The Union Budget FY24 continues to put growth on the forefront. The focus remains on capital expenditure that can drive a multiplier impact on economic growth and employment. This is evident from the sharp 37% increase in capital expenditure for FY24 (versus a meagre 1% increase in revenue expenditure).
Positive for Equity Markets
Contrary to some pre-budget rumors, no changes were made to the equity capital gains taxation. This removes the near-term uncertainty with regards to equity taxation. Prior to the budget, we had a positive view on equities with a 5–7-year horizon
Our equity view is derived based on our 3-signal framework driven by:
As per our current evaluation, we are at neutral valuations + early phase of earnings cycle + neutral sentiments
A robust earnings growth environment over the next 3-5 years is expected. This expectation is led by manufacturing revival, banks (improving asset quality & pickup in loan growth, revival in real estate, government’s focus on infra spending which continues in FY24 Budget), early signs of corporate capex, structural demand for tech services, structural domestic consumption story, consolidation of market share for market leaders, strong corporate balance sheets (led by deleveraging) and government reforms (lower corporate tax, labour reforms, PLI) etc.
From a sentiment point of view, direction of FII flows remains a key near term trigger. The market expectations on next year elections which will start getting built by the fag end of this year will also have an influence on near term returns. Overall, we maintain our positive view on Indian equities from a 5-7-year time frame. The budget announcements reinforce our robust earnings growth outlook.
Favourable for Debt Markets
The fiscal deficit for FY24 at 5.9% of GDP is broadly consistent with the fiscal glide path and in line with our expectation. The government also reiterated its intention to bring this deficit number down to 4.5% of GDP by FY26.
FY24 net market borrowing (Gsec +T bills) at INR 12.3 lakh crores also is in line with the bond markets expectations. The absence of significant negative surprises in the budget seems to have kept the bond yields in check.
In our assessment, we may be close to peak policy rates driven by:
Sharp fall in domestic inflation in recent months – CPI inflation dropped by 169 basis points from 7.41% in Sep-22 to 5.72% in Dec-22
The current repo rate at 6.25% is comfortably above RBI’s inflation expectation of 5.0% in Q1 FY24.
The external monetary environment is showing some signs of easing amid falling global inflation and slowing pace of rate hikes by the US Fed.
We expect RBI to go for a long pause in rate hikes from here on or after one more rate hike to 6.50% in the next policy.
Given the sharp increase in yields over the last 12 months, 3-5-year bond yields (GSec/AAA) continue to remain attractive. The current yields provide a sufficient buffer for higher returns compared to FDs over a 3+ year time frame even if yields were to temporarily slightly inch up further.
We prefer debt funds with 1) High credit quality (>80% AAA exposure) and 2) short duration (1-3 years) or target maturity funds (3-5 years)
Finally, to summarize, all in all, it’s a balanced budget focusing on capex and consumption (tax cuts for individuals), while adhering to the fiscal consolidation path. From an equity market perspective, it's a positive budget as the focus continues on capex-led growth and manufacturing, with the fiscal deficit under control and no negative surprises on the capital gains front. From a bond market perspective, the fiscal deficit and borrowing numbers are in line with expectations.
Arun Kumar is Head of Research, FundsIndia