Budget for the Bond Market - Budget 2019-20

• Gross fiscal deficit was projected at 3.3% of GDP as compared to 3.4% projected in the interim budget.
• Government to borrow overseas as part of the borrowing program.
• Nominal GDP is expected to be 12% in next few years while Real GDP is expected to be at 8%.
• Dividends from RBI and PSUS budgeted to increase by 37%.
• The total expenditure of the Government is estimated to be at 13.2% of GDP

Reduction in fiscal deficit as percentage of GDP and borrowing in overseas markets will bring down yields on government bonds and also strengthen the INR. Credit spreads too will come off on the government's thrust on corporate bond market and the partial guarantee for banks lending to NBFCs. Widening the scope of FII investments in domestic debt is also positive for credit spreads. Bank recapitalisation will improve credit growth and keep credit lines open to NBFCs.

The current credit crisis is however unlikely to ease off in a hurry given the stress on market risk aversion and increasing number of defaults and rating downgrades. Credit spreads will not come off for weaker issuers.

Equity markets are reacting to the minimum 35% public ownership norms proposed in the budget that could see higher supply. Government disinvestment at Rs 1.05 trillion would also add to the supply. However, the markets will benefit going forward on the back of GDP projected to almost double in the next five years. Cleaning up of the banking system, thrust on spending on rural economy and roads and infrastructure will keep the economy growing.

The government has shown its intention for the private sector to play a larger role in the economy, from defense to aviation and railways. The government aims for the PPP route for higher investments in railways.

The full budget for fiscal 2019-20 presented by the Financial Minister, Nirmala Sitharaman, was largely favorable to the bond markets. Gross fiscal deficit was projected at 3.3% of GDP as compared to 3.4% projected in the interim budget. The gross and net borrowing numbers are largely unchanged from the interim budget.

The government is looking to borrow in overseas markets, as part of its borrowing program. This would bring in capital flows and also prevent crowding out the private sector from bond markets. Encouraging NRIs to invest in INR Bonds, the NRI investment route has been merged with the normal FII route. The government is also enabling FIIs to invest in a wider range of debt securities.

Corporate debt market has been singled out for increasing the debt and width of the market while there is a move to encourage retail investors to invest in government bonds.

On the NBFCs crisis, the government has given partial guarantee to banks lending to NBFCs and increased their limits on securitized debt of fundamentally strong NBFCs.

The Budget 2019-20 Cheat Sheet gives you the numbers that are relevant and helps you focus on the impact of the numbers on the market.

Key Reference Numbers for or GDP and Fiscal deficit, Revenues and Expenditure are provided in Tables

Total revenue (Rs bn )- Union Budget 2019-20 - July 2019

Total Expenditure ( Rs bn )- Union Budget 2019-20 - July 2019

Fiscal Deficit - Union Budget 2019-20 - July 2019