The excitement of watching a Budget day speech for most industry participants is nevertheless as fascinating as celebrating one’s birthday. Depending on who is watching the spending budget, the points of adrenalin rush differ!
For the bond industry participants also there is, amongst other people, a single point watch – just like how Arjuna was focused on the bird’s eye in the Mahabharata. That single point watch for bond industry participants was the fiscal deficit quantity as a percentage of India’s GDP. This quantity is substantial due to the fact in contrast to lots of components of Western globe, India’s fiscal deficit is virtually totally captive funded. Also, this spending budget FY 2202 has been presented amidst the vaccine period or the year of Hope. Hence, the palpitation was understandable.
So what did the industry make out of the spending budget numbers presented this time?
Budget FY22 has been a relatively realistic one on most counts. The thrust has been on capital expenditure which has noticed an raise of 26% more than FY 2021.
There has been an emphasis on infrastructure and the BFSI sector with a concentrate on healthcare also. While there is consciousness on becoming fiscally accountable more than time, for FY 22 the total fiscal deficit has been pegged at 6.8% of GDP – signalling larger industry borrowing to fund capex. Tax assumptions also have been really modest (in line with nominal GDP development) and can be thought of positive as financial development picks up.
While equity markets have relished this move, an added INR Rs 80,000 cr of government bond provide for FY 21 has spooked the bond yields (~15 bps uptick in bond yields). The gross borrowing for FY 22 is pegged at INR 12 lakh crore – which is larger than what markets anticipated. Hence yields have moved up across the curve particularly mid to lengthy finish of the yield curve. Liquidity in the banking program nevertheless remains comfy, therefore overnight prices may perhaps continue to hug the reverse repos price for now. The existing yield curve is also steep enhancing the case to chase the carry in fixed revenue as opposed to capital gains.
All eyes are now on RBI’s MPC to indicate a way forward. With comfort in inflation, reduction in gold imports, steady-to-appreciating INR, we believe it is also premature to take away accommodation bias on interest prices. We do count on a status quo, therefore a lengthy pause may perhaps continue. Key to watch is some indication on OMO continuity – a important ingredient if lengthy finish yields want to stay in verify. For now, the extra borrowing of INR Rs 80,000 cr is surely an unanticipated one and with poor appetite, it is complicated to see passage of the auctions devoid of uptick in yield. For investors, it is most effective to stick to intended investment horizons as volatility would continue to be order of the day.
(Lakshmi Iyer, CIO – Debt & Head – Products, Kotak Mahindra Asset Management Company. Views expressed are the author’s personal.)