UNION BUDGET 2016 - 2017

UNION BUDGET 2016 - 2017

INDEX

o

Key Highlights

o

Tax Rates

o

Market movements: Equity & Debt

o

Economic update:

-

Budget summary

-

Revenue snapshot

-

Expenditure snapshot

o

Sector updates

o

Equity Market: Outlook and Strategy

o

Debt Market: Outlook and Strategy

1 UNION BUDGET, 2016 - 2017

KEY HIGHLIGHTS

Though the Union Budget is essentially a Statement of Account of public finances, it has historically become a significant opportunity to indicate the direction and the pace of India‘s economic policy. At a time when the global economy is in serious crisis, global growth has slowed down from 3.4% in 2014 to 3.1% in 2015. Financial markets have been battered and global trade has contracted. Amidst all these global headwinds, the Indian economy has held its ground firmly. Thanks to our inherent strengths and the policies of the Government, a lot of confidence and hope continues to be built around India. With this in the background, we present the key highlights of Union Budget 2016-17.

Economy •

Tax revenues (net to centre) to grow by 11.2%

•

Total expenditure growth at 10.8% (FY16: 7.3% affected by increased state allocation)

•

52% increase in non-debt capital receipts

•

Disinvestment of Rs.565 bn (FY16: Rs.250 bn) includes Rs.205 bn from SUUTI and others

•

25% increase in non-tax receipts

•

Mid-term fiscal consolidation path reiterated with fiscal deficit target of 3% in FY18

•

Mobilisation of additional finances to the extent of Rs. 31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority by raising Bonds. 2 UNION BUDGET, 2016 - 2017

KEY HIGHLIGHTS

Direct Taxes • Income tax slabs remain unchanged. • Rebate under section 87A increased from Rs. 2000 to Rs. 5,000 for people having total income less than Rs. 5 lac p.a. • The finance minister has proposed to extend benefit limit under section 80GG from Rs. 24,000 p.a. to Rs. 60,000 p.a for people not having their own house and not receiving any HRA from employer. • Additional exemption of Rs. 50,000 for interest paid on housing loans upto Rs. 35 lac, provided cost of house is not above Rs. 50 lac. • Withdrawal of up to 40% of corpus from pension to be made tax-exempt under NPS. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made on or from 1.4.2016. • 10% tax on dividends in excess of Rs 10 lakh received by individuals, HUFs; this will be in addition to DDT. • LTCG period for unlisted firms reduced to 2 years from existing 3 years. • Reduction in corporate tax rate for FY17 for relatively small enterprises, with turnover not exceeding Rs. 5 crore, to 29% plus surcharge and cess. • Infrastructure cess, of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs.

3 UNION BUDGET, 2016 - 2017

KEY HIGHLIGHTS

Direct Taxes • Positive: The increase in rebate u/s 87A, the additional exemption for interest paid on housing loan, enhancement of limit u/s 80 GG, reduction in term for LTCG period for unlisted companies, reduction in corporate tax for SMEs and tax exemption of 40% of withdrawal under NPS scheme are all positives for investors/individuals/savers. The benefits will accrue on account of tax saved as well as help create a corpus for the future.

3 UNION BUDGET, 2016 - 2017

KEY HIGHLIGHTS

Miscellaneous • •

Allocation of Rs. 25,000 crore towards recapitalisation of Public Sector Banks. 100% FDI will be allowed through FIPB route in marketing of food products produced and manufactured in India. This will benefit farmers, give impetus to food processing industry and create vast employment opportunities.

•

A new policy for management of Government investment in Public Sector Enterprises, including disinvestment and strategic sale, has been approved.

• •

Establishment of Monetary Policy framework and Monetary Policy Committee. With only marginal increase in service tax, the GST bill seems to be relegated.

• •

General Insurance Companies owned by the Government to be listed on exchanges. In order to incentivize creation of new jobs in the formal sector, Government of India will pay the Employee Pension Scheme contribution of 8.33% for all new employees enrolling in EPFO for the first three years of their employment.

•

•

Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non institutional investors to invest in Securitization Receipts. RBI will facilitate retail participation in Government securities.

•

New derivative products will be developed by SEBI in the Commodity Derivatives market.

