Key Points
- India’s Interim Budget for FY2024/25 ticked all the right boxes from a macro stability perspective, while not making any major new policy changes in the lead-up to the General Elections in April/May 2024.
- Overall, the Budget increases our confidence that INR can strengthen gradually below the 82 handle over the next 12 months (see IndiaPulse – The Tide Has Shifted), while also raising the probability of earlier and perhaps one more rate cut by the RBI. We continue to expect 50bps of repo rate cuts starting from the September 2024 quarter as our base case, but see some risk that this could come sooner than we currently expect.
- We highlight three key positives from a market perspective:
- First, the estimated fiscal deficit for India was smaller than expected at 5.8% and 5.1% of GDP for FY2023/24 and FY2024/25 respectively. The market was likely looking for a headline target of 5.3% of GDP for the latter.
- The fiscal consolidation path was driven by robust direct tax and GST collections, slightly higher than anticipated dividends from RBI and state-owned enterprises, coupled with expenditure restraint of around 0.6pp of GDP. The tax assumptions are generally quite realistic in our view, and as such the fiscal targets should be met even with no changes in taxation policies.
- Second, the quality and mix of spending was also quite good, with a continued emphasis on maintaining public infrastructure spending at a high level of 3.4% of GDP. Nonetheless, this still implies a slowdown in government capital expenditure to around 11%yoy from the robust 28%yoy growth in FY2023/24.
- Meanwhile, food and fertiliser subsidies, coupled with defence, transport, and pension spending are expected to decline as a share of GDP, helping to offset slightly higher allocations to healthcare, agriculture, rural, and social welfare expenditure to support the vulnerable and improve economic inclusivity (see Chart 4 below). There were also specific programmes announced to boost agriculture productivity, homeownership, renewable energy adoption, the electric vehicle ecosystem, coupled with research and development and tourism.
- The third positive that came out of the Interim Budget was a leaner than anticipated gross market borrowing programme of INR14.1 trillion. The market was looking at a figure of around INR15-15.5 trillion before the announcement. The smaller fiscal deficit target of 5.1% of GDP certainly helped, but the lower borrowing requirement was also due to a recovery of funds through the GST Compensation Fund.
- Indian government bonds rallied sharply after the Budget announcement, with 10-year IGB yields declining to 7.05% from 7.14% previously (see Chart 2), while USDINR fell marginally below the 83.0 handle.
- Overall, we think the Interim Budget is good from a macro stability and sovereign credit rating perspective, and by extension, also for our call for INR to strengthen gradually to 81.5 in 12 months (see IndiaPulse – The Tide Has Shifted). A smaller fiscal deficit for India can help ease inflation pressures and reduce the current account deficit among other factors. On the portfolio inflow side, it could also further attract foreign bond inflows, and this is coming at a time when there are already sizeable bond index inclusion inflows expected from June 2024 to begin with for India.
- From a monetary policy perspective, with inflation relatively benign and moving gradually towards 4.5%, we think fiscal prudence will give greater confidence for RBI to ease up on its current hawkish and current tight policy. Our base case is still for 50bps of repo rate cuts in FY2024/25 starting in the September quarter, but we see the risks skewed towards earlier and perhaps one additional rate cut.
