The stock market's gearing up for the Budget. In the cash segment, there's been a brief pre-Budget rally, while in the derivatives segment outstandings on put options have jumped 36 per cent compared with last week, clearly suggesting that market players are hedging their bets ahead of the Budget.

Here's a look at some of the sectors in which policy changes are expected:

Oil and Gas: The finance minister is expected to cut import duties on crude and petroleum products in the Budget. If this happens, it's negative for refining companies like Reliance and positive for marketing companies like Bharat Petroleum Corp and Hindustan petroleum Corp.

Oil and Natural Gas Corp could be hurt, as its crude is benchmarked to global rates. But considering the huge increase in crude prices so far this year, the expected drop in duty to 8 per cent will hardly affect earnings growth. The impact on refining companies' margins, again, is expected to be offset by an increase in refining margins.

The gain for marketing companies, on the other hand, may disappear if they have to pass it on to consumers, or if an increase in crude prices isn't compensated by a hike in domestic prices.

In case of petrochemical products, the lower import duty are expected to impact GAIL the most, followed by Reliance and IPCL. However, in case duties on crude are untouched and only that of products are reduced, the impact will be much more.

Automobiles: In the auto sector, the major change expected is service tax on transporters. With freight rates also moving downwards and considering the diesel price hike recently, the service tax will severely hurt transporters.

In turn, this could result in lower demand for commercial vehicles. But that needn't be the end of the road for commercial vehicle stocks, as the huge spending on roads and other infrastructure, as well as the expected ban on old vehicles could offset the negative impact.

Infotech: IT stocks, in the last two Budgets, have made sharp moves on account of changes in 10A and 10B provisions.

This time around, no changes in tax provisions are expected except for the increase in the service tax rate, which will hurt software education companies.

The fact remains that software companies will do much better this year, with volumes continuing to grow at a fast pace, billing rates stabilising and the rupee depreciating.

Shipping: Tonnage tax tops the agenda of the shipping industry's wish list. But, although dry bulk rates have  fallen by 30 to 40 per cent in the last few months, they are high on an average basis.

Moreover, freight rates in the tanker segment have been fairly steady. Accordingly, even if the tonnage tax is not introduced, shipping companies are still expected to do well.

Pharmaceuticals: The pharmaceutical industry is hoping that the finance minister maintains the status quo of a weighted (150 per cent) deduction on R&D expenditure and tax benefits on plants set up in backward areas.

These measures, if implemented, would be a clear positive, but it would do little to improve profitability in the short run. The recent change in the environment for exclusivity in the US will result in profit margins shrinking considerably.

... and for foreign institutional investor inflows

There's a consensus that what matters for the markets is how the foreign institutional investors view the Budget. That's because FII flows affect all markets -- the stock markets went up last year because FII money flowed in, and they fell this year because it moved out; interest rates fell and bond prices shot up because FIIs poured in funds into the country and the rupee rose against the dollar because of the inflows.

So the view that FIIs take of the Budget will be critical for markets. One section of opinion feels that with interest rates hardening in global markets, and money flowing out of emerging markets, the Indian market cannot be immune to that trend, no matter how good the Budget.

Also, global fund managers are still overweight on the Indian market, which limits the upside. Some of them say that the only reason selling by FIIs has been muted is because there's no depth in the Indian market. If the Budget is good, things will remain as they are and if it's bad, there'll probably be a wave of selling.

The optimists, however, point out that the interest rate tightening in the developed markets has already been priced in. Interest rate rises in the US are likely to be gradual, a view reinforced by recent US not-so-good jobs data.

They point to a recent rise in risk appetite for emerging markets, and it's true that India funds have gained $75 million in the past week.

According to this view, the Budget is a litmus test of the new government's intentions and could induce FIIs to modestly increase inflows into the Indian market. MSCI indices for most Asian markets have been positive in the last one month.

Whichever view is right, there's no question that FII flows are the key to the performance of all our markets.

With contributions from Mobis Philipose and Amriteshwar Mathur

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