Since the election results, a section of market participants has been fearing a turn in policy approach of the government. The concern generally has gone in the direction of a looser fiscal approach and more reflationary policies, the latter most directly via higher minimum support price hikes. This was partly alleviated even before today with a relatively well contained CPI - weighted increase in support prices. Our requirement of burden of proof that policy continuity will be maintained was far less taxing, and we were happy to wait out till the final budget while retaining our structural bullish view on India rates and accompanying product positioning(https://bandhanmutual.com/article/16931). The biggest takeaway, in our view, from the budget today is that anyone doubting the ongoing policy commitment to macro stability should no longer be doing so.
The government has delivered on the optimistic end of expectations for the fiscal deficit target, with the current financial year pegged at 4.9% of GDP. Further it aims to reach a deficit below 4.5% next year. From 2026 – 27 the endeavor will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP. The accompanying reduction in dated government borrowing is a modest INR 12,000 crores which is the reason for somewhat subdued market optimism at the time of writing. This is owing to a meaningful reduction in reliance on other sources of borrowing like treasury bills and small savings receipt versus the interim budget numbers. However, this is less than a side show as far as the bond market is concerned, given that the strong reaffirmation that has simultaneously been provided for India’s overall macro story and policy direction.
The composition of expenditure is also not noticeably different from the interim budget. Capital spending from the budget is kept the same while revenue spending is up by a modest INR 55,000 crores. Capital spending via public enterprises is up by INR 26,000 crores. On the receipts side, the tax assumption seems conservative with gross tax budgeted to grow only 10.8% over provisional FY24 figures. This is despite a stellar tax growth for the first quarter. Thus the fiscal compression, apart from the well documented higher RBI dividend, is owing to only a conservative hike in total expenditure through the budget versus the interim numbers. The expenditure expansion constitutes 0.17% of GDP versus market expectation of closer to 0.3% of GDP.
The detailed table is presented below:
Conclusion
The budget takes out (hopefully) the last remnants of doubt with respect to policy continuity. In addition, the vision and the cohesive statement of intent is apparent thereby keeping India as one of the rare large nations around the world that can still claim this positive. We reiterate that India bonds are a structural trade for reasons that we have dwelled into multiple times before. The number one risk for fixed income investors remains reinvestment risk and this needs plugging via appropriate duration selection on incremental investments. In active duration bond and gilt funds we continue to prefer 30 year government bond (actual maturity closer to 29 years). This is probably the best way to express a structural view on India fixed income, in our view.
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