SCENARIOS - What to look for in budget

By Surojit Gupta

NEW DELHI (Reuters) - The new government will present the 2009/10 budget on July 6 and is expected to expand both the budget deficit and its market borrowing requirement to support growth.

Following are some scenarios on what Finance Minister Pranab Mukherjee may announce and its impact on financial markets. The current fiscal year of 2009/10 runs until the end of next March.

BUDGET DEFICIT

The government is almost certain to expand the 2009/10 budget deficit beyond the 5.5 percent set in an interim and pre-election budget in February.

Bonds have priced in expectations that the deficit will swell to between 6.25 percent and 6.5 percent of GDP. So it is unlikely to be rattled so long as the deficit is around these levels.

But any sign that the government is bowing to pressure for populist spending measures to make good on promises made in the April and May general election would spark a bond sell off.

If it also fails to present a plan to bring the deficit back under control in subsequent years, the country's credit rating could come under pressure.