The finance minister clearly outlined the intent towards fiscal prudence by announcing the fiscal deficit target for FY25 at 5.1% as against the market expectation of 5.3%. Taking a step forward, the finance minister further stressed that the FY26 target is pencilled in lower than 4.5%, which is a welcome move by the Government. We believe that monetary policy has done the heavy lifting in managing the economy thus far and the baton has now passed on to the fiscal side where the deficit gap needs to be narrowed.
Even from a capex perspective, the numbers presented are encouraging. At an allocation of ₹11.11 lakh crore for 2024-25, the capital expenditure outlay for 2024-25 is 17% higher than the revised capex estimate of ₹9.5 lakh crore in 2023-24. The upcycle of the central government’s capex spend has resulted in a significant buildup of infrastructure across the country and has had a multiplier effect on various segments of the economy.
When it comes to the equity market, the budget impact is expected to be neutral. Historically, election years have been marked by increased market volatility. At the current valuation, 2024 looks poised to be the costliest election (in valuation terms among the past five election years).
Given that valuations are not cheap, this warrants an investment approach in hybrid and multi-asset allocation schemes which can dynamically manage exposure to various asset classes. Among the various market capitalisations, we continue to believe large-cap stocks provide a better margin of safety as compared to mid- and small-caps. What one needs to be mindful of is that most of the positives are already factored in the price at current valuations.
Existing investors can continue to stay invested as India’s long-term story remains intact. Investors who wish to add equity should focus on offerings such as large-cap funds, flexi-cap, or hybrid category funds. In these types of schemes, the fund manager can decide where to invest based on what seems most attractive across market capitalisations and sectors.
We continue to remain positive on sectors like auto, cement, and telecom. From a contrarian perspective, we are considering a few of the consumer staple names. Financials, insurance, and consumer staples are some of the attractive pockets.
The interim budget showed the government’s overarching focus on maintaining macro stability. Also, fiscal impulse needs to be counter-cyclical in nature, and currently with growth being strong, the government’s approach towards fiscal prudence would help in avoiding overheating of the economy. A lower fiscal deficit resulting in lower borrowing programme and passive flows in the coming months due to global bond inclusion bodes well for the bond market in the short term.
We believe growth would continue to remain strong due to high-quality spending and this may result in RBI maintaining the neutral stance.
In this scenario, we believe duration needs to be played tactically, and active duration management is the way forward for navigating fixed-income markets as global factors remain challenging coupled with a low probability for rate cuts.
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