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The Indian government on Tuesday lowered its fiscal deficit target to 4.9% of GDP for the financial year ending March 2025, from 5.1% in the interim budget in February, aided by a hefty surplus transfer from the central bank and robust tax revenues.

The fiscal target was part of India's federal budget, announced on Tuesday by Finance Minister Nirmala Sitharaman.

WHY IT'S IMPORTANT

The target signals the government's intention to remain fiscally prudent despite expectations it may ramp up spending on welfare programs following a weaker than anticipated election victory for Prime Minister Narendra Modi's alliance in June.

A lower fiscal deficit will boost foreign investors' sentiment and improve India's chances of a sovereign rating update as it brings the country closer to its goal of narrowing the deficit to below 4.5% of GDP by fiscal year 2025/26.

India's budget gap stood at 5.8% of GDP in fiscal year 2024.

CONTEXT

A record surplus transfer of 2.11 trillion rupees ($25.3 billion) from the Reserve Bank of India, more than twice of what was projected in February, has helped the government narrow the fiscal deficit.

MARKET REACTION

The Indian 10-year benchmark bond yield briefly dropped to a two-year low, but reversed course as the cut in market borrowing was lower than anticipated.

India's benchmark stock indices, the BSE Sensex and the NSE Nifty 50, declined about 0.7% each after the government raised the tax on equity capital gains and trading in derivatives.

The rupee dropped to a record low of 83.7150 to the dollar, pressured by the drop in local equities.

GRAPHIC

KEY QUOTES:

"The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5% next year," Finance Minister Sitharaman said.

"From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP"