RBI Rate Cut, Government Stimulus Done: What Are the Markets Eyeing Now? Overall all the Indian market participants expect a calibrated approach from the government with more interventions as and when needed.

The world has witnessed an unprecedented crisis in the form of the COVID-19 pandemic, with a total of approximately 6.4 Million cases and nearly 400,000 deaths globally, the human cost of the pandemic has been gargantuan. In the absence of any vaccine or cure the only effective response to the crisis has been widespread lockdown of entire countries which has led to significant economic cost in addition to the loss of lives. As global economies have slowly started opening up the exact toll of the pandemic both in economic and health terms is yet to be quantified.

India has witnessed one of the most stringent forms of lockdown for over a month and a half, this extreme lockdown was perhaps necessary for a country of the size of India in terms of population and with an in-adequate health infrastructure. The economic cost of this lockdown has been very high, it is expected that it will take the Indian economy at-least two years to make up for the economic losses. The GDP forecasts for FY 20-21 paint a gloomy picture on an average the Indian economy is expected to contract by at-least 5 percent.

Being mindful of the economic costs of the lockdown, the government has unveiled fiscal stimulus in a phased manner. The economic response to the crisis have been more nuanced and has been provided in the form of direct cash transfers, lowering of interest rates and liquidity infusion through the Central bank, in addition there have been several announcements of fiscal stimulus for various sectors of the Indian economy.

The first relief package by the government was for the poor and the marginalized sections of society and a series of liquidity enhancing measure by the Reserve Bank of India (RBI) including cutting the rates down by 75 basis points (bps) – the most aggressive cut in the last 10 years. To ease the pain of the borrowers the RBI has further announced moratorium on all term loans for a period of six months. Post the first phase of liquidity measures, the Central Bank followed up with an emergency cut in the policy repo rate by another 40 basis points; in total the Central Bank (RBI) has infused liquidity worth Rs 8 Trillion into the Indian financial system.

The economic packaged announced by the government which totals to around INR 20 Trillion includes INR 8 Trillion liquidity infusion by the RBI and a fiscal stimulus totalling to approximately INR 12 Trillion of which INR 1.9 Trilllion was announced in the first phase. The most prominent aspect of the Indian economic package is the INR 3 Trillion collateral free loans for MSME sector a move that is expected to benefit 4.5 Million micro, small and medium enterprises which are the backbone of the Indian economy. This economic rescue rests largely on boosting company credit for micro, small and medium enterprises (MSMEs), but does not include new public spending, tax breaks or additional cash support that are required to revive demand.

What are the markets eyeing now?

The initial response to the fiscal package announced by the government has been lukewarm; the Indian equity markets in-fact came down sharply post the announcements as the government response was deemed in-adequate by the markets. Market participants believe that while the government has announced stimulus measures for various sectors, there is little action to push demand in the near future. While these measures show long-term promise, lack of schemes to boost immediate short term demand has disappointed investors. The industry in general viewed it as a general economic agenda that lacked substantive decisions to support consumption, promote manufacturing and even the broader reforms lacked the spark.

The markets have two sets of expectations from the government and the Central Bank, although the Central bank has played proactively role in reducing the policy rates by 115 basis points, much of this benefits have not been transmitted to the end users in terms of reduced interest rates. The liquidity measures totalling INR 8 Trillion have so far largely failed to reach the industry as the banks are reluctant to give out fresh loans due to NPA fears. The market expects RBI to positively nudge banks to disburse fresh loans and reduce interest rates so that Industry which includes large corporations as well as millions of micro, small and medium enterprises are able to meet their working capital needs through this additional disbursements. On unconventional policies, the markets expects more aggressive open market operations, further liquidity injections via targeted longer-term refinancing operations (TLTROs), including expanding its scope to target banks loans.

As regards to government policies, markets expect this to be an ongoing process – at least till the time the economy is up and running. They expect coordinated fiscal and monetary easing to continue and the next tranche of fiscal measures to address the immediate cash-flow challenges faced by SMEs and other hard-hit industries. Till now, the government has not announced any direct package to industry segments such as auto, aviation, leisure & tourism these are the ones which have been the worst affected sectors of the economy and are in dire need of immediate help. The markets are expecting industry specific targeted fiscal intervention as the Indian industries need an urgent infusion of nearly $200 billion which can pump into the market in a staggered manner to retrieve the business cycle without incurring further economic loss.

Overall all the Indian market participants expect a calibrated approach from the government with more interventions as and when needed. The current economic conditions appear to be priced in by the markets and going forward the market trajectory will be defined by how effectively the spread of COVID-19 is contained and how fast the industry and the Indian economy responds to the fiscal stimulus as the government continues on easing the lockdown restrictions.