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How should you react to the budget?
Thu, 10 Jul Pre-Open

The Indian stock markets will be on tenterhooks today. Finance minister Arun Jaitley presents his maiden Union Budget today. Expectations are high from all quarters. The markets especially have moved up recently in anticipation of big policy announcements. This budget is indeed a golden opportunity for the finance minister to clearly spell out the government's economic agenda. At the top of the list of priorities could be reining in the fiscal deficit, faster clearances for infra projects and a big push for the manufacturing sector. However, considering the sentiment on Dalal Street, the markets may be expecting a little too much.

Consider the situation that the FM is in. He does not have any room to maneuver on the fiscal front. The government's own finances are in a mess. The fiscal deficit targets are unrealistic. The UPA government has left unpaid bills of over Rs 1,000 bn for the new government to handle. In such a situation the FM may not have the funds for many big ticket projects. While fixing the deficit and reducing subsidies will be a big positive for the economy, it will result in short term pain that the markets may not like.

Then there are concerns of a deficient monsoon. This could stroke inflation and keep interest rates high. Thus this year budget could be a tight rope walk. This may not necessarily be a bad thing for the economy but what about the markets? Will we see a correction if there are no big announcements?

As per an article in the Economic Times, there may not be a sell-off in the markets even if the budget does not live up to the high expectations. However, we believe the budget should be no reason to take a call on your equity investments. In the long term, events like the budget will have little to no effect on high quality companies. What is important is to invest in these companies with proven moats, at the right prices. No matter what the knee-jerk reaction of the markets may be, investors should not change their approach to long term investing.

Do you think the budget can address the concerns of long term investors? Share your views on the Equitymaster Club.

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