Santosh Kamath

What are your reactions on Union Budget 2013-14?

The Union Budget delivered on the fiscal deficit front, but the gross market borrowings were higher than market expectations (partly due to the buyback). The FY14 targeted fiscal deficit at 4.8% of GDP is to be achieved through tax revenues and divestments. At the same time, there have been no concrete measures to control expenditure and this has increased quite sharply (especially planned expenditure at 29% yoy).This means that the achievement of the fiscal deficit projection would depend on tax revenues and we need to see concrete progress on subsidy rationalization. Given the expanding current account deficit, a lot depends on the global commodity prices, export growth and currency movements. Given this uncertainty, debt markets have reacted negatively and yields have moved up across the curve.

The announcement of new measures to boost the depth in the debt markets and reiteration of the old measures were positive -

• Stock exchanges to have a dedicated debt segment and insurance companies, provident funds and pension funds will be allowed to trade directly.

• FIIs will be allowed to participate in currency derivatives (for their rupee exposure) and also use their bond/gilt investments collateral

• Debt funds and ABS made eligible securities for Pension and Provident Funds

• Securitisation Trust to be exempted from Income Tax - removes uncertainty

Overall, the sentiment in the debt markets appears to have been impacted by the heightened pre-budget expectations on the fiscal consolidation front. There has been disappointment over the absence of measures to address the CAD. Another factor to watch out for the potential flows into tax-free infrastructure bonds, which would impact the overall liquidity in the debt markets. We continue to remain cautiously optimistic amidst the various uncertainties, but are clear that interest rates have to move down to support economic growth. RBI's comfort with the government's fiscal consolidation measures will reflect in its monetary policy review measures in the coming months and investors will also closely watch the reaction of global rating agencies. We would continue to recommend a portfolio of funds that offer exposure to corporate bonds and have the potential to benefit from any capital gains.

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