Market rallies on monetary & fiscal stimulus, but sustainability depends COVID-19 control

Vinod Nair

Indian market collapsed on March 23 due to stringent measures announced by the Securities and Exchange Board of India (SEBI) to increase requirement of margin-fund and downfall in world equity market due to fear of uncontrollable coronavirus (COVID-19) pandemic spread.

Heavy delivery selling and square-off happened on Futures & Options (F&O). Post which the market stabilised due to huge stimulus measures announced by the United States and Europe and in expectation of a similar announcement by the government and the Reserve Bank of India (RBI). During the week, global market also improved from the recent low, Nifty also recovered excellently for a span of four trading days.

In India, the package started with relaxation on regulatory and compliance norms providing relief in the recording and maintenance of supervisory paperwork and penalty.

Second, was fiscal stimulus focusing on the needs and sustenance of the underprivileged section, by provisioning availability of free food, increase in cash in hand, job safety, loan and various steps. The total fiscal schemes are about 1 percent of the GDP and likely to increase fiscal deficit by 1 percent to 4.5 percent.

It is marginally below the expectation with about Rs 2 trillion forecast. This will be positive for defensive and staple businesses like FMCG, giving support to rural and semi-rural economy.

Thirdly, the RBI announced monetary stimulus to increase financial liquidity and reduce risk in the system by providing huge cut in interest rate and cash reserve ratio, moratorium and working capital interest deferment for three months, open market operations (OMO) and other relaxation which will provide liquidity of 3.2 percent of GDP, which is massive.

In total, we have 4 percent stimulus to the domestic economy which is very positive. However, considering the weak sentiments of the economy, liquidity boosting measures from the RBI will have limited impact.

Moratorium is a welcome step, though it can have negative implications on the profitability of banks and stressed assets in the future. Long-term repo operation (LTRO) is a boost to the corporate bond market as the liquidity availed by the banks will be deployed in investment grade corporate bonds, commercial paper and non-convertible debentures.

Globally, the US and Europe have provided similar stimulus to their economies. The US Fed announced zero interest rate and purchasing of treasury securities and mortgage backed securities (MBS) in large quantities to support market and transfer money in the hands of employers, household and businesses to address their liquidity crunch and reduce interest rate to boost economic growth. The US government has approved fiscal stimulus of $2 trillion. World currency is likely to be volatile in which USD may appreciate in the short-term as funds move from risky assets to haven like USD and Gold. In the medium-term USD may weaken due to lower control over spread of virus in the country and high amount of quantitative easing (QE) announced.

All these are financial stimulus, very useful for financial, non-financial and households in an economic cyclical and structural issue. Today, the pandemic is adding pressure and volatility to the economy and financial market. We need not only financial stimulus but better public health policy and success of lockdown. Which is working well in some market while not so successfully in developed markets.

The huge financial stimulus announced in the developed markets is unlikely to flow to emerging markets due to quarantine in their own respective economies. It seems that a good part of the benefits announced is factored in the market given more than 15 percent bounce from the recent low. The probability of the recovery to sustain will be high if strict lockdown system is announced in developed market and number of new virus reduces.

The author is Head of Research at Geojit Financial Services.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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