•

To increase retail participation, capital gains tax exemption has been extended to merger of different plans within a MF scheme.

•

The Government will launch a new health protection scheme which will provide health cover up to Rs. 1 lakh per family. For senior citizens of age 60 years and above ,an additional top-up package up to Rs. 30,000 will be provided. 4 UNION BUDGET, 2016 - 2017

MARKET MOVEMENT

Equity Market •

Budget day was a roller-coaster ride for Indian equity market, which declined over two percent, but finished the day with moderate losses of just over half a percent.

•

As Finance Minister Arun Jaitley read out his Budget proposals for FY17, investors‘ knee jerk reaction eroded almost 660 points from the benchmark indices.

•

However, markets see sawed throughout the day as the Finance Minister went about presenting the Union Budget.

• •

In the end, the Sensex closed at 23,002 levels with loss of 152.30 points or 0.66%. Among the BSE sector indices, IT index lost 2.11% while Teck index lost almost 2%. Capital Goods, Consumer Durable and Oil & Gas indices were down by 1.99%, 1.75% and 1.5%, respectively. Banking sector index was up by 1.07%,while Finance

•

and Realty gained 0.9% and 0.27%, respectively. Among Sensex stocks, ICICI Bank (2.79%), Reliance Industries (1.69%),ITC (1.65%) & Lupin (1.42%) were the top gainers while ONGC (-9.72%), Maruti Suzuki (-4.88%) and BHEL (-4.21%) were among the major losers.

Debt Market G-Secs rallied by approximately 16-18 bps across all tenors as • The FY17 Union Budget estimated the government's gross market borrowing at Rs 6 lakh crore, Rs 20,000-30,000 crore less than anticipated by market participants. •

The Union Budget also stated that the government is committed to its fiscal deficit target of 3.5% for FY17, lower than expectations of 3.6% - 3.7% by the markets.

•

Adherence to the fiscal deficit number by the centre arms the central bank with ammunition to cut rates further. 5 UNION BUDGET, 2016 - 2017

ECONOMIC UPDATE

GOI follows revised FRBM path with deficit at 3.5%; lower excise duty estimate provides buffer

Implementation of 7CPC pulls capital expenditure growth down to 3.9%; at current rates on petro products, Centre has a buffer of Rs ~400 bn available in their excise collection forecast Tax revenues (net to centre) to grow by 11.2% • Gross tax revenue growth of 11.7% driven by: — 18.1% increase in income tax supported by additional tax due to 7CPC — 12.2% increase in excise duty due to additional clean cess (130 bn), Infra Cess (30 bn); and excise duty on petrol and diesel (230 bn as against 630 bn at current rate) and — 10% jump in service tax with ~3% increase coming from additional 0.5% Krishi Kalyan Cess • 25% increase in non-tax receipts • Revenue from Telecom at Rs 990 bn up from Rs 570 bn driven by spectrum auction • 52% increase in non-debt capital receipts • Disinvestment of Rs 565 bn (FY16: Rs 250 bn) includes Rs 205 bn from SUUTI and others Total expenditure growth at 10.8% (FY16: 7.3% affected by increased state allocation) •Capital expenditure growth down to 3.9% (FY16: 21%); driven by railways and road •Subsidies at Rs 2.5 tr: Food subsidy at Rs1.35 tr seems lower than expected by Rs 150 bn; given food security act to cover remaining 11 states Mid-term fiscal consolidation path reiterated with a fiscal deficit target of 3% in FY18 UNION BUDGET, 2016 - 2017

6

ECONOMIC UPDATE

Rs. Tr.

FY14

FY15

FY16

% YoY FY17 FY15

FY16

FY17

A income A RE BE FY17 fiscal math: Higher tax, excise and service tax to boost tax collections; GOI assumes Nominal GDP9.04growth 11%10.8% in FY17 Tax Receipts (Net) 8.16 9.48 of 10.54 4.9% 11.2% Non-Tax Revenue

