Indian markets have seen a sharp rally and remain among the top three best performing stock markets this year.
The Sensex has gained rapidly and price to earnings multiples make it the costliest stock markets in the world.
Here are reasons why the stock markets could see a reaction by at least 5 per cent in the short term if the budget disappoints.
Markets have rallied despite weak corporate earnings
The earnings season at best has been woeful. From L&T to Hindustan Unilever to ICICI Bank there were major disappointments.
Despite this the stock markets have been gaining ground and valuations have become horribly expensive not matching performance.
In fact, one year forward price to earnings multiple for Sensex companies is at 18 times, which is rather high. The hopes are pinned on the Union Budget for large scale reforms. If this does not meet expectations be prepared for losses.
RBI may continue to keep interest rates on hold
If the fiscal consolidation as announced in the Union Budget is not qualitative and quantitative expect the Reserve Bank of India to continue to hold interest rates steady.
This may make it difficult for economic growth and investment to happen at a faster pace.
S&P brushes aside hopes of a rating upgrade
"Improvements in India's weak fiscal balance sheet are likely to be gradual and are thus unlikely to lead to a rating upgrade in the next three to five years," rating agency S&P has said.
Hopes of a sovereign rating upgrade anytime soon have now been quashed. This is certainly not good news for investors looking for a ratings upgrade, at least for the next three to five years.
Not the best time to be in the markets
No matter what investment experts suggest, markets are expensive at the current levels. There is more potential for a downside risk, then an upside.
It's best to stay invested if you have already made money. But, to add fresh money at the current levels and increase exposure may not be the best idea at the moment.