By Arvind Chari
It is good to see the government focus on reviving growth. The reaction in the equity markets is a testament to that. It’s by far the best budget for equity markets. Lots of positive surprises and no major negatives.
The bond markets haven’t liked the budget at all. It’s a shock. No one expected that PM Modi will agree to shed his fiscal conservatism to such an extent. Long term Bond yields have already headed higher. We would expect the RBI to also begin normalization and interest rates hikes in the coming months. Bond yields have bottomed and the best of the returns from long bond funds are behind us.
The key of course is the long-term outlook. This increase in spending over the next 4 years needs to revive growth back to at least the 7% level. If that happens, then the higher deficit will be forgiven. If not, high inflation and high deficits can cause macro instability in the years ahead.
(The author is CIO, Quantum Advisors)
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