1.99

1.98

2.59

Non-Debt Capital Receipts 0.42 0.51 Rs. Tr. FY14 FY15 Total Receipts 10.57 11.53 A A Revenue Expenditure 13.72 14.67 Tax Receipts (Net) 8.16 9.04 Capital Expenditure 1.88 1.97 Non-Tax Revenue 1.99 1.98 Total Expenditure 15.59 16.64 Non-Debt Capital Receipts 0.42 0.51 Fiscal Deficit 10.57 5.03 11.53 5.11 Total Receipts Revenue Deficit 3.57 3.66 Revenue Expenditure 13.72 14.67 Primary Deficit 1.29 1.08 Capital Expenditure 1.88 1.97 G.Sec.: Net 4.54 4.53 Total Expenditure 15.59 16.64 G.Sec. + T.Bills: Net 4.61 4.62 Fiscal Deficit 5.03 5.11 GDP 112.73 Revenue Deficit 3.57 124.88 3.66

0.44 FY16 12.50 RE 15.48 9.48 2.38 2.59 17.85 0.44 5.35 12.50

3.23

-0.5% 30.7% 24.9% % YoY 0.67 23.0% -14.1% 51.8% FY17 FY15 FY16 FY17 14.44 9.1% 8.4% 15.5% BE 17.31 6.9% 5.5% 11.8% 10.54 10.8% 4.9% 11.2% 2.47 4.8% 20.9% 3.9% 3.23 -0.5% 30.7% 24.9% 19.78 6.7% 7.3% 10.8% 0.67 23.0% -14.1% 51.8% 5.34 9.1% 1.6% 8.4% 4.8% 15.5% -0.2% 14.44

3.42 3.54 15.48 17.31 0.92 0.41 2.38 2.47 4.41 4.25 17.85 19.78 5.09 4.42 5.35 5.34 135.67 3.42 150.65 3.54

2.4% 6.9% -15.8% 4.8% -0.1% 6.7% 0.2% 1.6% 10.8% 2.4%

-6.5% 5.5% -14.6% 20.9% -2.8% 7.3% 10.2% 4.8% 8.6% -6.5%

3.6% 11.8% -55.4% 3.9% -3.5% 10.8% -13.2% -0.2% 11.0% 3.6%

Fiscal Primary Deficit %Deficit GDP G.Sec.: Net Revenue Deficit % GDP

1.29 4.5% 4.54 3.2%

1.08 4.1% 4.53 2.9%

0.92 3.9% 4.41 2.5%

0.41 3.5% -15.8% -14.6% -55.4% 4.25 2.3% -0.1% -2.8% -3.5%

G.Sec.Deficit + T.Bills: Net Primary % GDP

4.61 1.1%

4.62 0.9%

5.09 0.7%

4.42 0.3%

Tax buoyancy 0.74 124.88 0.86 135.67 2.00 150.65 1.06 GDP 112.73 Expenditure Elasticity 0.80 0.62 0.85 0.98 Fiscal Deficit % GDP 4.5% 4.1% 3.9% 3.5%

Revenue GDP &3.2% Source : AxisDeficit Bank % Business Economic 2.9%Research 2.5% 1.1%

0.9%

0.7%

0.3%

Tax buoyancy

0.74

0.86

2.00

1.06

0.80

0.62

0.85

Seems on higher side: 20.5K cr. from strategic investments plus 36K cr. from divestment

Capital expenditure growth down to 3.9%

0.2% 10.2% -13.2% 10.8%

8.6% 11.0%

Higher excise duty collections due to successive hikes in excise duty rates pushed tax buoyancy rate at 2 during FY16

2.3%

Primary Deficit % GDP

Expenditure Elasticity

Telecom spectrum auction assumption holds the key with additional revenue of Rs 400 bn

0.98

7 UNION BUDGET, 2016 - 2017

ECONOMIC UPDATE

Revenues buoyed by higher income tax, increased excise collections from petroleum products and service tax collections

Rs. Tr.

