Budget 2018: How bond deals may swing on Arun Jaitley’s fiscal math on Budget day

By: | Updated: January 29, 2018 7:10 PM

Budget 2018: The last full Budget of the present government and the first Budget post-GST will be presented by Arun Jaitley on February 1, and investors will be keeping a close eye on the development. Here's how the bond market is likely to react to Arun Jaitley's fiscal math on February 1.

How bond market is likely to react to Arun Jaitley's fiscal math in Budget 2018Budget 2018: How bond market is likely to react to Arun Jaitley’s fiscal math on February 1. (Image: PTI)

Budget 2018: The last full Budget of the present government and the first Budget post-GST will be presented by Arun Jaitley on February 1, and investors will be keeping a close eye on the development. While some analysts are suggesting that Arun Jaitley’s fifth Budget is likely to be populist keeping in mind the impending General Elections in 2019, others are saying that this time the finance minister will walk the tightrope. Meanwhile, the biggest of all concern is if Arun Jaitley will be able to keep up with the fiscal deficit target of 3.2% of the GDP in FY18 and will continue with the same target in FY19.

According to BofA Merrill Lynch Global Research report, bonds have been volatile and have generally traded very weak on concerns that the government could potentially deviate from the fiscal consolidation path. “Anecdotal evidence suggests that onshore investors expect the government to target a fiscal deficit of 3.2-3.3% of GDP in the India Budget 2018-19. Offshore investors are, however, a bit more bullish and believe that the fiscal deficit target could come in below 3.2% of GDP,” the report said.

Also Read: Budget 2018: How Sensex moved from Budget to Budget in three years of Narendra Modi government

Our economists expect the government to announce a fiscal deficit target of 3.2% of GDP, but we believe there is a risk that it could come in below 3.2%, BofA Merrill Lynch said. However, uncertainty around GST revenues and higher oil prices will constrain the government in terms of how much it can spend without deviating from the fiscal consolidation path in the Union Budget 2018.

Earlier this month, anticipating higher macroeconomic risks, Singapore-based DBS group’s economists said that they reckon that a fair amount of bad news is already in the price of the Indian bonds. Indian bond markets continue to trade on a cautious note. The DBS group flagged concerns over FY18 fiscal targets, high oil prices, a firmer inflation trajectory, and rising US rates, saying that these are likely to dampen the mood in the domestic debt markets.

Watch Video: Will Tax Slabs Be Revised In Budget 2018?

Ten-year bond yields have risen to 7.4% this month, back to July 2016 highs and up by 90bps in 2017 compared to relatively flat movements in the region, India and China. In the immediate-term, the focus is on the new ten-year security at Friday’s auction, upcoming state governments’ borrowing schedule and bank recapitalization plans, the DBS group said.

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