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Published on 5/02/2020 5:20:11 PM | Source: Religare Broking Ltd

Union Budget 2020-21 Impact on Currency Markets - Religare Broking

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Budget 2020-21–Expectations were sky high

Finally the cat is out of the bag-amid heightened expectations that the government will announce bold measures to bring the Indian economy back on the growth track, the finance minister Nirmala Sitharaman presented the Union Budget 2020-21. The common man expected a cut in income tax rates, while the industry pinned hopes on initiatives to promote economic growth. As per the Finance Minister, this budget was aimed at boosting incomes and enhancing purchasing power while stressing that the economy’s fundamentals were strong and inflation was contained. The Budget has meticulously crafted a roadmap in an endeavour to boost consumption and growth in the economy. There was emphasis on agricultural sector, wherein the FM unveiled 16-point action plan to revive the sector targeting doubling farmer income by 2022. The FM revised the tax slabs giving relief to tax payers and putting more money in the hands of small taxpayers. The Fiscal deficit target for FY20 is revised to 3.8 per cent and for FY21 the target has been revised to 3.5 per cent. But the budget had its misses as there was no announcement on reduction in Long-Term Capital Gain (LTCG) tax and there was no bold reform. The new personal income tax regime also has various riders. Looking at the broad canvas, this budget could have focused more on key areas that needed attention to boost growth. However, given the limited resources the government had, as it faced declining revenue on account of the stimulus packages announced earlier the FM seems to have kept the house in order. Walking the tight rope, the Finance Minister has adhered to the fiscal consolidation path, even though there has been a minor slippage, but we believe that is largely in line with the street expectations which should bode well for the Indian rupee in medium term. We present below a crisp budget analysis on major points that impact the currency markets.

The fiscal deficit roadmap

The scene so far was of a slowing economy and declining revenues. The deficit was increasing and it was expected to be 3.6 percent of GDP for FY20 as against the estimated figure of 3.3 percent of the GDP as proposed in the previous budget. However, in the current budget the fiscal deficit target for FY20 has been revised to 3.8 per cent. This seems in line with expectations as the economy is contracting and fiscal deficit was bound to increase in order to boost the Indian economy. For FY21, the target has been revised to 3.5 per cent. Given the slowdown in growth, this target for FY21 looks somewhat difficult and ambitious to achieve but still the government has been able to strike a balance and exercised fiscal prudence. The overall impact is likely to be positive for rupee in the medium term.

Nominal GDP to grow by 10 percent during FY21

The FM in its budget speech has estimated the normal GDP growth for 2020-21 at 10 per cent. She said that receipts for 2020-21 were pegged at Rs 22.46 lakh crore, expenditure was estimated at Rs 30.42 lakh crore. The revised estimated expenditure for FY20 has been pegged at Rs 26.99 lakh crore and the receipts at Rs 19.32 lakh crore. Net market borrowings would be at Rs 4.99 lakh crore in FY20 and are estimated at Rs 5.36 lakh crore in the next fiscal. She also added that the government expected tax buoyancy to take time and the recent cut in corporate tax may cause loss of revenue in short run, but is hopeful that the economy will reap huge returns in due course.

FPI limit in corporate bonds hiked

In her second Budget presentation, the FM plans to increase investment limit for foreign portfolio investors (FPI) in corporate bonds from 9 per cent to 15 per cent alongside certain government securities, which will be opened for foreign investors. The FM also proposed new debt-exchange traded funds comprising mainly of government securities. Hiking FDI limit in corporate bonds will help deepen the bond market and will bring in more inflows in the domestic market and improve sentiment thereby underpinning the domestic currency.

DDT abolished

The FM announced abolition of dividend distribution tax (DDT) which means companies will no longer be required to pay DDT. The revenue foregone due to DDT removal will be Rs 25,000 crore. Currently the government levies taxes at the rate of 20.35 per cent (this includes cess and surcharge) on the dividends distributed by companies to their shareholders. This used to leave less money in the hands of investors. But now companies will be paying out more to their shareholders thereby improving investor sentiment and making India an attractive investment destination.

 

Rupee outlook

Given the government's focus on agriculture with its 16 point action plan to revive agricultural sector and doubling of farmer income by 2022, there will be increase in rural incomes. With reduction of income tax rates, there will be more money in the hands of small taxpayers. On the fiscal deficit front, the government has exercised fiscal prudence and adhered to the fiscal consolidation path. But going forward it will be a challenge to meet the fiscal deficit target given the need for reviving growth. The abolishment of Dividend Distribution Tax (DDT), means the companies will be paying out more to their shareholders thereby improving investor sentiment. However the expectations of the markets from the budget were sky high but bold measures to kick start the economy were lacking. Still given the resources, the FM has done a balancing act. Given the fact that the equity markets have reacted negatively post the budget, the immediate impact on rupee is likely to be slightly negative, but in the medium term we expect rupee to find support around the 72.50 mark. Going forward, global factors like the US Fed rate trajectory, crude oil prices and other global headwinds like coronavirus outbreak will steer the rupee.

 

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