The new Modi government unveiled a responsible and prudent budget yesterday that focused on job creation, upskilling the youth and women, and improving infrastructure, Commerzbank FX strategist Charlie Lay notes.

Government maintains commitment to fiscal consolidation

“The Indian government maintained its commitment to fiscal consolidation and there were no signs of fiscal profligacy. Some had feared a ramp-up in populist spending after the weaker-than-expected performance by PM Modi’s Bharatiya Janata Party (BJP) in this year’s federal election. The government even lowered the fiscal deficit projection for the current fiscal year 2024-2025 to 4.9% of GDP vs the interim projection of 5.1% in February and against 5.6% for the previous year.”

“These are positive signs and pave the way for a rating upgrade in the next year or two. S&P upgraded India’s rating outlook to positive from neutral in May this year. It cited the robust growth environment and the improving quality of government spending. The budget allocated INR11.1trn or 3.4% of GDP to capex spending for the current fiscal year, aimed to improve the country’s infrastructure.”

“The SENSEX dipped initially but closed just slightly lower and the 10Y government bond yield was just 1bp higher at 6.98%. USD/INR was also just modestly higher around 83.70. The monthly PMI reports for the manufacturing and services sectors published this morning surprised to the upside and continue to point to a healthy expansion.”