Budget 2023: No populist measures, bond markets pleased, should you invest in long-duration funds?

During the Budget 2023 speech, the Finance Minister announced a fiscal deficit of 5.9% and net market borrowings of Rs. 11.8 lakh crores, which were lower than expectations leading to lower G-secs yields.

 long duration funds

In 2024, the Union Election will be held. As this was the last full-fledged budget before the elections, the markets were focused on whether the government will announce any populist measures. Also, the markets worried about the implications of the populist measures, if any, on the fiscal deficit and the government’s market borrowing. However, the Finance Minister stuck to fiscal prudence. In this article, we will understand the 2023 Union Budget announcements on fiscal deficit, the government’s market borrowings, and their implications on the debt markets.

Budget 2023: Key announcements related to the debt market

The Finance Minster made the following announcement in Budget 2023, to which the debt markets reacted positively.

1) Fiscal deficit for Financial Year 2024
The Finance Minister announced that the fiscal deficit for FY 2024 is expected to be 5.9% of the GDP. The budget deficit number was lower than market expectations. The markets were relieved that there were no populist measures announced, keeping in mind the Union Elections next year. The government expects the FY 2024 nominal GDP to grow by 10.5% and the net tax receipts to grow at 11.5%.

2) Government’s market borrowings
The Finance Minister announced that the government’s gross market borrowings are expected to be Rs. 15.4 lakh crores. Out of this, the net market borrowings from Government Securities are expected to be Rs. 11.8 lakh crores. The remaining amount is expected to come from small saving schemes and other sources. The debt markets were satisfied with the market borrowing numbers.

3) Fiscal deficit goal for 2025-26
The fiscal deficit for FY 2024 is expected to be at 5.9% of GDP. The number is lower by 0.50% compared to the fiscal deficit of 6.4% for FY 2023. The Finance Minister committed to the fiscal consolidation glide path and said the government aims to reduce the fiscal deficit to below 4.5% of GDP by FY 2026.

Also Read: How Revenue Deficit And Fiscal Deficit Impact The Economy?

Impact of budget announcements on debt markets
All the above growth expectations mentioned by the Finance Minister in her Budget 2023 speech are modest, and the numbers look realistic. As a result, the debt markets reacted positively on Budget Day (1st February 2023), and the G-secs yields declined.

Many debt fund managers expect the bond markets to respond positively in the near future. They expected the 10-year Government Bond benchmark yields to be between 7.25% and 7.50% in the near term. If the monsoons are good, inflation falls in future, and the RBI monetary policy is favourable, the yields on Government Bonds are expected to fall. It will lead to a rise in bond prices, benefiting G-secs and long-duration debt mutual fund investors.

Also Read: Best Debt Mutual Funds To Invest In India

What should debt mutual fund investors do?
For the shorter term, debt mutual fund investors may consider investing in shorter-duration funds. Currently, the Yield To Maturity (YTM) of these funds is in the 6.5% to 8.00% range (as of 6th March 2023).

For the longer term investment strategy, consider investing in long-duration funds. The interest rates are expected to peak soon and start falling either at the end of 2023 or the first half of 2024. Whenever the market interest rates fall, the bond yields will fall, and bond prices will rally, resulting in an increase in the Net Asset Value (NAV) of long-duration debt funds.

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