The Indian government on Tuesday lowered its fiscal deficit target to 4.9% of GDP for the financial year ending March 2025, from 5.1% in the interim budget in February, aided by a hefty surplus transfer from the central bank and robust tax revenues.
The fiscal target was part of India's federal budget, announced on Tuesday by Finance Minister Nirmala Sitharaman.
WHY IT'S IMPORTANT
The target signals the government's intention to remain fiscally prudent despite expectations it may ramp up spending on welfare programs following a weaker than anticipated election victory for Prime Minister Narendra Modi's alliance in June.
A lower fiscal deficit will boost foreign investors' sentiment and improve India's chances of a sovereign rating update as it brings the country closer to its goal of narrowing the deficit to below 4.5% of GDP by fiscal year 2025/26.
India's budget gap stood at 5.8% of GDP in fiscal year 2024.
CONTEXT
A record surplus transfer of 2.11 trillion rupees ($25.3 billion) from the Reserve Bank of India, more than twice of what was projected in the interim budget in February, has helped the government narrow its fiscal deficit from the interim target.
MARKET REACTION
The Indian 10-year benchmark bond yield dropped 3 basis points to 6.9260% after the budget announcement while the Indian rupee rose 0.04% to 83.6225 against the U.S. dollar.
India's benchmark stock indices, the BSE Sensex and the NSE Nifty 50, declined about 0.2% each.
