Why Do Stock Markets Tend to Decline Ahead of Union Budgets?
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Synopsis
As we approach the Union Budget for 2026-27, stock markets often show a downward trend due to fears of unexpected policy changes. However, historical data suggests that recovery is common post-budget. This article explores the reasons behind this phenomenon and what investors can expect moving forward.
Key Takeaways
- Markets often dip before budget announcements due to fear of policy surprises.
- Post-budget, there’s typically an average gain of 1.36%.
- High volatility is common on budget day.
- Investors should focus on strategic opportunities in Defence and PSU Banks.
- Fiscal deficit targets are projected at 4.4% of GDP.
New Delhi, Jan 25 (NationPress) As the government gears up to unveil the Union Budget for 2026-27, historical data from the years 2010 to 2022 indicates that stock markets frequently experience declines in anticipation of this significant event. This is largely due to concerns over unexpected policy changes. Interestingly, rebounds following the budget announcement are notably frequent, with an average increase of 1.36 percent in the week that follows, as observed by market analysts.
This pre-budget downturn is often linked to heightened volatility, which is reflected in the average 2.65 percent intraday trading range observed on budget day itself, according to experts.
In the last 15 years, the average performance of the Nifty index one week prior to the budget has been negative, recorded at -0.52 percent, with the index finishing higher on only 8 occasions.
This trend corresponds with broader market patterns, where the Nifty has shown negative returns in the month leading up to the budget in four of the past five years, including a notable decline in January 2025.
“Looking ahead to the Union Budget 2026, expectations are focused on striking a balance between fiscal responsibility and growth stimulation, especially against global economic challenges like tariffs imposed by President Donald Trump,” remarked Rahul Sharma, Director and Head of Technical and Derivative Research at JM Financial Services Ltd.
Key expectations revolve around increased capital spending in sectors such as Infrastructure, Defence, and Railways to fortify the economy against external shocks, with an anticipated rise in defence allocations.
Industry groups are advocating for support for MSMEs, manufacturing, green energy, AI, and exports, pushing for incentives like expedited GST refunds and improved logistics investment.
“The fiscal deficit is expected to be around 4.4 percent of GDP, focusing on job creation, rural demand, and sustainable development to guide India towards a $5 trillion economy,” he added.
However, various risks could influence market reactions. Budget day typically sees significant volatility, with potential sell-offs likely if the stimulus measures do not meet expectations or if fiscal targets are missed, which could lead to increased bond yields and tightening liquidity.
Geopolitical tensions, currency volatility, and disruptions in global trade present additional external risks, while delays in domestic policy implementation could undermine investor confidence, according to analysts.
Concerns about overvaluation, foreign institutional investor (FII) outflows, and a potential bubble burst in AI are further challenges that could hinder the Nifty's ascent towards 29,000 in 2026.
“Investors are advised to maintain cash reserves until post-budget clarity is achieved, concentrating on sectors like Defence and PSU Banks for selective opportunities,” Sharma cautioned.
CareEdge Ratings anticipates the fiscal deficit to GDP ratio to remain at 4.4 percent for FY26.
“The fiscal deficit is likely to be set at 4.2-4.3 percent for FY27. We expect gross borrowing to be within the range of Rs 16-17 trillion in FY27, with net borrowing expected at Rs 11.5-12 trillion,” the report detailed.
Point of View
It is crucial to recognize the cyclical nature of market reactions to the Union Budget. While the pre-budget anxiety often leads to declines, it is equally important to note the recovery trends that follow. This duality presents both challenges and opportunities for investors, emphasizing the need for informed decision-making.
NationPress
25/01/2026
Frequently Asked Questions
Why do markets decline before the Union Budget?
Markets often decline before the Union Budget due to uncertainty and fear of unexpected policy changes. Investors may sell off stocks to mitigate risks.
How have markets performed historically before the budget?
Historically, the average return for the Nifty index one week prior to the budget has been negative, at -0.52%, with only eight positive closures in the past fifteen years.
What are the key expectations for the upcoming budget?
Expectations for the upcoming budget include increased capital expenditure in Infrastructure and Defence, and support for MSMEs and green energy initiatives.
What risks could affect market reactions on budget day?
Risks include high volatility, potential sell-offs if stimulus measures fall short, and external factors like geopolitical tensions and currency fluctuations.
What should investors do before the budget announcement?
Investors are advised to maintain cash positions and focus on sectors like Defence and PSU Banks for selective opportunities until post-budget clarity emerges.
