Budget 2023: Debt mutual funds to gain from government’s lower fiscal deficit, borrowing numbers

Many mutual fund managers and advisors believe that 2023 may be the year of debt mutual funds. The budget just underscored it. According to mutual fund managers, the fiscal deficit numbers and the government borrowing will have a positive impact on the bond market and the debt mutual funds.

The finance minister said that the Revised Estimate of the fiscal deficit for FY 2022-23 is 6.4% of GDP, adhering to the Budget Estimate. The fiscal deficit estimate for FY24 is set at 5.9% of GDP.

“The fiscal deficit is estimated to be 5.9 per cent of GDP. In my Budget Speech for 2021-22, I had announced that we plan to continue the path of fiscal consolidation, reaching a fiscal deficit below 4.5 per cent by 2025-26 with a fairly steady decline over the period. We have adhered to this path, and I reiterate my intention to bring the fiscal deficit below 4.5 per cent of GDP by 2025-26,” said the Finance Minister.

To finance the fiscal deficit in 2023-24, the net market borrowings from dated securities are estimated at Rs 11.8 lakh crore. The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs 15.4 lakh crore.
Fund managers say that since the borrowing number was slightly below the market expectation, it is a positive for the bond market.

“We were expecting the finance minister to set the fiscal deficit at 5.8%, net and gross market borrowing was expected to be around Rs 12 trillion and Rs 16.4 trillion respectively. The fiscal deficit estimate and the government borrowing number both are in line with market expectation of fiscal consolidation. I believe this is a big positive for the bond market,” says Pankaj Pathak, fund manager, Quantum Mutual Fund.

Fund managers also expect that debt mutual funds will benefit from the fiscal consolidation and other related factors in 2023. They expect the funds to offer returns between 9-10%. “From a bond market perspective, the borrowing numbers are in line with expectations. With the US yields down so much from their peak, Indian yields were looking for an opportunity to go down as well. The Budget is a non negative event, and has triggered a minor rally today. The investment demand from insurance companies, provident funds is likely to remain strong on back of increasing corpus and FPIs could turn buyers as the real interest rates have turned significantly positive as well. If inflation remains under control and there is no incremental hawkishness shown by the central bankers, it is quite possible that Indian bonds could rally by 50-60 basis points this calendar year. Debt mutual funds could deliver significantly better performance by returning 9-10% this year,” says Sandeep Bagla, CEO, TRUST Mutual Fund.