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What does the budget hold for the commodity and bond markets

The commodity and the bond markets are critical components of the financial market. While it is the capital markets that attract most of the attention, in most countries the commodity and debt markets are much bigger in size and complexity compared to the equity trading markets. Here are some of the key expectations that the commodity and the bond markets have from the Interim Budget 2019.

Expectations of the Commodity Market from Budget 2019-01-26

The markets do understand that being an interim budget the finance minister will have his own limitations on undertaking too many large scale reforms. However there are some basic expectations that commodity markets do have..

A. Since agricultural commodities constitute a significant component of the overall commodity markets, their expectations become quite important. To begin with, the commodity markets will be looking at a much bigger allocation to the farm sector so that supply quality and quantity can be sustained by farmers in a profitable manner. Commodity markets also expect that the government ensures the extension of the minimum support price (MSP) model to all agricultural crops (food and cash) and also ensure that the farmers actually realize the promised MSP. The agricultural sector will want the government to go beyond mere subsidies and give them workable incentives for mechanizing farms and use of modern and innovative technology in farming.

B. We are aware that the government had decided to impose the commodities transaction tax (CTT) on all commodity market transactions effective the year 2013. The introduction of CTT has been a dampener on volumes and that impact is still visible. The commodity markets are expecting the scrapping of the CTT or at least reduction of the rates of CTT to encourage greater participation.

C. The commerce ministry is pitching for reduced rate of customs duty on imported gold to a level of around 4% so that exports of jewellery from India can be truly globally competitive. There has also been a demand to increase the invoice value of gold purchases to Rs.2 lakhs and the limit for cash purchases to Rs.1 lakh to simplify the gold buying process for retail buyers.

D. The commodity markets will also be looking at the government for some more reforms. In the recent past, the government has permitted BSE and NSE to offer commodities and had also subsumed the FMC into SEBI. Options have also been permitted on commodities on a graded basis. The budget will be looking at greater participation of foreign investors, domestic mutual funds and portfolio management services in the commodity market with more liberalized norms. The commodity markets will also look at the government permitting banks to actively participate in the commodity markets, which is currently barred today. This not only leaves out the largest component of the Indian economy from participating in the commodity markets but puts the commodity markets at a disadvantage vis-à-vis the equity and the currency futures market.

Expectations of the Bond Markets from Budget 2019-01-26

A. Bond markets have been hit in the last one year due to a mix of rising yields and falling liquidity. The bond markets are expecting both the issues to be addressed in the budget. Like in the case of the US Fed, the bond markets have been looking for a greater longer trajectory on repo rates. The Fed gives an approximate idea of the rate movements over the next one year. Also aggressive liquidity support from the banks and the RBI will be required to ensure that yields don’t get distorted due to liquidity shortfalls in the market.

B. Currently, the regulator only permits AA rated bonds and above as eligible for institutional investments, at least for entities regulated by the RBI. Bond markets have been demanding that since the government definition of Investment Grade is “BB+”, they can at least make a start by permitting institutions to invest up to “A” rated bonds. This will widen and deepen the market and also give these institutions the opportunity to earn extra yields.

C. The bond markets will also expect the government to push through the proposal to urge all large corporates to raise at least 25% of their debt requirements only through the bond markets and only the balance through banks. This will not only increase the supply of paper in the debt market but also reduce the dominance of banks in the bond markets. That will go a long way in broadening and deepening the bond markets.

D. Finally, the bond markets will also call for greater structure in the credit rating process. In the recent past, we have seen tremendous volatility caused in bond markets when bonds of IL&FS and Amtek got downgraded abruptly. A clearer process flow for credit rating and review will obviate this worry.

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