Posted On Friday, Feb 02, 2024
Fiscal prudence, continued capex spending, green growth and status quo on direct and indirect taxes were the key highlights of the Interim Budget FY 2024. The full budget will be presented only in July 2024, by the government that comes to power. Explore perspectives on the budget from the CIO and our fund managers, who analyze key takeaways for Equity and Bond Markets.
There was an expectation that given it’s an election year, the budget could tilt more populist with more support for rural sector. However, contrary to expectations, the government continues to be driven by development and fiscal prudence as the central focus.
Given the economic growth momentum, there was need for assuring macroeconomic stability which has been judiciously crafted to give way for fiscal consolidation. The lower tax collection assumption could either be conservative or government signal to assume some growth moderation going forward. The government continues its capital expenditure spending with focus on Inclusive development with Agri, Infra (including housing) and Green ecosystem as the key thrust areas with an emphasis on Research and Technological developments.
There was a need to support manufacturing momentum and way to revive rural economy. However, probably that could be part of the main budget that gets presented in July as government plans to showcase a pathway for Developed India.
Overall, the Government is on a fiscal consolidation pathway and continued infra spends would support the broader economic growth in the long term.
As expected in an interim budget, the budget was neutral for equity markets.
Keep return expectations anchored
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This is a very good budget for the bond market as the government chose fiscal prudence over populist spending. The budgeted fiscal deficit of 5.1% of GDP is lower than even the lowest of market estimates.
Faster fiscal consolidation and consequent decline in the government’s market borrowing should drive bond yields lower and bond prices higher.
Another positive aspect is that the government has pegged only a moderate growth in the non-capex expenditure. This should keep inflation under check and provide enough headroom to the RBI to cut interest rates.
Bond yields went down around after the announcement with the 10-year government bond yield falling 7.14% to 7.06%.
We expectlong term bonds to do well in 2024.
Investors can capture this opportunity with dynamic bond funds which are invested in long term bonds. Dynamic bond funds stand to benefit from fiscal consolidation. Dynamic bond funds have the flexibility to change the portfolio positioning as per the evolving market conditions.
Investors with a short-term investment horizon and with little desire to take risks should invest in liquid funds which invests in government securities and does not invest in private sector companies which carry lower liquidity and higher risk of capital loss in case of default.
For detailed Fixed income view, please click here.
Source: Budget Documents, Quantum Internal Research
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