Domestic Bonds

Investment proposals can be inflationary; stocks, bond markets may not like


On the positive side, the overriding factor is that the 2022 budget is a continuation of what the finance minister did last year in terms of capex. Other than that, there are no real surprises when it comes to the reshuffling of the tax slabs or anything that may upset the stock market. The government is trying to achieve more ambitious goals over the years. As expected, the focus was on new era roads, railroads, infrastructure and industries.

On the negative side, huge capex proposals can be inflationary in the short term, which equity and bond markets may not like. Indeed, bond yields can jump up to 7%. The budget should also be viewed in light of what is happening globally – faster than expected US Federal Reserve (Fed) rise, oil prices, etc. The US central bank has been more hawkish than expected, which may put pressure.



Prior to the budget, the market expected a lot of money to flow into the bond markets in the coming year. The budget was supposed to provide tax exemptions for the settlement of Indian bonds on Euroclear, but it remained silent on this and, as a result, doubts remain about India’s inclusion in the bond market index. Without these entries in the bond market, the rupiah could also come under pressure in the future. So for the markets, it could double as interest rates are expected to tighten and the rupiah, too, could come under pressure.

Given the evolution of capital markets over the past few years, the divestment target for FY2022-23 (FY23) should have been better. That said, if global markets are under pressure, the heat will also be felt at home. So from that perspective, the FY23 divestment target seems reasonable.

When it comes to digital asset taxation, the positive here is that the government has not imposed a blanket ban. It is now proposed to tax cryptocurrencies / bitcoins, non-fungible tokens (NFT), etc. at 30% instead of prohibiting them in general

Once the budget euphoria subsides, markets will look to global developments for clues. In terms of domestic factors, the budget set the trajectory for higher growth over the next few years, which bodes well for India Inc.’s earnings growth and markets. The only thing that can Discouraging minds is rising interest rates globally and the possibility of a rate hike at home. Capital goods, materials, and infra-related themes that were the focus of the budget will move forward. That said, since capital expenditures have been spread across all sectors, the execution of projects and the use of money indeed become essential.

For me, the best part of the budget proposals has been the continuity in managing the budget situation and the focus on capital spending without any nasty surprises. Over the years, budget has become less important to markets and this year was no different.


(Andrew Holland is CEO, Avendus Capital Alternate Strategies. Opinions expressed here are his own. As told in Puneet Wadhwa)

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