The forthcoming budget—the last full budget of the present government ahead of the general elections to be held in mid-2024—will be more rural- and infra-focused, said a foreign brokerage.
The upcoming budget is likely to boost rural/agri spending by USD 10 billion–a growth of 15 per cent over FY23—and maintain double-digit 20 per cent growth in public capex over the current fiscal, given that the nation will be going to the polls in mid-2024, UBS India economist Tanvee Gupta Jain said in a note on Wednesday.
However, she noted that the government is unlikely to go beyond fiscal boundaries with its election-oriented budget and also expects the subsidy burden to ease significantly in FY24, creating more fiscal space to reallocate money towards existing rural schemes, including the rural jobs scheme MGNREGA, rural housing and roads, amongst others.
She also expects the economy to moderate further and pencils a GDP growth of only 5.5 per cent for next fiscal, much lower than the consensus 6 per cent, saying the slowing global growth and delayed impact of monetary tightening, coupled with the spillover effect of an expected global slowdown in this year.
However, she also said the country's structural growth story remained intact and therefore continued to expect the domestic economy to be able to maintain potential growth of 5.75-6.25 per cent in the medium term, as she sees the government to continue with its push on capex, manufacturing and digitalisation.
On rupee she said the depreciation pressure would ease before the local unit plumbing to 85 a US dollar somewhere in the first half of the year and then to recover and that the rupee will continue to underperform its emerging market peers. This will also have an impact on the bond prices, which may peak to 7.5 per cent mid-year and then moderate to 7 per cent by the end of the next fiscal.
The Swiss brokerage also has flat outlook for the markets with a forecast of zero gains in Nifty, citing the already expensive valuation.
"Receding household flows and high valuations may weigh on the market and we expect Nifty to deliver a CAGR (Compounded Annual Growth Rate) of around 10.5 per cent over the next three years as against 11 per cent over the past five years, said the report.
More than earnings, the brokerage said, the trajectory of the market will be influenced by valuations in the next 12 months.
With the pandemic-related excess savings unwinding and local bank deposit rates rising, household flows to market are showing early but clear signs of fatigue, said the brokerage and expected valuations to normalise with receding household flows.
Its 12-month Nifty target is at 18,000 (0 per cent upside from current levels, with target PE at 7 per cent above the long-term average.
Gupta Jain expects CPI (Consumer Price based Inflation) to moderate towards 5-5.5 per cent in FY24 (from 6.6 per cent in FY23) but to remain above RBI's medium-term target of 4 per cent due to uncertainty regarding the food inflation outlook.
She expects the repo rate to peak at 6.5 per cent by end-FY23 before easing to 6 per cent by end-FY24.
