Budget for the Bonds!

Every budget has a story, what’s the story in this one?

Borrowing a line from a short 57-minute speech of FM, “Next 5 years will see unprecedented development”, the government has set the ball rolling by resisting the temptation to go populist in an Election year.

First the headlines:

  1. Fiscal Deficit for FY24 is estimated at 5.8% of GDP (lower than 5.9% estimated)
  2. Fiscal Deficit for FY25 is pegged at 5.1% of GDP, which is remarkably lower than every expectation
  3. The glide path to get the Fiscal deficit below 4.5% by FY26 will continue and Govt is firmly committed to same.
  4. Government capex outlay to see an increase of 11.1% from the current 10Lac Cr to 11.11 Lac Cr, which is 3.4% of GDP
  5. The nominal GDP Growth assumption is around 10.5% for the next FY and Tax buoyancy assumed at 1.13 times (growth of 11.9%). These estimates are fairly conservative.
  6. Status quo on both Direct and Indirect taxes. No changes.

Perhaps the Street was expecting a slightly higher Govt Capex number. But coming on the back of a 35% increase last year, this is a reasonable number for the year.

There are a few noteworthy announcements:

  • 2 Cr more houses to be constructed under PM Awas Yojana
  • 1 Cr HH to be covered under the Roof-top solarization program. This could entail up to 300 units of free electricity for each HH.
  • 50-year long-term interest-free loans for Research & Innovation – corpus of 1 Lac Cr set aside for same.
  • 50-year long-term interest-free loans to State Governments for milestone linked reforms – Corpus of 75000 Cr set aside for same.
  • 3 dedicated railway corridors to be set up – Energy, Minerals, and Cement

Our take:

Given that this was an interim budget in an election year, the Government has done a commendable job on fiscal prudence. It’s very difficult to search for positive nuggets for the equity market. Perhaps, no change is a big change for markets. However, this is a big budget for the Bond markets. 10-year GOI bond yields have eased off dramatically and are down 1% this morning.

Easing bond yields augurs very well for:

  • Existing debt funds. The longer the duration of such funds, the higher the appreciation
  • Corporate and Government borrowing rates should ease off with lower yields
  • Existing books of Banks and Insurance companies holding bond portfolios should see a good MTM gain because of easing yields
  • Finally, easing yields should also give some relief to borrowers (home loans, personal loans, etc). Which in turn should lead to higher disposable incomes for individuals.

In a nutshell, this is a budget for the Bonds. Equities will have to search for solace from the bond markets in due course.

The government has refrained from anything flashy or populist, which is a big positive!

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