Markets will keenly watch the execution of capex plans: Abhiram Eleswarapu

Markets have given a thumbs-up to most of the Budget proposals. Despite the rise in headline rates, ABHIRAM ELESWARAPU, head of India equities at BNP Paribas, tells Puneet Wadhwa in an interview that he expects real rates to remain negative for most of 2022. These conditions are good for equities. Edited excerpts:

What is your interpretation of the Budget proposals?

With this Budget, the government has decisively prioritised long-term investment over subsidies and employment guarantee schemes. There is a significant emphasis on physical infrastructure. 5G spectrum auction could follow in FY23 along with plans to extend the optic fiber network even to remote villages by 2025. All of these could have a multiplier long-term effect on the economy and overall well-being. One could argue that there was little in the Budget to boost near-term demand, but agriculture, food security and rural development were already focus areas in the previous Budgets.

Are the GDP and fiscal targets realistic?

To us, the nominal GDP targets look not only achievable, but also likely conservative given they are about 2 percentage points (ppt) below the Economic Survey’s estimate. The markets will keenly watch the execution around the capex plans. However, it is worth noting that there has already been a considerable pick-up in activity since December 2021 and along the lines presented in the Budget. The fiscal math does look conservative, as it is based on a nominal GDP growth of 11 per cent in FY23 (versus around 13 per cent in the Economic Survey). There is a possibility, therefore, that either the entire budgeted amount may not need to be borrowed, or that the fiscal deficit target factors in unexpected contingencies, such as one-off items or the need for a rural boost, if the latter is eventually required.

What’s worrying the bond markets?

It is true that bond yields have hardened by about 20bps to near 6.9 per cent since the budget. The gross borrowing program for FY23 at Rs 14-15 trillion is about Rs 1.5-2 trillion higher than what market participants expected. Fiscal deficits targets were slightly higher, too. Furthermore, there was no mention of inclusion of government bonds in global indices, which could have helped attract foreign demand to at least partly offset the elevated supply. It is quite possible also that the bond inclusion announcement can come at a later stage and assuage the market. The market’s knee-jerk reaction was not entirely surprising, but now that the numbers have sunk in, investors will await more clarity around the fiscal calculations.

How will bond traders view this?

The markets were obviously disappointed with the absence of clarity on capital gains tax exemption on the Euroclear platform and on the global bond index inclusion. It appears investors had priced in an inclusion this year and a possible passive inflow of $20-25 billion in the coming fiscal. That said, I wouldn’t be surprised if we do get this clarity in the next few weeks or months. For now, it is likely that without explicit RBI support or index inclusion, the 10-year benchmark yield could continue to inch higher over the next quarter, by say another 30bps from current levels.

What about the divestment target and strategy for PSU stocks in this backdrop?

The targets for both FY22 and FY23 appear to be placeholders for now, pending further clarity around the timing of the large and potentially lumpy stake sales. The stake sale of say 5 per cent in LIC could help the government comfortably achieve at least one year’s target. I do not think the outcomes of these stake sales would have a particular impact on all PSU stocks. In fact, the targets are close to the levels seen in the years before the pandemic, and look realistic.

How will the markets react to higher inflation, if any, induced by these proposals?

Inflation is already a reality, not only in India, but also globally. Given central banks will raise rates -- possibly several times this year – and easy money will likely go away, investors are preparing to shield their portfolios from excessive volatility by positioning themselves in quality companies and market leaders. That said, overall demand is still generally strong, and supply-side pressures are easing. Despite the rise in headline rates, we expect real rates to remain negative for most of 2022. These conditions are typically good for equities, especially for capex plays and companies with pricing power.

Where do you think the budget proposals lacked?

It is difficult to have a budget that can satisfy everyone, given that by nature the exercise involves allocating scarce resources across the economy. That said, lower subsidies and direct benefit transfers may be seen as a headwind for rural-facing industries such as fast moving consumer goods (FMCG), which has experienced a period of weak volume growth and cost pressures. Rising interest burden could also lead to limited space for welfare programmes, if receipts are not as strong as expected.