% YoY FY15

FY16

FY17

FY14

FY15

FY16

FY17

A

A

RE

BE

11.39

12.45

14.60

16.31

9.3%

17.2%

11.7%

Income

2.43

2.66

2.99

3.53

9.4%

12.5%

18.1%

Corporation

3.95

4.29

4.53

4.94

8.7%

5.6%

9.0%

Excise

1.70

1.90

2.84

3.19

11.6%

49.6%

12.2%

Customs

1.72

1.88

2.10

2.30

9.3%

11.4%

9.8%

Service

1.55

1.68

2.10

2.31

8.5%

25.0%

10.0%

Direct Tax

6.38

6.95

7.52

8.47

9.0%

8.3%

12.6%

Indirect Tax

4.97

5.46

7.04

7.80

9.8%

28.9%

10.8%

Tax Revenues (Net to Centre)

8.16

9.04

9.48

10.54

10.8%

4.9%

11.2%

Non-Tax Revenues

1.99

1.98

2.59

3.23

-0.5%

30.7%

24.9%

o/w Dividend & Profit

0.90

0.90

1.18

1.24

-0.7%

31.7%

4.7%

0.40

0.31

0.57

0.99

-23.7%

87.4%

72.5%

10.15

11.01

12.06

13.77

8.5%

9.5%

14.2%

Capital Receipts

0.42

0.51

0.44

0.67

23.0% -14.1%

51.8%

o/w Disinvestments

0.29

0.38

0.25

0.57

28.5% -32.9% 123.2%

Total Receipts

10.57

11.53

12.50

14.44

Tax buoyancy

0.74

0.86

2.00

1.06

Gross Tax Revenue

Telecom Revenue Receipts

9.1%

8.4%

Additional tax of Rs ~140 bn due to salary increase under 7CPC Clean cess (130 bn), Infra Cess (30 bn); and excise duty on petrol and diesel (230 bn much lower than 630 bn at current rate)

Additional 0.5% Kalyan Cess

Telecom auction

Krishi

spectrum

Includes Rs 205 bn from SUUTI and others

15.5%

Source : Axis Bank Business & Economic Research

8 UNION BUDGET, 2016 - 2017

ECONOMIC UPDATE

Quality of fiscal consolidation compromised due to 7CPC implementation; food subsidy seems to be underprovided Upside from excise collections may surprise with higher than budgeted capital expenditure Rs. Tr.

% YoY FY15

FY16

FY17

FY14

FY15

FY16

FY17

A

A

RE

BE

15.59

16.64

17.85

19.78

6.7%

7.3%

10.8%

4.53

4.63

4.77

5.50

2.1%

3.1%

15.3%

Central Plan

3.40

1.92

2.61

3.08

-43.7%

36.1%

18.0%

Assistance to State Plans

1.13

2.71

2.16

2.42

140.0% -20.2%

11.9%

11.06

12.01

13.08

14.28

8.6%

8.9%

9.2%

2.55

2.58

2.58

2.50

1.4%

-0.2%

-2.9%

0.92

1.18

1.39

1.35

27.9%

18.5%

-3.3%

Fertilizer

0.67

0.71

0.72

0.70

5.5%

1.9%

-3.4%

Petroleum

0.85

0.60

0.30

0.27

Interest

3.74

4.02

4.43

4.93

7.5%

10.0%

11.3%

Defence Services

1.24

1.37

1.43

1.63

10.0%

4.7%

13.6%

Salary

0.71

0.82

0.89

1.02

15.0%

8.9%

14.9%

Pension

0.75

0.94

0.96

1.23

25.0%

2.3%

28.9%

Defence Capital

0.79

0.82

0.81

0.86

3.5%

-0.6%

6.1%

13.72

14.67

15.48

17.31

6.9%

5.5%

11.8%

Capital Expenditure

1.88

1.97

2.38

2.47

4.8%

20.9%

3.9%

Expenditure Elasticity

0.80

0.62

0.85

0.98

Expenditure Plan

Non-Plan Subsidies o/w Food

Revenue Expenditure

-29.4% -50.2% -10.2%

Bringing additional 11 states under Food Security Act likely to push food subsidy by at least Rs. ~150 bn

Jumped on account of implementation of 7CPC

Major drop in Capex growth to accommodate 7CPC expenses

Source : Axis Bank Business & Economic Research

9 UNION BUDGET, 2016 - 2017

ECONOMIC UPDATE

Sources of financing fiscal deficit: Net market borrowings on decline while gross borrowing still ticks up

Lower short-term borrowings in line with new debt management strategy (bringing proportion of paper with maturities less than 1 year below 10% from current 10.9%)

