DebtFX: Budget Spin - A Short-Term Positive for Bonds and Rupee

The Union Budget 2016-2017 has reinforced the credibility and confidence of investors by adhering to the fiscal consolidation path. This is a near-term positive for both debt and forex, says India Ratings and Research (Ind-Ra). However, Ind-Ra believes that the reinforcement of confidence is necessary but not the sufficient condition for changing underlying fundamentals.

To that effect, we believe five factors are crucial for the DebtFX trajectory: (1) total bond issuances, (2) a proposed committee for reviewing Fiscal Responsibility and Budget Management (FRBM) Act, (3) headroom for monetary easing (4) a corporate and bank sector recovery, and (5) fiscal arithmetic composition.

Both debt and currency markets are likely to gain owing to improved investor sentiments in the near term. Benchmark 10-year G-sec is likely to stay in the range of 7.58%-7.68%, while the rupee is likely to stay in the range of 67.45-68.15/USD this week.

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