BSE Building new
BSE Building newReuters file

When Finance Minister Arun Jaitley presented the first full-year budget of the Narendra Modi government Feb. 28, 2015, the stock markets were volatile but managed to end with gains, primarily on the assurance to gradually reduce corporate tax rates (from 30 percent) over the next four years and defer applicability of General Anti-Avoidance Act (GAAR) by two years. 

The S&P BSE Sensex gained 141 points after a wild swing of about 700 points and settled at 29,361 while the NSE Nifty ended the day at 8,901, up 57 points.

The gains were the first on a Budget day in four years; in the previous three sessions on Budget days, the Sensex had ended with losses.

Situation then

The Narendra Modi government last year was still riding a popularity wave, notwithstanding its first electoral drubbing since coming to power in May 2014 when the Arvind Kejriwal-led AAP won a landslide victory in the Delhi Assembly polls, reducing the BJP to just three seats.

Optimism was in the air for Modi on the economic front.

"Indian equity markets were near record highs, the rupee was outperforming its regional peers and a collapse in oil prices (Jan 2015's $48/bbl from June 2014's $116/bbl) provided a huge windfall for the fiscal balances," said Radhika Rao, economist, group research, DBS Bank in her note a few days ago.

Situation now

But the situation has changed drastically for Modi since then: Exports have fallen for 14 months in a row, retail inflation is at a 17-month high, stressed bank loans are at alarming high levels and there are multiple headwinds in the political circles in the form of the JNU row and Dalit student Rohith Vemula's death, making the task more daunting for Modi as his government presents its third Budget Monday.

Based on Friday's closing level of 23,154, the Sensex has slipped 21 percent from its Feb. 28, 2015 levels, reflecting the drift in the Indian economy that is facing a tough external environment.

The situation has been caused due to a fall in crude oil and commodity prices, weakening the global economy.

The economies of countries dependent on oil and commodity exports have been hammered, leading to a contagion effect on other countries, including India.

Global equity markets have witnessed significant sell-off since the beginning of the year.

Foreign institutional investors (FIIs, also FPIs) have been net sellers of Indian stocks for many months now, and have pulled out about Rs 5,690 crore from Indian stock markets this month (till Feb. 26).

The Indian rupee closed at 68.62 Friday, not far away from its all-time low of 68.85 against the US dollar in August 2013, when the Congress-led UPA was in power.

"Bond yields have hardened, with the benefit from low oil prices largely spent and narrow room for further rate cuts. Despite global central banks maintaining an easy policy bias, foreign investors have trimmed their exposure in January and February," Rao said in her Wednesday note.

With speculations ranging from a possible hike in service tax rate to 16 percent from the current 14 percent, an expected tweak in long capital gains norms, higher outlay of Rs 1.10 lakh crore on account of implementation of the One Rank One Pension (OROP) scheme and recommendations of the 7th Central Pay Commission, the markets are on the edge.

Foreign investors would be looking at the government's commitment to the fiscal consolidation path to keep the fiscal deficit at 3.9 percent of the GDP this year and 3.5 percent in FY2017, besides a reduction in corporate tax rates as was promised last year.