Market Loans

FY14

FY15

FY16

FY17

A

A

RE

BE

4.5%

4.1%

3.9%

3.5%

Fiscal Deficit

5.03

5.11

5.35

5.34

Net Market Loans

4.69

4.53

4.41

4.25

Gross

5.64

5.92

5.85

6.00

Repayments

0.95

1.39

1.44

1.75

Buyback | Switch

0.16

0.05

0.39

0.00

Net T.Bills

0.08

0.09

0.69

0.17

Net Market Borrowings

4.60

4.58

4.71

4.42

Small Savings

0.12

0.32

0.53

0.22

State PF's

0.10

0.12

0.11

0.12

External Assistance

0.07

0.13

0.11

0.19

Others

0.31

0.74

0.11

0.26

-0.19

-0.78

-0.22

0.13

Rs. Tr. Fiscal Deficit % GDP

Non-market borrowings

Cash Surplus

Source : Axis Bank Business & Economic Research

10 UNION BUDGET, 2016 - 2017

SECTOR UPDATES

Sector

Agriculture

Key budget measures Impact Allocation to irrigation tripled to Rs 170 bn in FY17 vs. Rs 53 bn in FY16. Total irrigation allocation at Rs 865 bn over next 5 yrs (vs. Rs 500 bn earlier) Higher farm income: Target to double farm income by 2022. Crop insurance, interest subvention, MGNREGS allocation and 15% YoY growth in agri-credit

Positive: Agri input companies

Rural infrastructure: Continued focus on rural roads (allocation up ~2x from FY13/14 levels) and a common emarket platform to cover 585 APMCs across India

Autos

Pro rural measures to improve farm productivity and spur rural income growth Road (urban + rural) capex to increase by ~50% to Rs 1.3 Positive: Commercial vehicle cos trn Negative: Passenger car manufacturers Infra cess (wef 1st March ‘16) of 1-4% on PVs to increase cost of ownership Defense outlay for MHCVs increased by >75% Deduction on R&D expenditure reduced Recapitalization of PSU banks (Rs 250 bn provided, for now) Roadmap for consolidation of weaker PSU banks and privatization of IDBI Bank

Banking & Financial Services

Addressing asset quality issues – propose insolvency and bankruptcy code and incentivize investment in ARCs. Boost financial position of ARCs by allowing 100% FDI under automatic route, increase FPIs investment to 100% in Security Receipts (SR), complete pass through of incometax to investors in SR Exemption of tax on NPA provisions for NBFCs (up to 5% of income) Encouraging affordable housing by increasing tax exemption on interest paid 49% FDI in insurance and pension sector via automatic route

Positive: Corporate lenders and HFCs

Divestment - plan to list PSU general insurance companies Source: Axis Capital

11 UNION BUDGET, 2016 - 2017

SECTOR UPDATES

Sector

Key budget measures

Impact

Budgetary allocation towards capex up by 21% : Bulk of the increase in railways (up 24%) and roads (up 24%)

Capital goods

Cement

Push on metro rail projects and urban infra: 5 new metro projects to be awarded in FY17. Allocation for urban Positive: Capital Goods and EPC infra projects up by 129% companies Defense capex the only disappointment: FY16 capex of Negative: Wind equipment cos 14% below budget allocation, and a paltry 6% increase in FY17 allocation Wind equipment: Reduction in accelerated depreciation to 40% from 80% from FY18 Demand boost from ~50% increase in road and rural housing spending Excise duty on cigarettes hiked by weighted average ~10%. We estimate ITC cigarette volume to decline by 5% in FY17

FMCG

Increased investment on the rural side in the form of various schemes and increased MNREGA investment to aid FMCG companies

Increased funds for Roads and Railways Infrastructure Sunset clause on tax breaks is not a major concern Measures to revitalize PPP

Positive: Volume growth for cement cos

Negative: Cigarettes manufacturers Positive: Consumer cos

Positive: EPC companies

Source: Axis Capital

12 UNION BUDGET, 2016 - 2017

SECTOR UPDATES

Sector

Key budget measures

Impact

Reintroduction of 70% abatement on service tax on Indian Railways' haulage charges (effective service tax at 4.2% now vs. 14% earlier) Logistics

