Rupee, bond trade flat ahead of key Budget announcements

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Union Budget for FY 23-24 is likely to bring back the focus on fiscal consolidation after being fiscally expansionary to support growth recovery after the Covid-19 induced pandemic. Analysts expect the fiscal deficit at 5.8 percent for FY24 from 6.4 percent as budgeted in FY23.

Analysts also expect that the overall focus will continue on the growth agenda through higher capex allocation that will accelerate the investment cycle and employment.

The recent data on goods and services tax showed that India collected Rs 1.56 lakh crore in January. While tax collections have increased robustly in 2022-23, economists see them growing at a slower pace next year on account of lower nominal GDP growth.

"The buoyancy in tax revenues is expected to normalise in FY24 and likely be a tad above GDP growth at 11.6 percent. While growth in gross tax revenue is likely to moderate, the subsidy outlay is likely to also reduce significantly. Subsidy towards food, fertiliser and petroleum, which had increased substantially in the last three years to come down sharply. For FY24, it is expected at 1.3 percent of GDP as against 2.2 percent in FY23," said ICICI Securities in its latest report.

On Tuesday, the economic survey stated that the challenge of the depreciating rupee persists with the likelihood of further increases in policy rates by the US Federal Reserve. The Current Account Deficit may continue to widen as global commodity prices remain elevated and the growth momentum of the Indian economy remains strong. Exports could also remain under pressure as slowing world growth and trade shrinks the global market size in the second half of the current year.

The rupee is already under pressure and weakened past 82 mark on Tuesday, after continued selling pressure by foreign investors. So far in January, FII sold around $2.4 billion in local equity markets.

All eyes are on the US federal meeting outcome and the markets have discounted a 25 bps hike. This week is likely to remain highly volatile as the European Central Bank and Bank of England will also increase interest rates as markets expect these central banks to remain more hawkish vs the US Fed’s less hawkish stance, analysts said.

The 10-year bond yields were trading flat on Wednesday. The traders are eying the borrowing programme announcement in the Budget.  According to news reports, India's federal government is likely to keep its gross market borrowing below Rs 16 trillion for 2023-24 as it does not want to destabilise the bond market with any negative surprises.