Budget 2023: Market crash may have to do with factors beyond the budget

The 2023 union budget  ticked the key boxes Dalal Street was hoping it would: no tinkering with capital gains tax, meaty capital expenditure allocation, no unrealistic tax estimates, sops for the middle class, no pre-poll populism.

For a while, the market seemed thrilled with the ‘no-news-is-good-news’ budget, till the wheels began to come off abruptly. Which surprised many, because the market had come for the big event without any big expectations. The turmoil in shares of the Adani group last week had further added to the cautious mood. With foreign institutional investors (FII) net short on Nifty futures in a big way, it was felt that even a neutral budget could spark off a massive rally, as bears scrambled to cover their short positions.

Things played out differently. The Nifty soared around 300 points midway through the Finance Minister’s speech, and swiftly fell by as much soon after the speech ended. By then the talking point in the market was the rapid slide in Adani group stocks, led by flagship Adani Enterprises, which was breaching one circuit filter after the other on the way down. Adani stocks had been under pressure right from the start of the session, and the flashpoint was a Reuters report saying that the wealth management arm of Credit Suisse had stopped accepting Adani bonds as collateral against loans.

While the Nifty managed to pare its losses by the close of trading, the mood is jittery. And even seasoned market players are clueless. Some feel the weakness in Adani group stocks is a major overhang and would take a while to play out. Others pointed out that high-volume traders are heavily long on index and single stock futures. With prices moving sideways for a while now, these traders are now beginning to tire.

And the overall environment does not seem conducive for a massive upswing anytime soon. Third quarter earnings have been a mixed bag. India is looking expensive vis-à-vis some of the other emerging markets, particularly China, inflows into equity mutual funds (MF) have been slowing, while FIIS have been heavy sellers for a while. The sense one gets from domestic brokerages is that both high net-worth individuals and small investors have cut back on purchases of late.

Traditionally, even the best of union budgets have had just a fleeting impact on sentiment. After two sessions, the focus once again shifts to fundamental and technical factors. In the recent past, whenever FIIs have been net short on the Nifty, they have been forced to cover their positions by expiry day. But that was during a period when India was performing better than global markets. That cycle has reversed over the past couple of months, and India is now lagging its global peers.

From the looks of it, the problem in Adani group shares could linger for a while. The common refrain is that retail investors and HNIs do not have much of an exposure to these stocks. Even then, a 35-50 percent fall in a matter of a week can have a ripple effect on the rest of the market. For now, bears are holding the high cards.