"The revised Fiscal Deficit Estimate for FY21 is pegged at 9.5% higher than the 7.5 to 8.5% estimated by market participants. And this is inspite of a doubling of collections from small savings (Rs 4.8 lakh cr vs initial budget estimates of 2.4 lakh crore). The revised estimates also pegs a substantial increases from External Debt at Rs 54,522 cr (initial estimates of Rs 4622 cr). On closer look at the numbers, a 23% decline in tax revenues, 85% expected decline in divestment proceeds combined with a 13.5% increase in expenditure has been the main cause. Most of the increase in expenditure is in revenue expenditure and not capital expenditure. The pandemic fueled lockdown and slowdown has thus led to worsening of fiscal metrics on all fronts.
The Fiscal Deficit estimate for FY 2022 at 6.8% is also higher than market estimates. The projected increase in tax revenues for FY 22 from the revised estimates look reasonable provided we are on the path of full economic recovery. To that extent we may not see large slippages in tax revenues or fiscal deficit from this estimate. The FY 2022 Net borrowing for gsecs at Rs 9.25 lakh cr and gross at Rs 12.06 lakh cr is substantial and RBI support will be required to get this through. However given the economic recovery RBI need not provide the extraordinary accommodation they did in FY 2021. They also have to be mindful of not allowing asset price inflation to generalize to CPI.
Thus overall we expect government bond yields to rise. The ten yr benchmark has reacted to today's policy announcements and breached the 6% mark. We expect that this current ten yr benchmark may move towards 6.50 in next six months given the global environment may also turn towards higher bond yields."