Every budget is a tightrope walk for the government and this will be no different. But this year's union budget due on 28 February acquires extra significance because this will be the last full budget presented by the ruling Congress-led UPA government before the general election due in May 2014, raising the risk of populist measures.
Sonal Varma, economist, Nomura India expects the government to present a prudent budget targeting a fiscal deficit of 4.6% of GDP in FY14 (year ending March 2014) from 5.3% in FY13, with gross and net market borrowing at Rs 6 trillion and Rs 4.7 trillion, respectively. The government is likely to introduce the Food Security Bill in the budget session of parliament, which proposes foodgrain entitlement for up to 75% of the rural and up to 50% of the urban population. Priority households will be entitled to 7kg of subsidized foodgrain perperson per month.
While Credit Suisse's bond strategist, Ashish Agrawal said that the 4.8% fiscal deficit target translates into net issuance of Rs 4,700 billion, putting gross issuance at Rs 5,650 billion. If the government formalizes plans for buybacks, starting in 2013/14, the net numbers could be higher.
'The buybacks will likely exaggerate the steepening in the bond curve. The budget likely to be bullish for the local currency sovereign bond market. The government's ability to stick to this year's fiscal deficit target is a significant positive, while progress on the fiscal front with subsidy reduction was one of the pre-requisites for the RBI to ease policy rates. Targeting a lower fiscal deficit for 2013/14 will be another positive. In the near term, completion of this fiscal's borrowing program coupled with potential Foreign Institutional Investor purchases of bonds will likely fuel the on-going rally. It sees potential for 10-year bond yields to fall to 7.5% levels this quarter before consolidating,' Ashish Agrawal said on bond market outlook.
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