We expect fiscal deficit at 5.8-5.9% of GDP in FY24, says Mirae Assets’ Mahendra Jajoo

The fiscal deficit in the first eight months of the last financial year was 46.2 percent of the last year’s target.

The Centre is targeting a fiscal deficit of Rs 16.61 lakh crore for the current financial year, or 6.4 percent of the GDP.

Edited excerpts:

What challenges and uncertainties do you think will remain for the debt market in 2023, especially after the Budget?

Global markets will continue to weigh on domestic sentiments. While inflation seems to have peaked across the globe supported by softening commodity prices, we would be closely monitoring the pace of easing. Policy rates in developed markets have still not peaked and central banks are continuing to withdraw liquidity. As a result, external support to domestic debt markets has remained muted. Markets are expected to stabilise in the next quarter as the current tightening cycle comes to an end. Domestic markets should continue to remain rangebound with benchmark yields at 7.30 percent-7.50 percent and a bearish bias as domestic supply remains robust. A high trade deficit and likely higher absolute borrowing calendar may weigh on markets in the first half of the year.

After remaining stable and firm for the last few weeks, do you see there is a risk of an eventual break in the rupee?

The chances of a meaningful depreciation in the rupee are relatively low. The trade deficit is expected to moderate given softening commodity prices. Flows from services, remittances and FDI are expected to remain robust as the domestic economy remains resilient. We may also see foreign currency issuances from Indian corporates as credit spreads narrow, which should also support the rupee. One would expect the rupee to remain rangebound, especially given the recent weakness in the dollar index and the central bank intervening to manage volatility and add to existing reserves in case of large flows.

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What are your expectations from the Budget, especially from the fixed income point of view?

Expectations are that the government would stick to the fiscal deficit target of 6.4 percent of GDP for 2022-23 given that a large part of the revised nominal GDP has already been factored into food and fertiliser subsidy announcements. This may result in additional borrowings by way of Treasury Bills or Cash Management Bills aggregating Rs 0.8-1.0 lakh crore.

For FY 2023-24, we expect the fiscal deficit in the range of 5.8 percent-5.9 percent of GDP, which will affirm the government’s commitment to achieving 4.5 percent by 2025-26. A high supply of government securities will remain the dominant theme with expected gross borrowings aggregating Rs 16.5-17 lakh crore. The narrowing gap between the administered small savings rate and commercial banks’ deposit rates might impact the market rates while drawing down a large amount to fund the fiscal deficit.

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Corporate and banks have raised funds heavily in December, how do you see issuances going forward?

Muted issuance activity was largely on account of a shift in borrowings by corporates from markets to banks given the excess liquidity held by banks. As market liquidity continues to reduce and deposit growth lags, banks have resorted to market borrowings to fund credit growth. In the background of a relatively swift pass-through to corporates, given that a majority of lending is linked to MCLRs and external benchmarks, we expect this divergence to narrow and issuances would remain robust in the current quarter.

Which five things do you think the government will focus on in the Budget and what are your expectations from it?

The budget would likely remain focused on growth as concerns about inflation diminish. The government should continue with strong capex as private investment remains muted. The Budget would also focus on the rural sector and one would be closely monitoring allocations to government-sponsored schemes given that rural demand has significantly lagged urban demand. Fiscal prudence will also be closely watched as fiscal deficit estimates higher than 5.9 percent may result in upward pressure on yields especially as we approach elections in 2024. There may also be a strong focus on ensuring executions relating to disinvestments as well as under the National Monetisation Pipeline. We may also see specific announcements on bank privatisation.