                --        --        --              1,367.59


For the Year 2003

   27 March             741.02         745.76     730.78     732.35
   28 March             735.94         735.94     725.48     732.01
   31 March             731.74         732.28     713.55     718.81

For the Year 2004

   7 July           840.85        856.07         840.85      854.51
   8 July           854.11        867.58         834.73      839.66
   9 July           839.21        865.29         821.36      861.76

For the Year 2005

   25 February        1,064.73        1,067.34   1,051.21   1,052.87
   28 February        1,052.83        1,070.60   1,039.37   1,065.42
   1 March            1,068.12        1,091.11   1,058.05   1,089.80

For the Year 2006

   27 February        1,915.28        1,929.91   1,914.61   1,922.51
   28 February        1,938.91        1,993.04   1,906.19   1,969.59
   1 March            1,977.35        2,004.57   1,974.33   1,995.71

For the Year 2007

   27 February        1,820.22        1,825.23   1,771.41   1,777.38
   28 February        1,739.71        1,844.02   1,706.44   1,785.88
   1 March            1,791.99        1,799.17   1,771.60   1,785.95

BSE PSU Index:

For the Year 2007

   27 February           5,935.02       5,944.96     5,844.63   5,864.16 -- -- --
   28 February           5,764.56       5,823.33     5,577.19   5,713.93 -- -- --
   1 March               5,718.76       5,807.93     5,652.68   5,765.35 -- -- --

For the Year 2006

   27 February           5,736.64       5,763.19     5,728.88   5,749.62 -- -- --
   28 February           5,761.66       5,798.35     5,605.59   5,648.39 -- -- --
   1 March               5,653.52       5,685.17     5,630.02   5,678.74 -- -- --

For the Year 2005

   25 February           4,382.90       4,415.05     4,372.18   4,385.28 -- -- --
   28 February           4,404.94       4,491.71     4,370.16   4,456.21 -- -- --
   1 March               4,459.47       4,459.47     4,390.22   4,409.07 -- -- --

For the Year 2004

   7 July           3,122.90        3,163.21       3,106.06     3,143.17 -- -- --
   8 July           3,159.32        3,183.15       2,933.53     2,962.92 -- -- --
   9 July           2,887.02        3,038.96       2,861.15     3,024.45 -- -- --

For the Year 2003

   27 March            1,595.39       1,614.79      1,594.85    1,596.33 -- -- --
   28 March            1,597.74       1,606.25      1,596.88    1,601.21 -- -- --
   31 March            1,599.70       1,599.70      1,581.26    1,583.33 -- -- --


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