The markets were expecting a lot from the Union Budget 2015-16 presented to the parliament by the Finance Minister Arun Jaitley, today the 28th of February 2015. The budget failed to live up to expectations and instead gave a negative surprise in the form of higher than expected fiscal deficit. However, the budget does not assume any fancy growth in revenues and that makes the fiscal deficit target achievable.
The lack of any major reforms in the budget will disappoint markets in the short term. The Sensex and Nifty trended down post budget but will see stability as markets look at prospects of rising FII flows on the back of ECB pumping in Euro 60 billion a month through asset purchases. Rate cut expectations could grow if inflation stays at levels of 5% as projected by the government, below RBI’s target of 6% for January 2016.
Bond markets were expecting a gross borrowing program of Rs 6000 billion, which the government delivered. Net government borrowing would cover 82.1% of fiscal deficit of Rs 5559 billion, which works out to Rs 4654 billion. Bonds worth Rs 1346 billion are to be redeemed this year.
Bond market will view the borrowing as easily absorbable and given expectations of rate cuts, yields will trend down.
The INR will look to strengthen as Current Account Deficit (CAD) is projected at below 1% of GDP and given expectations of rising FII flows.
The overall macro situation is looking healthy. GDP growth at 8.1% to 8.5%, CPI inflation at 5%, fiscal deficit at 3.9% of GDP and CAD at below 1% of GDP are all better than last years levels of 7.4%, 6%, 4.1% and 1.3% respectively. Prospects of sovereign rating upgrade would also play on improved market sentiments.
The government has announced that GST (Goods and Services Tax) will be implemented from April 2016, which is a major indirect tax reform and can sharply push up tax revenues.
The risk to the macro will stem from reversal of FII flows on risk aversion due to global geo political issues, Eurozone going into turmoil on debt issues and corporate growth not picking up as per expectations. Risk from Fed rate hikes is low as markets are anticipating hikes. Oil prices will stay down given global oversupply and below trend economic growth in major nations of the world.