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Budget 2020: Rupee to consolidate in this range, only a shocking budget will weaken it

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Rahul Gupta

Head of Currency - Research

27 Jan 2020

Budget 2020-21: The RBI has done its fair by cutting rates 135 bps so far to boost demand and economic growth. Now, if the FM is unable to deliver, high volatility is likely in stocks, bonds and then rupee post the announcement of Union Budget

In a bid to pull back India from the economic slowdown, drive up consumption and investment spending amid job crisis, FM Sitharaman may have to be generous at the Union Budget 2020-2021. It is going to be an interesting and critical budget of recent times as India’s GDP (Q2 at 4.5%) has been falling for the consecutive five quarters, suggesting that the slowdown could be more pervasive than it looks.

Just like the previous budget, this year also the government will provide a holistic, rational and long-term goal-oriented. The market has high expectations from the government on fiscal stimulus and financial sector reforms to boost investment and consumption. It may maintain its focus on the development of infrastructure such as roads, water and affordable housing to give the economy much-needed earnings and employment stimulus. Along with that, we can expect some positive announcements on tax cuts for lower-income categories and long-term capital gains, incentives for real estate and credit support for small businesses.

However, the centre has a very limited fiscal room as on the back of weak indirect tax collections, shortfall in the divestment target and expenses on social schemes that are necessary. The government’s gross borrowings are entirely through domestic sources, but going forward, the government may raise a part of its borrowings in foreign currency, sovereign ratings and financial markets. The FY20 gross borrowing estimate stood at Rs 7.1 trillion (3.3% of GDP) while the net borrowings were budgeted at Rs 4.73 trillion. The expansionary FY21 fiscal policy may bring the deficit closer to the 4% GDP mark, lowering the Sovereign Credit Rating, thus, the budgetary decisions will be keenly watched.

We believe that the government may find it difficult to meet the FY20 fiscal deficit target of 3.3% and slightly diverge from the fiscal-deficit-management. The bond market has already priced in slippage of nearly 50 bps and an additional borrowing of around Rs 500 billion for this fiscal year (FY20). While market consensus expects a gross borrowing of around Rs 7.50 trillion to 7.80 trillion in FY21.

The RBI has done its fair by cutting rates 135 bps so far to boost demand and economic growth, now if the FM is unable to deliver, given high expectations we will see high volatility in both stock and bond and indirectly on rupee post the announcement of Union Budget. Prior to the budget, we can see USD/INR trading within 70.75-71.50, only a shocking budget may take USD/INR above 71.50 otherwise it will continue to consolidate within a broad range of 70.50 and 71.60.