03 Feb 2017

RETAIL RESEARCH
Post Budget Impact Analysis MF & Debt

The recent Budget presented by FM Arun Jaitley can be termed as a good effort under the prevailing circumstances. Prudence is writ large across the pages of the
Budget document.

The following are our comments / observations:

Fixed Income Impact & Outlook

The Union Budget has taken the median approach by balancing the need for higher public infrastructure spending with the medium-term need for continued fiscal
prudence. The fiscal deficit has been budgeted at 3.2% of the GDP (Gross Domestic Product) in FY2017- 18 with a target of achieving 3% in FY2019 (vs 3.5% in FY17).
The fiscal room has been used to increase the capital expenditure from 13.9% of total expenditure in FY17RE to 14.4% in FY18BE.

Largely in line with market expectations the government kept the borrowing programme in check which was a positive. Gross borrowing for FY2017-18 pegged at
INR 5.8 lakh crore (same as FY2016-17); net borrowing at INR 3.5 lakh crore (lower than FY2016-17) should result in lower supply of fresh government bonds and
may provide an interim comfort to bond markets. Net market borrowings of INR 3.5tn is significantly lower than market expectations of INR 4.3-4.5tn on the back
of INR 750bn worth of buybacks. The announcement on buy back of approx. 75000 crore of securities maturing over the next 2-3 years is a positive for the short
end of the curve. However buybacks are generally undertaken towards the tail end of the fiscal; as such, markets would have to brace for supply initially.

The intention to bring down the debt to GDP ratio to 60% over the next few years is welcome. The new roadmap requires the general government debt-to-GDP
ratio to be lowered to 60% by 2023 (40% for the centre; 20% for the states) from ~66% in FY16 and the central government fiscal deficit target to be lowered to 3%
of GDP in the next three years.

Slowdown in growth, benign inflation coupled with fiscal prudence and lower government borrowing could provide some headroom to the RBI for an interest rate
cut. With underlying inflation expected to undershoot RBIs March 2017E target by 50bp, we continue to expect the RBI to ease the policy repo rate by 50bp over
calendar 2017.

We expect interest rates to stay lower and yields to fall. In the event of any growth concerns stemming from foreign grounds, we believe that the RBI still has some
room for a rate cut in this year. Even though there is downward bias to interest rates, room for further fall is limited given the sharp fall from 8.8% to 6.5% in last 3
years.

The government seems to be relying heavily on inflows under small savings to fund fiscal deficit. Small savings collections have been assumed at Rs.1 lac cr (vs 0.9
lac cr in FY17 mainly driven by demonetization and low interest rates and Rs.0.52 lac cr in FY16).

Lower government borrowing could provide more space for corporate borrowings in the capital market. Low capacity utilization leading to low credit
offtake/supply could augur well for spread compression in the sub-AAA segment.

Global macroeconomic factors such as possible rise in crude prices, stronger recovery in US (which could lead to interest rate hike by the US Fed) and further
outflows by FPIs may impact bond markets.

RETAIL RESEARCH Page |1

We expect the 10-year Gsec to inch lower and trade in the range of 6.30-6.35% by March 2017E amid benign inflationary pressures, comfortable liquidity in the
banking system, subdued credit growth and monetary policy easing.

We expect bond yields to firm up towards H2FY18 once the monetary policy easing cycle comes to an end, demand for credit picks up, higher commodity prices
feed into CPI, and government spending boosts demand.

Measures specific to Mutual Funds and Debt

There is no change in LTCG and STCG on mutual funds and on listed bonds and debentures
There is no change in the dividend distribution tax(DDT) for debt funds
There is no change in tax on the interest received on bonds and debentures.
A new ETF with diversified CPSE stocks and other Government holdings will be launched in 2017-18. Government will put in place a revised mechanism and
procedure to ensure time bound listing of identified CPSEs on stock exchanges. The shares of Railway PSEs like IRCTC, IRFC and IRCON will be listed in stock
exchanges. Hence investors will get an opportunity to invest in these relatively safe issues.

Senior Analyst: prashant.mehta@hdfcsec.com

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax:
(022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com

Disclosure: We the authors, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our
compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Research Analyst or his/her relative or HDFC Securities Ltd does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have
beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC
Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock No

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to
others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or
complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform
investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients

This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or
may not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

Disclosure by Research Analyst: Research Analyst or his relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities
Ltd. or its Associate does not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research
Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock - No

Disclosure by Research Entity: HDFC Securities Ltd. may have received any compensation/benefits from the subject company, may have managed public offering of securities for the subject company in the
RETAIL RESEARCH
past 12 months. P a g months
Further, Associates of the Company may have financial interest from the subject company in the normal course of Business. The subject company may have been our client during twelve e |2
preceding the date of distribution of the Research report. Research analyst has not served as an officer, director or employee of the subject company. Research entity has not been engaged in market making
activity for the subject company. We have not received any compensation/benefits from the Subject Company or third party in connection with the Research Report. Securities Ltd. is a SEBI Registered Research