Budget announcements usually have an indirect impact on the rupee and that too mainly via the movements in the stock market in response to the Budget announcements.
However, given the backdrop of a broadbased and sharp slowdown in growth, weak investment climate and twin deficits particularly a high current account deficit, market participants and foreign investors were looking at the Budget 2013 to deliver fiscal consolidation in order to provide long-term support to a weak rupee.
The FM has clearly delivered. The fiscal deficit for next fiscal is pegged at 4.8% of GDP as against 5.2% in this one. Importantly, in the current financial year, despite higher subsidies, overall spending was lower than what was initially estimated last year, which implies that for achieving the fiscal deficit target of 5.2%, there was a widespread reduction in spending on other key areas like defence.
Measures such as introduction of inflation linked bonds and steps towards increasing coal production, would also help the rupee by curbing the demand for imported gold and coal.
Others announced for financial inclusion would also have a positive impact on the rupee in the long run, as they will help increase financial savings in the economy by providing more households access to financial and banking system. That, in turn, will help reduce physical savings in the form of gold.
Overall, the commitment shown towards fiscal consolidation by curbing fuel subsidies would go down well with the foreign investors and ratings agencies.
That, in turn, would make a case for a pick-up in capital inflows gradually which would reduce the pressure on interest rates and the rupee.
A lower fiscal deficit would also strengthen the RBI’s hand for providing some more monetary stimulus through reductions in the repo rate, which in turn would help in softening interest rates across the board and help revive growth and support the rupee.
The writer is senior economist, Royal Bank of Scotland