The Union Budget for 2022-23 has estimated fiscal deficit at higher than expected 6.4%, triggering expectations of a rise in yields on bonds and interest rates to stay elevated.

Yield on 10-year government bond rose to 6.82% against 6.68% at previous close, following the presentation of the 2022-23 budget by Finance Minister Nirmala Sitharaman today.

The US Dollar-Rupee exchange rate converged with bond yields but diverged from Nifty as the budget was presented. Ten-year bond yields were up 14 bps at 6.82% and the USD-INR spot was up 17 paise at 74.80.

Yields hardened and the rupee weakened. Over the near term, USD-INR may operate within a range of 74.40 and 75.20 in the spot market, said Anindya Banerjee, DVP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.

 “The 2022-23 fiscal deficit has come in higher than expectations. Let’s hope the interest rates and inflation do not remain high for long,” said Dhiraj Relli, MD & CEO, HDFC Securities.

The higher fiscal deficit will result in higher borrowing by the government compared to 2021-22. The increased government borrowing is likely to push yield on 10-year bonds to rise to about 7%.

“We may expect interest rates to be elevated and can look forward to the RBI (Reserve Bank of India) to do more regular fine-tuning to balance liquidity with growing demand,” according to Bank of Baroda managing director and CEO Sanjiv Chadha. He said the budget is an investment oriented one with focus on capital expenditure, increasing the size of the budget significantly, but has stilled managed to rein fiscal deficit at 6.4%.

Abheek Barua, chief economist, HDFC Bank, also stressed that the budget has focused on driving public capital expenditure to support growth and thereby crowding in private investment. “Although markets could be disappointed with a higher fiscal deficit of 6.4% of GDP than expected, it is perhaps prudent to not undertake aggressive fiscal consolidation at this nascent stage of recovery.”  

Bank of Baroda Economic Research in a note said, “While the fiscal deficit target of 6.4% is higher than our expectation (6-6.25%), we still believe that government is on track to achieve its fiscal consolidation target by 2025-26.

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) was at 54.0 in January, down from 55.5 in December and signalling the weakest improvement in the health of the sector since last September. Still, the headline figure remained above its long-run average (53.6).

Commenting on the Economic Survey 2021-22 tabled in parliament yesterday, Sunil Kumar Sinha, Principal Economist and Director Public Finance, India Ratings and Research,  said the articulation that India’s emphasis on supply-side reforms rather than a total reliance on demand management is somewhat misplaced. Supply is only one side of the economy and can sustain only if there is an equal level of support coming from the demand side of the economy. Of the four demand drivers, except government final consumption expenditure, the other three – private final consumption expenditure, gross fixed capital formation and net exports – were floundering.

In the note, BoB Economic Research said to boost consumption, hardly any measures are announced. “We expect this to be a drag on growth.”