The Union Budget Myth: What Investors Expect vs What Actually Moves Markets

As the Indian stock market braces for the Union Budget 2026, scheduled for a historic Sunday presentation on February 1, investors are navigating a landscape filled with familiar anxieties. With Finance Minister Nirmala Sitharaman presenting her ninth consecutive Budget, the air is thick with speculation. However, history suggests that the market’s collective intuition regarding Budget outcomes is frequently flawed.

Often, the most significant market movements stem not from what is announced, but from the gap between what investors fear will happen and the reality of the policy text. By analysing key historical divergences where policy expectations clashed sharply with market reality, we can better navigate the volatility of the upcoming Sunday session.

The 2024 Interim Budget

Conventional wisdom dictates that Interim Budgets before a general election are vehicles for populism, heavy on subsidies and light on fiscal discipline. The 2024 Interim Budget turned this logic on its head.

Expectation: Markets anticipated a ‘vote-on-account’ filled with populist sops to woo voters, potentially widening the fiscal deficit.

Reality: The government prioritised fiscal consolidation, setting a lower-than-expected fiscal deficit target of 5.1% for FY25. Major populist spending was notably absent.

The ‘Wrong’: The market misjudged the government’s confidence. By expecting populism, traders had positioned themselves for specific ‘subsidy’ sectors. The reality of a prudent Budget led to a rally in bond markets (yields fell) and a repricing of PSU stocks, rewarding a focus on macroeconomic stability over short-term handouts.

The 2021 ‘COVID-19 Cess’ Phantom

The Union Budget 2021 provides a textbook example of the market’s tendency to over-discount negative scenarios. Coming on the heels of the devastating COVID-19 pandemic, the consensus on Dalal Street was grim.

Expectation: Analysts were almost certain the government would introduce a ‘Covid Cess’ or hike taxes to fund the massive vaccination drive and healthcare spending. The market remained jittery and subdued in the weeks leading up to February 1.

Reality: The Finance Minister did the opposite. There was no new tax, no Covid cess, and instead, a strong push towards capital expenditure (Capex).

The ‘Wrong’: The market had incorrectly priced in a defensive, tax-heavy Budget. When the reality of a growth-oriented, counter-cyclical Budget hit the wires, the Sensex rallied over 5% on Budget Day, its best performance in decades.

The 2019 FPI Surcharge

One of the most glaring examples of a disconnect between policy intent and market reality occurred in the Union Budget 2019. The government, aiming to increase revenue from the super-rich, introduced a higher surcharge on individuals earning above Rs 2 crore and Rs 5 crore. However, a critical oversight was the failure to exempt Foreign Portfolio Investors (FPIs) structured as trusts.

Expectation: The market expected a continuity Budget following the election victory, with a focus on infrastructure and growth.

Reality: The effective tax rate for FPIs jumped, triggering a massive sell-off. Foreign investors pulled out over Rs 30,000 crore in the months following the announcement, forcing the indices into a tailspin.

The ‘Wrong’: Policymakers underestimated the sensitivity of global capital to tax friction. The market, conversely, was blindsided, having priced in stability. The government eventually rolled back the surcharge for FPIs in August 2019, acknowledging the policy misalignment.

The 2018 LTCG Tantrum

The 2018 Budget is remembered for the reintroduction of the Long-Term Capital Gains (LTCG) tax on equities, a levy that had been absent for 14 years.

Expectation: The rumour mill was active, but a large section of the market hoped the government would avoid such an unpopular measure to maintain retail participation.

Reality: A 10% tax on LTCG above Rs 1 lakh was imposed. The immediate reaction was a sharp sell-off, with the Nifty correcting significantly in the days that followed.

The ‘Wrong’: The market’s initial reaction suggested this was a death knell for retail participation. However, the grandfathering clause (which protected gains made up to January 31, 2018) buffered the actual financial impact. In retrospect, the ‘wrong’ was the market’s belief that a zero-tax regime was sustainable indefinitely. The structural bull run that followed in subsequent years proved that taxes do not derail long-term growth stories, only fundamentals do.

Pre-Budget Anxiety vs Post-Budget Clarity

Aggregating these historical instances reveals a clear pattern in ‘wrong’ expectations. The market consistently exhibits a negative bias leading up to the event, only to correct upwards once uncertainty resolves.

Pre-Budget Trend: On average, the Nifty 50 delivers a return of -0.52% in the week preceding the Budget. This reflects the ‘fear premium’ being priced in.

Post-Budget Trend: In the week following the Budget, the index averages a gain of +1.36%. This is the ‘relief rally’.

The error investors make is assuming that pre-Budget volatility is a signal. In reality, it is merely the cost of uncertainty. The ‘smart money’ rarely bets on the Budget speech itself; it bets on the macro direction that becomes visible only after the fine print is read.

Distinct Insights Table: Expectations vs Reality Check