Budget 2017: Expectations for Debt and Commodity investors…

Debt in India may still be an institutional market, but there are surely some key expectations that debt investors have. On the commodities front, there are some expectations that have emerged in the aftermath of the regulator for commodities being merged under SEBI. The following are the key expectations from the Union Budget…

Key Expectations from the Union Budget for Debt Market investors…

  • The first expectation of debt markets will be a clear direction on inflation and interest rates. While this may be partly in the purview of the bi-monthly monetary policy, it is the Union Budget that lays down the broad direction. During the previous year, the demonetization exercise led to a sharp reduction in interest rates and that benefited many investors in debt mutual funds. The markets will be looking to a direction of lower interest rates from the Union Government in this budget too. The government needs to ensure that its budget is broadly non-inflationary and in sync with better transmission of rate cuts to the end consumer.
  • A very important indicator for debt markets is the extent of government borrowings during the year. This indication is given by the fiscal deficit. Last year, the government had given a positive indication to debt markets by keeping the fiscal deficit targets under control despite the pressures of OROP and 7CPC. With these pressures addressed, the government will be in a much better position to maintain fiscal deficit at 3%. Of course, this year the government has the luxury of a target range for fiscal deficit rather than a target number. That allows a leeway of up to 50 bps in fiscal deficit. However, with the government debt at 68% of GDP, any laxity on the fiscal deficit will be seen as negative for India’s external ratings. Also too much of government debt will keep rates hard and crowd out private debt borrowings. Government has a delicate balance to manage in this budget.
  • Debt mutual funds are expecting a more equitable treatment in taxation terms for debt funds vis-à-vis equity funds. Firstly, there is an expectation that the ELSS benefits may be extended to debt funds too apart from equity funds. This will open the market for debt funds much wider. Secondly, the tax rates on debt funds and the classification of LTCG may be aligned closer to the definition in case of equity funds.
  • There are some anomalies in the treatment of TDS deduction on debt as well as the tax incentives in case of long term FDs. In case of TDS on interest earned on bank FDs, the TDS is deducted if the interest in any fiscal year is more than Rs.10,000/- This makes it too cumbersome in case of retirees and senior citizens. Hence there is an expectation that this limit may be raised to Rs.20,000/- per annum or higher. Secondly, long term bank FDs also qualify for Section 80C benefits up to Rs.150,000/- However, these long term FD entail a compulsory lock-in period of 5 years. There is a demand to align this lock-in with other benefits like in the ELSS where the lock-in period is only 3 years. That will spurt the demand for long term FDs as an asset class for tax saving.

Key Expectations from the Union Budget for Commodity Market investors…

  • The major expectation of the commodity markets for the last few years has been the scrapping of the Commodity Transaction Tax (CTT). Like the STT on equities and derivatives, the CTT is imposed on the value of the commodity transactions. In a market that is predominantly dominated by traders and hedgers, even a small increase in cost makes a big difference to the economics of the trade. The CTT has already distorted the volumes on the commodity exchanges. The expectation is that the CTT may be scrapped or, at least reduced, to begin with.
  • Commodity markets still lack an institutional framework. The participation of banks and FIIs in commodity markets is still not permitted due to the sensitivities involved. It is expected that with FMC being merged into SEBI, the institutional framework to support institutional investors may already exist. Hence time may be ripe for institutional participation.
  • There is also an expectation that this budget may permit the introduction of a plethora of innovative products in the commodity markets. The budget may expedite the introduction of options on commodities, which currently constitute over 85% of the volumes on equity derivatives. The budget may also look at innovative hedging products which also include cross-hedging across commodities and equity markets.
  • Lastly, the NSEL spot market scam continues to be a big overhang on the commodity markets. Even after nearly 4 years of the scam, there has been little progress in recovering the Rs.5600 crore that was lost in the scam. While the money trail has been apparently established, the follow up action is still pending. A quick action plan will go a long way in reinforcing the confidence of investors in the commodity markets.

Debt and commodity markets will be looking at some direct and indirect benefits from the Union Budget. The government made a confident start last year by merging the FMC into SEBI. This year will judge how much farther the government is willing to bite the bullet.

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