Bond Markets to Focus on Supply and Equity Market to Focus on Spending – Interim Budget 2019-20
The interim budget 2019-20 saw the government increasing expenditure by around 13% largely driven by spending on providing income to small farmers at Rs 800 billion. The government increased spending on agricultural subsidies to protect farmers against falling food prices. The higher spending on farmers has resulted in fiscal deficit targets being breached for fiscal 2019-20 with deficit at 3.4% of GDP against FRBM target of 3%. The target of 3% has been moved to next year.
The government has fallen short of GST collections by around Rs 1 trillion for this year but Rs 500 billion has been made up by higher direct tax collections. Expenditure has been largely against budgeted targets and fiscal deficit has moved up marginally from target of 3.3% of GDP to 3.4% of GDP.
Government borrowing is down this fiscal year largely due to higher than budgeted inflows into small savings schemes. The government has increased its estimate for flows into small savings schemes in fiscal 2019-20, which will ease burden of market borrowing to fund the fiscal deficit.
On the revenue side, government expects higher flows by 18% from GST in fiscal 2019-20. Income tax is also expected to grow by 17%. The government has given tax sops to individuals by exempting income upto Rs 500,000 from tax.
The bond market is looking at a gross borrowing of Rs 7.1trillion, which is over 24% from this year. RBI has absorbed a good portion of the borrowing this year through OMO bond purchases of around Rs 2.3 trillion. Next fiscal year, borrowing will be higher and RBI may not be present in a big way and with states too borrowing heavily at over Rs 6 trillion gross, supply is high.
Bond yields will rise on supply worries and election uncertainty.
Equity markets will view the higher spending as positive for the consumption economy, especially the rural economy. However, markets will be edgy on election uncertainty. Tax sops too put extra income in the hands of the middle class that is emerging as a high growth consumption segment.
Sensex and Nifty will be range bound but will exhibit volatility going into elections in May.
The INR will largely move on global risk factors and oil prices and both seems to have been easing at present with Fed likely to hold back rate hikes and oil markets seeing a weakening demand scenario.