Reduction in abatement rate to 60% vs. 70% earlier for Container Train Operators - effective service tax increased to 5.6% (with input service credit) vs. 4.2% (without credit) earlier

Positive: Train container operators

Doubling of clean energy cess to Rs 400/t Increase in import duty on aluminium to 7.5% vs. 5% currently Neutral for metal and mining companies Metals Cut in export duty on low grade iron ore to nil (currently at 10% for fines and 30% for lumps). Duty on high-grade ore however retained at 30% Change in cess rate for E&P companies from Rs 4,500/te (USD 9.4/bl) to 20% ad-valorem (USD 9/bl at crude price of USD 45/bl) No change in custom duty structure on crude and petroleum products Oil & Gas

Positive: Oil marketing cos Negative: Upstream cos

FY17 budget provides for incremental revenue of Rs 210 bn from excise duty for petrol/diesel. This is lower than estimated incremental revenue of Rs 580 bn assuming flat excise duties. Thus, the government has kept adequate buffer to reduce excise in future (if crude rises)

Source: Axis Capital

13 UNION BUDGET, 2016 - 2017

SECTOR UPDATES

Sector

Key budget measures

Pharmaceuticals

R&D exemption limit to be lowered from 200% to 150% from Marginally negative for companies with tax 1 April, 2017 to 31 March, 2020 and to 100% from 1 April, rates higher than MAT 2020 Clean Energy Cess on coal increased to Rs 400/ton from Rs 200/ton: Encouraging structural shift to renewables

Power

Realty

Retail

Introduction of dispute resolution bill and guidelines for renegotiation of PPP concession agreement could revive private investment in Infra but the bill will need to be passed in both houses of Parliament

Impact

Negative for IPPs selling power on merchant basis Neutral for Power cos

Hurdle for REITs cleared: No DDT on dividend payment from Positive for annuity assets owners; SPV to REIT affordable housing sops beneficial for Multiple impetus for affordable housing to both buyers and developers with strong execution track developers record Phasing out tax benefits on SEZs Excise duty on branded readymade garments of retail sales price of Rs1,000 or more to attract duty at 2% (with Negative for jewellery and apparel cos credit)/12.5% (without credit). 1% (without input tax credit) or 12.5% (with input tax credit) on gold and studded jewellery.

Source: Axis Capital

14 UNION BUDGET, 2016 - 2017

EQUITY MARKET OUTLOOK AND STRATERGY

•

•

The Union Budget 2016-17 delivered a pleasant surprise by sticking to the preannounced fiscal deficit target of 3.5% of GDP as this move is likely to have a

positive impact on the macro economy by preserving stability. The Union Budget puts forward Government‘s focus of continuing on the path towards fiscal consolidation which also makes it easier for the central bank to continue with its accommodative stance.

•

The Budget also underlines the Government‘s determination to provide an impetus to the economy especially through the infrastructure, rural and financial sectors.

•

The Indian economy is poised to grow at a healthy rate in contrast to the global economy which slowed down from 3.4% in CY 2014 to 3.1% in CY 2015.

•

India‘s macroeconomic fundamentals remain intact with improvement in growth, moderate inflation, improving CAD and robust forex reserves.

•

Amidst a global slowdown in economic growth, India continues to be a leading investment destination.

•

Equity market valuations are also reasonable when compared to their long term Price to Earnings (P/E) averages.

•

We recommend investors to accumulate equities from a 3 to 5 years investment horizon.

15 UNION BUDGET, 2016 - 2017

DEBT MARKET OUTLOOK AND STRATERGY

•

The government retained its fiscal deficit target for RE 2015-16 and BE 2016-17 at 3.9% and 3.5%, respectively. Mid-term fiscal consolidation path was also reiterated with a fiscal deficit target of 3% in FY18.

•

The Centre is likely to borrow Rs. 6 lakh crores in FY17 (Rs. 5.85 lakh crores in FY16). However, the net borrowings in FY17 will be Rs. 4.25 lakh crores (Rs. 4.41 lakh crores in FY16), after considering repayments of past loans and interests.

•

Gross supply of Central and State government securities is likely to be at Rs. 9.03 lakh crore in FY17, compared to Rs. 8.90 lakh crore in the current fiscal.

