A trend in the performance of the Bombay Stock Exchange Sensex over the past 10 years suggests a simple relationship between its pre-Budget and post-Budget performance.

When the index has moved up in the two months prior to the Budget, it has declined between 10 and 25 per cent in the six months after the Budget.

Run-up to the Budget: Complete Coverage

On the contrary, if the pre-Budget rally fails to take off, the index shoots up over 25 per cent in the six months following the Budget.

The Budgets of 2000, 2001 and 2002 were preceded by a rally, taking up the Sensex by around 10 per cent. However, the market declined sharply by 10-25 per cent in the six months following the Budget.

Incidentally, the market shot up over 25 per cent within six months after the Budgets of 2003 and 2004, which were not preceded by a rally.

This simple observed relationship is leading market entities to cross their fingers on the behaviour of the market in the three weeks ahead of this year's Budget.

Political instability played a major role in the market ahead of and after the Budgets of 1997,1998 and 1999. The Dream Budget of 1997 saw the stock market surge even after the pre-Budget rally. In 1998, it continued with its downturn even after the Budget in 1998.

The 1999 Budget, the first full Budget by the National Democratic Alliance saw the Sensex continue with the momentum of the pre-Budget rally after the presentation of reform-oriented Budget.

So far, the market has been almost flat. In the last six months, stock prices have appreciated by over 28 per cent, leaving little room for the market to move up sharply in the next three weeks.

But market entities fear if the Sensex continues to ride on the current momentum, and reaches the magic 7,000-mark, there would be a prolonged bear phase after February 28.

Analysts quote various reasons for the markets to decline after the Budget this time. As it is, the liberalised telecom and power policies, introduction of the value-added tax, a hike in the interest on the employees provident fund and the entry of public provident funds in the equity market have already been announced and factored in.

What remains to be done in the Budget relates to liberalisation in the banking and infrastructure sectors and, of course, the rationalisation of the tax system.

Sectors such as steel, sugar, shipping, cement, aluminium, chemicals, commercial vehicles, tractors, construction, power, hotels and textiles have reported tremendous growth in profits in fiscal 2003-04 and the first nine months of 2004-05.