The Rupee could retest the 75.20-75.50 levels against the US Dollar on higher borrowing and fiscal targets

The Indian Rupee may retest the 75.20-75.50 levels on higher borrowing and fiscal targets.

By Amit Pabari

Prime Minister Narendra Modi’s government has presented India’s budget for the financial year 2023, presented by our Finance Minister, Nirmala Sitharaman, using a paperless tab. It was his fourth consecutive budget. He really needs to look at the budget from different angles and perspectives. Whether it is an allocation of funds, a transition to a technology-based process, or the launch of a new government program sufficient to stimulate growth in all sectors? If the granted budget was a relief for the ordinary bourgeois? Let’s analyze on these fronts.

Fiscal and growth targets

From an economic perspective, India has set a budget deficit target of 6.4% for FY2023, beating market expectations of 6%. They also revised their budget deficit target upwards from 6.8% to 6.9% of GDP for fiscal year 2022. The recently released 9-month figure for fiscal year 2022 (April to December 2021) suggests a deficit of 50.4% of the estimates against 145.5% in the previous year. This clearly shows that the last quarter will be more spending oriented and therefore the government could easily achieve the stated target. On the borrowing front, the government has set a gross market borrowing target of around Rs 14.95 lakh crore for FY23. . Capital expenditure will be increased by 35.4% to Rs 7.5 lakh crore. Government borrowing will also add to this.

On the growth front, India’s GDP is projected at 9.2% for FY2022, which is the highest of any major economy. During her speech, she said the budget will lay the foundation for economic growth over the next 25 years. To fuel growth, they promote fintech and technology-based development. Certainly, higher growth could be achieved if there were higher credit drawdowns, stronger support for startups and existing small businesses. All of this can be achieved if there is greater support for financial and infrastructural development. By rolling out Gati Shakti’s master plan, driven by 7 drivers: roads, railways, airports, ports, public transport, waterways and logistics infrastructure, it will not only help people to have easy access, but also help businesses to grow faster. To support Micro, Small and Medium Enterprises (MSMEs) amid the COVID-19 pandemic, FM also announced that the Emergency Line of Credit Guarantee (ECLGS) scheme will be extended until March 2023.

Searing revenue could help dampen fiscal target

On the revenue generation side, there were no new privatization or divestment announcements. They lowered the divestment target for FY21-22 to ₹78,000 crore from ₹1.75 lakh crore, indicating that large divestment proceeds are expected from Life Insurance Corporation of India’s IPO and that strategic divestments of BPCL and others may not materialize by March 2022. On the tax collection front, record collection of 1.4 trillion GST in January 2022 will certainly help improve tax momentum and reduce the budget deficit. But these numbers look very conservative as businesses have resumed steady growth and overall tax revenue in the current fiscal year could be 3 to 4 lac crore higher than the budget estimate.

No changes in LTCG on equity investments and no announcement on the inclusion of bonds

What the market had been expecting and reacting to over the past 10-15 days regarding the LTCG tax hike on equity investments has settled after the government did not announce any revisions to these taxes or of tenure. Although there was a proposal to cap the surcharge on the LTCG resulting from the transfer of any type of asset at 15%, helped the market calm down on this rumor. Moreover, the market was expecting any announcement on the inclusion of India’s bonds in the global indices, whose government seems to still have to finalize the tax treaty with other clearing and settlement countries and their counterparties.

No upward revision of personal income tax, this is also the good news

On the personal tax side, people from the middle class were expecting a drop in the tax rate or a review of the slab rate, but the government did not touch these rates. It should be understood that the government did not pass the burden of the budget deficit onto ordinary people by raising rates, so not lowering the tax rate is also good news.

Budget Analysis

So, after looking at expenditure against revenue, it can be clearly concluded that the government can easily come close to its annual budget target. But it also comes with a small condition, which is how the government, in coordination with RBI, is able to borrow from the market. How RBI plans and what it costs the government.

The budget was more focused on increased spending, mega infrastructure plan, digital rupee and crypto tax. There was no tax relief for the individual. We can therefore say that it was a reformist budget and not a populist one. It was more focused on growth and promoting Fintech and the digital economy. Obviously, this will create more jobs and help the economy.

Impact of the budget on the market and outlook

Unsurprisingly, but according to expectations, it will surely be a difficult year for the rates market and more difficult for the RBI to support these loans. In an environment where major central bankers are trying to calm inflationary pressure by raising rates, it would be difficult for RBI to borrow and become hawkish. This will surely add pressure on the local currency, the rupee.

As this was a reformer budget, the stock market turned red in a volatile session before ending up more than 1.37% on relief that the given budget could help achieve more growth. high as well as a higher budget deficit. The Indian Rupee failed to sustain its early gains and depreciated as low as 74.86 levels. On the outlook front, USDINR is likely to hold within the 74.20-40 area in the near term and we can expect a retest of the 75.20-75.50 levels on borrowing and fiscal targets. higher.

(Amit Pabari is the Managing Director of CR Forex Advisors. Opinions expressed are those of the author.)

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