Interim Budget 2024 softens bond yields, but stocks grumpy

Equities stayed calm before Sitharaman’s presentation in the Parliament but soon turned cold, snubbing the proposals. Illustration: Chaitanya Dinesh Surpur

The interim budget presented by finance minister Nirmala Sitharaman did very little to move the stock markets. Equities stayed calm before Sitharaman’s presentation in the Parliament but soon turned cold, snubbing the proposals. The interim budget, touted as pragmatic rather than populist by many economists, however, softened 10-year government bond yields. India's 10-year benchmark yield fell as much as eight basis points to 7.0511 percent during the day.  

With an eye on fiscal consolidation and overall lower market borrowings, the Budget 2024 proposals are expected to stabilise economic conditions in the financial year 2025. This, of course, augurs well for India as index provider JP Morgan will include India Government Bonds (IGBs) in the Global Bond Index-Emerging Markets from June 2024, expected to trigger $20-40 billion foreign flow in a staggered manner.

According to Ranen Banerjee, partner and leader economic advisory, PwC India, the government has walked the path of fiscal prudence. “The fiscal deficit being pegged at 5.1 percent for FY25 is a positive move as it will help free up space for private borrowings as they pick pace during the year, besides helping in containing inflationary pressures and supporting the bond markets,” he adds.

The FM said the government will continue on the path of fiscal consolidation to reduce fiscal deficit below 4.5 percent by 2025-26. The fiscal deficit in 2024-25 is estimated to be 5.1 percent of GDP (gross domestic product). The revised estimate of the fiscal deficit is 5.8 percent of GDP in FY24.

 “This is a judicious interim budget. The degree of fiscal consolidation with a target of 5.1 percent in FY25 is more than anticipated and is positive for softening of bond yields.  Further, the reiteration of the fiscal target for FY26 gives the bond market medium-term visibility. The consolidation impacts expenditure including capex by the government,” says Vetri Subramaniam, chief investment officer, UTI AMC.

Others concur. Two broad themes of the interim Budget are fiscal consolidation and stepping up focus on agriculture/rural to course correct to some extent the differential benefit of the ongoing economic growth, which is tilted in favour of households of upper income bracket/urban areas, says Devendra Kumar Pant, chief economist & senior director– public finance, India Ratings and Research.

“The first impression from the budget speech and fiscal deficit numbers for FY24 and FY25 suggests that the government is serious about achieving the fiscal consolidation path of 4.5 percent fiscal deficit by FY26. The nominal GDP growth assumption and revenue buoyancy appears plausible and in line with our expectations,” he adds.

As the general elections are likely to be in April-May, the interim Budget is only for a short term before the actual Budget is presented in July. A vote on account or interim Budget is a special constitutional provision, by which the government gets the Parliament’s vote to secure funds for essential expenditures for a part of the next financial year. The final Budget will be presented in July, when the new government is in place. The interim budget broadly steered clear of any changes to the tax regime and expenditure rationalisation and presented an ambitious fiscal consolidation target for next year.

According to Pranjul Bhandari and Aayushi Chaudhary, economists, HSBC, even though a fiscal consolidation of 0.7 percent of GDP should impart a negative fiscal impulse, when adjusted for better quality of spend (more capex), they find that the fiscal impulse to be zero (neither positive, not negative). “And this is precisely the winning stroke of this budget, lowering the fiscal deficit, without imparting a negative impulse on growth,” they explain.

The government announced a lower-than-expected gross market borrowing in FY25 of Rs 14.1 trillion versus Rs 15.4 trillion in FY24. “This was made possible by fiscal consolidation, with net market borrowing falling a shade. But also by using the GST cess funds for lowering repayments,” Bhandari and Chaudhary add.

Also read: A budget of fiscal prudence for Viksit Bharat

For FY25, the government has budgeted a 0.1 percent of GDP rise in revenues, led by higher net taxes. On the expenditure front, it aims to lower the subsidy bill and 'other' current expenditure by a total of 0.8 percent of GDP. On the other hand, it aims to raise capex by 0.2 percent of GDP, marking an overall cut in expenditure of 0.6 percent of GDP.

With higher revenue and lower expenditure, it aims to lower the fiscal deficit by 0.7 percent of GDP.

Rahul Bajoria, MD and head of emerging markets Asia economies (ex-China), Barclays, says “Overall, we believe the government is serious about carving out more fiscal space: It has opted not to undertake significant populist measures despite impending elections, and should continue to hold its strong track record of fiscal marksmanship.”

Why markets stayed grumpy?

After the two-day Federal Open Market Committee (FOMC), the US Federal Reserve left rates unchanged for a fourth straight meeting but signalled that a rate cut in March is unlikely which made investors worldwide nervous.

As US Fed Chief Jerome Powell pushed back on March rate cuts, the global central bank is unlikely to get confidence from supporting data by the March FOMC.  “We think the January FOMC was slightly more hawkish than immediate pre-meeting expectations, as Chair Powell pushed back on expectations of a rate cut in March. Nonetheless, we think the market will still likely be inclined to price in larger rate cuts than the Fed’s current dot plot projection of three rate cuts in 2024,” say Nomura analysts.

According to Siddhartha Khemka, head-retail research, Motilal Oswal Financial Services, the US Fed not hinting at an early rate cut dampened global sentiments. With two major events now behind, Khemka expect markets to take support from the ongoing earning season and should remain in positive territory.

On Thursday, the BSE Sensex ended at 71,645.30, down 106.81 points or. 0.15 percent. The Nifty closed at 21,697.45, 28.25 points or 0.13 percent lower.