Fund managers, brokerages fear costly money, inflation in higher deficit

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Top fund managers and brokerages, while hailing the no fresh/increase in taxes, have opined the steeply higher fiscal deficit and the resultant spike in market borrowings will make money dearer and inflation soaring and said that a lot now depends on the central bank.

The markets lapped up the budget with a 5 per cent rally, marking the biggest gains on the budget day. Dhiraj Relli of HDFC securities said the budget is unique with all the right measures to speed up growth and, higher spending will kickstart a virtuous cycle of growth. “But since higher spending will be funded by higher borrowing which has the potential to create an upward pressure on inflation and interest rates a few months down the line. We believe that the RBI will be in sync with the government and both will take necessary action to prevent this happening,” he said.

Prathit Bhobe of Tata MF said the budget surprised everyone with no fresh or increase in taxes, instead it boosts growth, making it a double joy for equity markets. The move on the dividend distribution tax (DDT) on Reits and Inveits will make markets more attractive apart from deepening the market. “Similarly, the plan to set up a body to buy investment grade bonds will deepen and markets and this is a very positive step for mutual funds. Total gross borrowings will be nearly Rs 12 lakh crore and net borrowings after repayment Rs 2.8 lakh crore will be Rs 9.2 lakh crore, which is much higher than the anticipated Rs 8 lakh crore. This will put upward pressure on bond yields, which already went up 10 bps during the day,” he said.

Vishal Kampani of JM Financial Group feels though the budget has laid the road map to achieve long-term sustainable growth with a counter-cyclical fiscal policy execution of the reforms announced including the robust divestment/asset monetization road map is the key.

Rahul Singh of Tata MF said the not-so-subtle shift to a counter-cyclical fiscal policy through increased government spending coupled with reforms and greater privatization thrust could support recovery, create earning upgrades and thus support the premium valuation of the domestic market. “Though there is a likelihood of slightly higher interest rates as a result, it can get offset by superior earnings momentum especially if the budget is successful in reviving the investment cycle. Lack of any negatives in terms of personal income tax, corporate tax, or capital gains is also a sentiment positive,” he said.

Nilesh Shah of Kotak Mahindra AMC said the budget will support equity markets in general and the fixed income market in particular which will look forward to the monetary policy as gross borrowings are on the higher side.

Motilal Oswal of Motilal Oswal Financial Services said the budget has been much better than expected as the market was fearing higher taxes/cess. All in all, a very good budget that avoids the pitfalls of raising taxes and at the same time provides a boost to the capex/infra spends, he said.

Stating that the budget has shifted the economy from the ‘revival mode’ to ‘growth trajectory’, B Gopkumar of Axis Securities said the budget has met the sky-high expectations of equity markets. The focus is clearly on spending to revive the economy without major changes in taxation and the government is doing quality spending with a focus on infra, healthcare, and key social programmes. “The fiscal deficit pegged at 6.8 per cent is clearly expansionary but will aid the economy significantly, which is clear from the allocation of Rs 5.5 lakh crore infra capex, which is a whopping 35 per cent more than FY21.

S Ranganathan of LKP Securities said the budget has delivered on many parameters without resorting to higher taxes at the same time trying to kickstart growth through higher spending on infrastructure, healthcare and the farm sector.

VK Vijayakumar of Geojit Financial Services is of the view that the growth-oriented budget was built on no fresh taxes or increase in taxation. “The market response to the budget reflects growth optimism. Overall the budget is pragmatic, bold, and visionary in these difficult times,” he said.

Vishal Kapoor of IDFC AMC said the budget makes a strong push for growth with a sharp increase in Capex, especially on infrastructure. “Corporates and MSMEs are happy to see additional custom duties on certain items with no increase in taxes for them. Retail investors will also look forward to the benefit from regulatory consolidation and the investor charter announced.” Krishna Karwa of Emkay Global Financial Services said equity markets are enthused with no tinkering in capital gains taxes or STT or any form of pandemic tax.

Ashutosh Bishnoi of Mahindra Manulife AMC, welcoming the extraordinary support the budget has provided for the infra sector with targeted investments through Invits and by streamlining the management of stressed assets, said the introduction of the zero-coupon bonds is welcome as it will help to support the sector. “The higher Rs 1.75 lakh crore disinvestment target if achieved will lead to higher free float in equity markets and thereby wider market participation,” he said.

Hemant Daga of Edelweiss AMC said the budget has strategically opened the doors for global capital to fund our growth needs and this is a masterstroke given the massive liquidity in the global markets. Similarly, a bid to monetize operational assets like roads, airports, transmission towers, etc is a clear win-win for both the government and investors, which will not only help the government to manage the fiscal deficit but will also help unlock capital for investing in other greenfield infra projects, according to him.

Vijay Chandok of ICICI Securities said the budget has set the foundation for the lifting of the economy from under USD 3 trillion to USD 5 trillion as it focuses on investing big in infrastructure, manufacturing, and healthcare, to be aptly funded through the higher fiscal deficit.

Aditya Narain of Edelweiss Securities said the budget has struck the right cords having marked a shift in its basic stance — expansionary now, focuses on the plumbing of the operating environment through clearing regulatory cobwebs, and sets a path for a longer term policy stance.

However the higher debt funded capex risks inflation, he warned.