The budget maintains the fiscal deficit target of 3.5% for FY17 and pegs it at 3% for FY18-19. Nominal GDP growth is pegged at 11% and gross tax revenues are budgeted to increase by 12%, while net tax revenues are budgeted to increase by 11%. Proceeds from disinvestments are pegged at Rs. 56,500 crore compared to Rs. 25,300 crore last year. Adhering to the fiscal consolidation plan raises the government's fiscal credibility and is expected to lead the RBI to cut rates by 25-50 basis points. However, higher supply of long-dated bonds could steepen the yield curve.

1. • Fiscal Deficit target for FY17 maintained at 3.5% as per
the fiscal consolidation road map. The fiscal deficit target
for FY18 & 19 pegged at 3%.
• The Nominal GDP growth pegged at 11%, the gross tax
revenues budgeted to increase by 12% compared to 17%
last year
• Net Tax Revenues budgeted to increase by 11%
compared to 5% last year ( revised estimated)
• Proceeds from disinvestments pegged at Rs.56,500
compared to Rs.25,300 last year.
• Gross Borrowings at Rs.6tn, the net borrowing pegged at
Rs.4.25tn.
Impact on Fixed Income Market – Fiscal Deficit Target of
3.5% a big positive for the market
Adherence to the original fiscal consolidation plan has raised
the fiscal credibility of the Government.
It may be noted that in the previous policy, RBI, while
maintaining the accommodative stance, had stated that it will
wait for the forthcoming budget, for further monetary easing.
With Government adhering the fiscal rectitude, we now
expect RBI to follow up with a rate cut to the extent of 25-50bp.
The bond market has already rallied in anticipation of a rate
cut by RBI. The 10 year yield has rallied from 7.78% to 7.64%.
BUDGET HIGHLIGHTS – A FISCALLY PRUDENT BUDGET
29th February, 2016
Demand Supply Dynamics
For the Financial Year 2016-17, we now expect a gross supply
of Rs.9tn, the net supply being in the range of 7-7.25tn, This
may more or less get absorbed by the market, as the demand
from key players like banks, insurance and provident funds is
estimated at around 7.5tn
Yield Curve to Steepen
However, it should be noted that the supply side is more
skewed towards the long dated papers, which may lead to
steepening of the yield curve. Further, increasing supply from
State Government will also keep the longer end of the curve
under pressure.
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for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the
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expressed in this note may not reflect in the scheme portfolios of Tata Mutual Fund. This note has been prepared using information
believed to be accurate at the time of its use.
Gross Supply of SLR Securities