MUMBAI/BENGALURU - Indian stocks rose more than 1 percent while 10-year bond yields gained 11 basis points on Friday after the government announced higher rural spending as well as tax exemptions in its last budget before the general election that must be held by May.
The government doubled income tax exemption limit to 500,000 rupees ($7,035.71) for individuals, while announcing more deductions such as interest on home and education loans.
"Market is basically forecasting increased consumption due to reduction in taxes," said Sunil Sharma, chief investment officer, Sanctum Wealth Management.
The Nifty advanced 1.08 percent to 10,948.35 as of 0759 GMT, while the Sensex added 1.12 percent to 36,663.04.
The government also allocated 750 billion rupees per year for farmer income while approving direct income support for farmers with small land holdings.
Prime Minister Narendra Modi's government was expected to try and shore up its political support with big-ticket farm giveaways and tax cuts for the middle class in its final federal budget, months before elections.
The government said the fiscal deficit for 2019/20 was seen at 3.4 percent of India's gross domestic product (GDP). The net market borrowing is expected to be 4.73 trillion rupees.
The 10-year benchmark government bond yield rose to 7.60 percent from 7.49 percent pre-budget, while the rupee was almost steady at 71.14 to the dollar compared to pre-budget level of 71.18.
The budget will also be a cue for the Reserve Bank of India's monetary policy, expected to be announced on Feb. 7. Any sharp rise in populist expenditure could diminish chances of a dovish policy stance and future rate cut expectations, traders said.
Stung by opposition parties' victories in three state polls in December and an impending national elections by May, Modi has already exempted many small businesses from paying taxes under a unified goods and services tax (GST). He is likely to do more to win back more voters including farmers and youth.
More than 900 million people will be eligible to cast votes in the world's biggest-ever democratic exercise and the pressure to woo them is intense.