Since Indian banks have large investment in government bonds, banking Index- Bank Nifty - moved up 192 points or 0.42% despite broader Nifty 50 index recording a fall of 28 points or 0.13% on the Interim Budget day. Nifty 50 closed at 21,697 while Bank Nifty closed at 46,188 on Interim Budget day.

Falling sovereign bond yield also is a cause célèbre for India Inc. as the cost of capital for the Corporate Sector is directly proportional to the sovereign yield. As lower bond yield translates into lower interest rates for Sovereign Bond, which enables banks to lower the interest rate on loans, which in turn lowers the cost of capital for India Inc.

Since low interest rates may encourage Corporate India to avail more loans, banking stocks have soared high on the Interim Budget Day even when stocks of other sectors like Pharma, Metal & Mining, Chemicals, Telecom, Engineering, FMCG, and Construction languished. Public Sector banks like Punjab National Bank moved up 3.9% while SBI and Bank of Baroda moved up by 3.37% and 1.12% respectively. Smaller PSU banks like Bank of India scaled up by 4.64% while Union bank of India and UCO bank moved up by 3.4% and 5.16%, respectively.

Why the Govt. preferred Fiscal Prudence to Welfare Schemes even in an Election Year?
The Central Government is probably keen to attract private capital into the country. And adhering to the path of Fiscal Rectitude sends all the right signals to financial institutions. Moreover, Indian Sovereign Bonds will soon be included in the JP Morgan Bond Index and before the inclusion; government set a fine example of Fiscal prudence.

According to JP Morgan these bonds will be included over 10 months through March 31, 2025, with a gradual inclusion of 1% weight per month.

The possible impact of the Budget on consumption

The cutting down of subsidy on Fertilizers by 13% to Rs 1.64 lakh crore does not bode well for the rural economy that is primarily agrarian in nature. While the allocation for MNREGA remained unchanged at ₹86,000 crore, the food subsidy has also been lowered marginally in this Budget.

Consumption-oriented sectors and companies targeting lower-end mass segments are already hard pressed to grow their sales. For instance, HUL’s sales volume grew by 2% between Q1 & Q2 of FY24 and Britannia’s sales volume growth was nil in the same period. Likewise, the two-wheeler industry has been showing negative volume growth since the pandemic.

Over the past few years, Consumption’s contribution to GDP fell by 5 Percentage Points and stood at tad above 60% of GDP. This is despite the rise in population. The lack of adrenaline boost to rural or agrarian economy in the budgetary allocations would not only affect the consumer stocks, but may also result in stunting growth.

Indian Bond Market

Bond markets rejoice fiscal rectitude at the cost of consumption