This is one of the reasons why corrections will be welcomed by investors wholeheartedly. The rationale is that they will be able to get shares at lower rates. For the sellers who have sold earlier, it will give them a chance to get in at a lower rate to book profits. The last major correction post the declaration of the election, which saw an intraday drop of nearly 6,000 points on 4 June in the Sensex, saw investors buying heavily with a spectacular rise in daily volumes.

The Sensex, after making an intraday high of 76,304, dropped to an intraday low of 70,234 before closing at 72,000-plus. At that time, it was the retail investors and mutual funds which played bull to the retreating FPIs. This time, however, everyone, including FPIs, FIs, mutual funds, and retail investors, is buying heavily in anticipation of a good budget with its long-term improvement in the economy.

This explains why, despite the 6,000-point intraday fall, the Sensex recovered in four sessions before notching up an all-time high of 80,000 in less than a month, on 3 July to be precise. FPIs bought heavily in June and the first few days of July. This is in sharp contrast to the selling pressure in May.

According to one view, the budget may not be the trigger for correction. Niket Shah, CIO, Motilal Oswal MF, which manages AUM of nearly Rs70,000 crore (of which nearly 90 per cent is in the top quartile), says: “The market needs to consolidate. I do not foresee a massive correction of 20-25 per cent.” Shah says while in some cases valuations are at a premium of 15 per cent over their 10-year average, he believes that large caps have not really gone up to that extent and they are on average trading at 5 per cent below their 10-year levels. Shah adds: “What could be a concern is that if the EPS growth slows down, we may see both a price and time correction.”

“Budget may not be a trigger for a correction,” says Vikas Khemani, founder of Carnelian Asset Advisors, an investment firm managing assets of $1 billion. Khemani exclaims that the economy is doing well and the environment for growth is good. A budget may give indications about the government’s long-term plans, and he does not expect any major disappointment.

He adds: “The mood is bullish, and even though some sectors look overvalued, I do not see any major corrections. I agree investors have to be careful. In any case, in a bull run, corrections are extremely short-lived. Any bad news in the budget will not last for more than a few days. What will guide the direction of the market are the FII flows and corporate earnings growth.”

As no one can time the markets or predict the timing and intensity of corrections, it is best that investors ignore short-term movements. Over the last 26 years, since 1988-99, the Sensex has gone up 21.3 times. These are the annual year-end figures, but they do not really show the sharp corrections which have taken place in those years. The ones which were really sharp occurred post the sub-prime crisis when the Sensex dipped from 20,000 in January 2009 to 9,000 within the span of a few months. 

More recently, this was seen during the onset of Covid-19. The point is that while there have been several sharp corrections over the past 2.5 decades, it’s important to consider the broad direction of the market, which has been bullish throughout, especially since 2014 when the Modi government came to power. In the third term, Modi’s team is likely to lay out a development timeline up to 2047 with a heightened focus on capital expenditure. This will include an emphasis on infrastructure development and creating an enabling environment for future growth.

It is true that the movements of the Sensex are not what really matter. What matters as far as investors are concerned is how their portfolios have fared. Not many investors have been around for such a long period. Many new investors, in fact, would be in the age group of 20-35 and would not have seen any major corrections. Given their convictions, it is unlikely that corrections would sway them. Post-budget, there will be another narrative, and corrections may not be the only talking point.

Fears ahead of the budget

The negatives which the market fears concern the proposals to bring about changes in the capital gains tax. Before the elections, indications were given that there should be uniformity in taxing gains on all asset classes. If this is to be done, either Long Term Gains on property would have to come down from the current 30 per cent to 10-15 per cent or LTGC on shares have to double to 20 per cent with a view to increasing it later. The other fear is that there could be a change in the period of long-term from the current one year to two years while retaining the incidence of tax at 10 per cent. One 

view is that the government in its third term will not do anything to disturb the equilibrium in the market. Old-timers point out that when the Security tax was introduced, it was to have been a substitute for capital gains. It was a more democratic way to introduce a tax on the turnover of trades.

The STT (Securities Transaction Tax) collection has been increasing year on year. In a year or so, it will become a formidable Rs50,000 crore. There is no separate classification in the receipt budget for short-term and long-term gains, as both are clubbed with the individual’s income, albeit at the special rate.