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Budget 2019: Bond purchases an uncertain sword hanging in the market

Budget 2019: Bond purchases an uncertain sword hanging in the market

Budget 2019: Bond purchases an uncertain sword hanging in the market
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By Nilesh Shah  Feb 4, 2019 8:43:31 AM IST (Updated)

This being an election year, clearly the government had to walk the tight rope between boosting the economy, helping alleviate farm distress and bringing about fiscal consolidation

The year gone by 2018 was one of the toughest in terms of making money. Given that this is an election year, there were a lot of expectations around this budget. The government has over the last few years initiated many structural reforms including the implementation of the goods and services tax (GST) and the Bankruptcy Code. It is now time to reap the long benefits of the same.

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Through the budget presentation, the government has made clear its key target areas. The focus of the budget has been threefold. This includes:
  • Boosting the income of the small and marginal farmers
  • Supporting the middle class tax payers and thereby aiding consumption growth and making efforts to revive the ailing real estate sector
  • Announcing of the farmer income support package in the form of a direct cash transfer giving Rs 6000/ year for nearly 120 million farmers is a step in that direction. The government also announced a 5% interest rate subvention on the timely repayment of farm loans.
  • Apart from the small and the marginal farmers, other focus area for the government has been to provide a boost for low ticket consumption and aid to the middle class tax payers. In this respect, the budget announced an income tax rebate (0 percent tax on incomes) for low income individuals extended from Rs 250,000 to Rs 500,000. Apart from this, the standard deduction is increased to Rs 50,000 from Rs 40,000 for employees.
    Thirdly, the budget also announced several measures to help revive the property sector and continue the thrust on affordable housing. While the measures aimed at the real estate space maybe small and incremental, it gives a message that the government is looking at the sector as a tool to add to overall economic growth. Income tax exemption for developers engaged in affordable housing has been extend by one more year. There have been a few positive measures from the consumers perspective as well, which includes capital gains exemption granted for investment in two house properties vs one earlier subject to a maximum capital gains of Rs. 20 million.
    The budget does deviate marginally from the earlier outlined glide path for fiscal consolidation. This being an election year, clearly the government had to walk the tight rope between boosting the economy, helping alleviate farm distress and bringing about fiscal consolidation. The key focus among other things for bond markets was the fiscal math. With the fiscal deficit pegged at 3.4% for both FY19 and FY20, the pause on the fiscal consolidation was possibly justified by the need for the farm package to boost the incomes of the small and the marginal farmer. The new glide path however does not change the original target of achieving 3% of GDP by FY21.
    The market is also concerned about how the revenue side estimates will pan out. Additionally, key to note is that ~60% of net government supply in FY19 was cushioned by RBI OMO bond purchases. Uncertainty on how much would be the quantum of OMOs and will they actually be needed will be an uncertain sword hanging in the market. From here on a lot depends on achieving the targeted rate of growth in net tax revenues including GST. We expect bond yields to remain at current elevated levels with sideways movement till MPC meeting slated for next week offers some clarity. For now, short duration funds are a better suited option for investors to participate in fixed income.
    Nilesh Shah is Managing Director and Chief Executive Officer of Kotak Mutual Fund
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