Budget 2024: Lower fiscal deficit estimate for FY25 cheers bond market

Rupee declines to new low over fall in domestic equities

The lower fiscal deficit projection for financial year 2024-25 cheered the bond market as yields softened after the announcement but settled flat due to profit booking.

The bond market was expecting the fiscal deficit to be between 5 per cent and 5.1 per cent for the current financial year. This is against 4.9 per cent announced by Finance Minister Nirmala Sitharaman in the Budget.

The benchmark yield settled at 6.97 per cent on Tuesday, flat against Monday.

“Overall, the Budget was positive; the bond market was expecting the fiscal deficit target between 5 per cent and 5.1 per cent. There is resistance around 6.95 per cent and it is expected to trade within the range of 6.95-7 per cent for at least two weeks,” said a treasury head at a private bank.

“We will need significant cues to break the 6.95 per cent mark,” he added.

The borrowing estimates for the current financial year were broadly similar to the interim Budget, with gross borrowings of Rs 14.01 trillion. This may continue to support the bond market's demand-supply dynamics.

The continuous inflow into the bond market on the back of JP Morgan bond index inclusion is also expected to keep yields in check.

“The reduction of the fiscal deficit to 4.9 per cent, compared to the interim Budget's 5.1 per cent, is a positive development for bonds. We expect this positive momentum of inflows to continue and find the finance minister’s guidance of extended fiscal consolidation to potentially 4.5 per cent next year as a welcome signpost for a potential rating upgrade in the future,” said a note by UBS Securities.

The finance minister said that in order to meet the economy's financing needs, the government will release a financial sector vision and strategy document, which will set the agenda for the next five years.

“For meeting the financing needs of the economy, our government will bring out a financial sector vision and strategy document to prepare the sector in terms of size, capacity and skills,” she said.

The rupee depreciated to a new low on Tuesday due to fall in domestic equities after the government proposed raising capital gains tax, said dealers.

The local currency settled at 83.70 against the dollar, and it touched a low of 83.72 during the day. On Monday, the rupee had settled at Rs 83.67 per dollar.

“The rupee fell because of weakness in the stock market and some FDI outflows,” said Anindya Banerjee, vice-president (currency derivatives and interest rate derivatives) at Kotak Securities.

Market participants said the Indian currency did not depreciate further as the Reserve Bank of India (RBI) intervened in the foreign exchange market by dollar sales.

During the current financial year, the rupee depreciated by 0.3 per cent, while in this calendar year it fell by 0.6 per cent so far.