The significance of the Indian budget has been reducing over the past few years - major reforms such as the Goods and Services Tax bill and demonetisation have taken place outside the annual event. Nevertheless, the Indian government tabled a strong and responsible budget that focused on continued fiscal responsibility, whilst tilting spending towards social expenditure. The longstanding fiscal deficit target of 3% by March 2019 was kept in place, which relieved both equity and debt markets as fears of fiscal spending indulgence proved unfounded. This will likely keep bond yields at a lower level, whilst this will afford the central bank room to resume its rate cutting cycle. The equity market cheered the announcements, rallying 1.8 in response.
As we've argued before, the economic fallout from the government's demonetisation drive will likely be less severe than market expectations. The temporary liquidity squeeze from a lack of currency in circulation is abating, with caps on ATM disbursements now being removed. At the same time, the worry of a negative wealth shock from consumers writing off their cash holdings has not played out. Around 97% of the demonetised cash has found its way back into the formal banking system which will result in a sharper revival in consumption than was initially expected. Indians, it seems, are canny people and have deftly innovated their way around this temporary disruption.