The fiscal deficit for the financial year 2025 is expected to remain at five per cent of gross domestic product (GDP) compared to the earlier interim budget announcement of 5.1 per cent, as per a report by Kotak Economics Research. It added that the government's cash balance moderated to around Rs 2.1 trillion in the week ending 5 July, dipping from Rs 3.2 trillion in the previous week.
However, due to excise duty collections, the cash balance is expected to have increased to Rs 2.4 trillion last week and is likely to register an increase to take the number to Rs 3.3 trillion this week, the report revealed.
Due to minimal risks of financial slippage, the markets remain sanguine. The fiscal headroom available to the government from the Reserve Bank of India’s excess dividend and upside to tax collections is likely to be utilised through higher capex and incremental support to consumption through rural and agricultural schemes. The Indian rupee continued to trade in a narrow range by closing at 0.05 per cent Week-on-Week lower against the US dollar. As per Kotak, the US dollar- Indian rupee trading to remain in the 83.25 to 83.75 range in the near term.
The Kotak report revealed that the System liquidity remained comfortable on expected lines as the surplus improved to Rs 1.1 trillion last week as compared to Rs 848 billion the week prior. However, the surplus is likely to moderate towards the end of the week led by goods and service tax (GST) collections. As far as the quarter is concerned, continued government spending along with minimal currency leakage is expected to keep the liquidity conditions in the surplus zone.
June consumer price index (CPI) inflation increased to 5.1 per cent from 4.8 per cent in May due to a spike in vegetable prices. The sharp increase in vegetable prices in the second half of June pushed up food inflation to 9.4 per cent, a 3.2 per cent month-on-month increase. It is expected that the prices will start to reverse in the coming two to three months. Overall, the FY2025 average CPI inflation is retained at 4.5 per cent.
However, Inflation began to soften in the United States (US) as US June CPI data surprised at 3 per cent, from 3.3 per cent in May. Prices of medical care, hotels, airlines and used cars and new car prices have also started to soften, signalling that discretionary spending is beginning to cool off in the US.
Indian bond markets have continued to hold well aided by softening US treasury yields and crude oil prices. Easy domestic liquidity conditions and Foreign Portfolio Investment (FPI) flows have also continued to remain supportive with Rs 59 billion under the Fully accessible route (Far) segment in July.
After registering a recent high of 7.03 per cent, the Indian ten-year benchmark G-sec yield has inched lower by 5 basis points to trade near 6.98 per cent. However, it is expected to trend towards 6.95 per cent in the run-up to the union budget.