•

The RBI through its ―Medium Term Debt Management Strategy‖ document laid emphasis on increased issuances in the longer end of the curve; the implication of which would increase the average maturity of debt from 14.9 yrs in FY15 to 16 yrs in FY18. With demand-supply dynamics likely to be similar to FY16, excess supply of high duration securities could continue to contribute to yield curve steepness.

•

The RBI in its February monetary policy stated that they continue to maintain an accommodative stance, while keeping an eye on inflation data and the Union Budget. With the Government committed to walk a tightrope and stick to its fiscal deficit target of 3.5%, the onus now shifts to RBI on the monetary policy front.

•

The budget announced an allocation for infrastructure bonds to the tune of Rs. 31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority by raising bonds. Further clarity is awaited on whether these bonds will be tax-free.

•

Yields are likely to be range bound in the near term. However, we are positive from a medium to long term perspective with a pro-active inflation targeting RBI and a credible government at the Centre.

•

Investors who have an investment horizon of at least 18 to 24 months can look at investing in long term income, gilt funds and dynamic bond funds.

•

Short term income funds can be recommended for investors with an investment horizon of minimum 12 -18 months to benefit from current accruals and ensuing capital appreciation if yields head lower during this period. 16 UNION BUDGET, 2016 - 2017

DISCLAIMER DISCLAIMER The report and information contained herein (hereinafter referred as ―Report‖) is of confidential and meant only for the selected recipient. This Report should not be altered, transmitted to, copied, reproduced or distributed, in any manner and form, to any other person or media or reproduced in any form, without prior consent of Axis Bank. The material in this report is based on information obtained from publicly available recourses and/or sources believed to be reliable, true and accurate by Axis Bank, as on dare of the Report. Axis Bank does not guarantee that the information is true, reliable and accurate, not misleading nor does it represent (expressly and impliedly) as to its genuineness or suitability for intended the purpose of use. The opinion expressed (including estimates and forecasts) in Report is subject to change, alteration, updation at Axis Bank‘s sole discretion but without any communication and without prior notice of intimation. This Report is not an offer or solicitation for dealing in any financial instrument(s) or is an official confirmation of any transaction. This Report is provided for assistance only and should not be construed as the sole document to be relied upon for taking any kind of investment decision. Each recipient of this Report should make his/her own research, analysis and investigation as he/she deems fit and reliable to come at an independent evaluation of an investment in the securities mentioned in this Report (including the merits, demerits and risks involved), and should further take opinion of own consultants, advisors to determine the advantages and risks of such investment. The investment discussed or views expressed herein may not suit the requirements for all investors. Axis Bank and its group companies, affiliates, directors, and employees may: (a) from time to time, have long or short positions in, and deal (buy and/or sell the securities) thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn commission/brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The applicable statutory laws, rules and regulations may not allow the distribution of this Report in certain jurisdictions, and persons who are in possession of this document, should inform themselves about and follow, any such restrictions. This Report is not meant, directed or intended for distribution to, or use by, any person or entity in any jurisdiction, where such distribution, publication, availability or use would not be in confirmation to the applicable law, regulation or which would require Axis Bank and affiliates/associates/subsidiaries companies to obtain any registration or license . Neither Axis Bank nor any of its affiliates, associates, subsidiaries companies, its directors, employees, agents or representatives shall be held responsible, liable for any kind of consequential damages whether direct, indirect, special or consequential including but not limited to lost revenue, lost profits, notional losses that may arise from or in connection with the use of the information or for ant misstatement or error(s) in it. Prospective investors and others are cautioned and should be alert that any forward-looking statements are not predictions and may be subject to change without providing any notice. Past performance should not be considered as a reference to future performance. The disclosures of interest statements if any included in this Report are provided only to enhance the transparency and should not be construed as confirmation of the views expressed in the report. Disclaimer for DIFC Branch: Axis Bank, DIFC branch is duly licensed and regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority (―DFSA‖). This Report is intended for use only by Professional Clients (as defined by Rule 2.3.2 set out in the Conduct of Business Module of the DFSA Rulebook) who satisfy the regulatory criteria set out in the DFSA‘s rules, and should not be relied upon, acted upon or distributed to any other person(s) other than the intended recipient.

17 UNION BUDGET, 2016 - 2017