by Vipul Jain – Knowledge Desk

While the Union Budget 2021 came with many good surprises and had been one of the best budgets over the past many years; it did impact Indian Debt Markets and increased volatility.

Rather than putting any extra tax burden on Super Rich / high net worth individuals (say, Covid Cess, Wealth tax), the Government focused on enhancing the deficit and increasing borrowings in Budget 2021. Not raising additional cess/taxes acted as a booster for positive sentiment in Indian equity markets as they headed towards fresh highs. However, this move made fixed income markets a bit volatile.

DEBT MARKET OUTLOOK AFTER BUDGET 2021

The following can be the factors which created volatility in debt markets:

• India’s fiscal deficit – the gap between its revenue and expenditure – for the current financial year is set to rise to 9.5% for FY 2020-21 and 6.8% for FY 2021-22, the highest since the country opened its markets to the world in 1991. It was a surprise for markets since the figures were above market expectations.
• The Market fears that expanding borrowing to support growth may lead to a rating downgrade.
• Increased government spending for an extended period will create an inflationary situation over the medium term which may lead to interest rates to move higher in coming years, leading to Long duration funds to face high volatility in coming months.
  Another factor of worry was additional borrowing of Rs 80,000 crore from the market this fiscal year.

THE BOTTOM LINE

As an investor in debt funds, it is recommended to stay invested in funds with relatively short-term maturity or the Bonds that matches with your investment horizon. This will reduce the impact of interest rate movements on your debt investments.

We, at Finogent Advisory, always recommend proper diversification in the debt mutual fund space among fixed market instruments of different maturity and over different time horizons.