As India manages life under a 21-day lockdown to stem the spread of the coronavirus pandemic, the government and the central bank have quickly moved to help the economy and the poorest. The Reserve Bank of India cut the repo rate by 75 basis points, following the finance ministry’s announcement of a relief package worth Rs 1.7 trillion. The government has promised "no one will go hungry" as it doubles down on improving healthcare in the country. The Reserve Bank’s has said it will ensure liquidity supply. Who gains from these announcements and who is going to lose out? Subhomoy Bhattacharjee explains.
Subhomoy Bhattacharjee, Business Standard
The government and the central bank moved quickly last week to help the economy as India manages life under a 21-day lockdown to stem the spread of the coronavirus pandemic. Their decisions bring opportunity for some businesses as others miss out.
The Reserve Bank of India (RBI) cut the repo rate by 75 basis points on Friday, following the finance ministry’s announcement of a relief package worth Rs 1.7 trillion for India’s poorest income groups and a Rs 50 lakh per head insurance cover for medical personnel fighting the pandemic. Nei-ther of them gave any guidance on the macro indicators for the economy battered by the lockdown. “Projections of growth and inflation would be heavily contingent on the intensity, spread and duration of Covid-19…,” said RBI Governor Shaktikanta Das when he announced the lending rate cut, referring to the disease caused by the virus.
Das is justified, but it means India is off to 2020-21 with no guidance about the gross domestic product (GDP), the fiscal deficit and projections for inflation.
The markets will get their first indication of what the fiscal deficit could look from the finance ministry’s borrowing calendar for the first half of the year, due to be released on Monday. For the first time, the RBI’s monetary policy committee met before the borrowing calendar was released.
So are the markets flying blind? The RBI and the finance ministry agree that liquidity supply is their priority now. That belief has international endorsement. On Thursday, the G20 bloc of nations pledged $5 trillion to support their economies. After a week of tumultuous developments, here is our assessment of the sectors that would gain and lose from these decisions. The gainers are FMCG, e-commerce, food processing, real estate, financial services, medical devices and insurance sectors. Banks, metals and infra, and auto will lose.
The clear winner from the promised high liquidity will be the FMCG sec-tor. The Nifty FMCG index at the NSE has done better than other sectoral indices in the past 30 days, dropping only 18.9 per cent, next to the pharma index at 15.66 per cent. A Business Standard report quotes market re-search firm Nielsen to say: “the panic buying of food items and hygiene products in the recent weeks has pushed up growth rates of food and non-food categories by 300 and 400 basis points respectively, compared to the numbers in January. However, companies argue the spike will not compensate for the fall in the overall growth rate during the quarter due to the virus”.
The FMCG index measures up something more: an expected softness in inflation numbers this summer despite high liquidity in the economy. Consumer price inflation is expected to ease as people defer purchases during the lockdown and certainly defer high-end purchases. Sales of white goods will be down, so air-conditioners and air coolers could see muted performance this summer. Manufacturers of packaged food items and all toiletries will gain, especially as states end restrictions on moving perishable commodities.
“This is not the end of investing in equities. We have seen such situations many times in the last couple of decades. As regards the COVID-19, one now needs to monitor fresh cases in the US, Europe and India. Developments in these geographies will decide the markets trajectory from here. Typically, when the markets fall so fast, there is some support once they slip around 25 to 30 per cent from the peak—and that’s where we are right now in terms of current market. The biggest correction phase in history was around 60 per cent fall from the top in 2008 during the GFC. The corresponding level now works out to be around 6,000 on the Nifty, which should act as an absolute support base,” said U R Bhat, managing director at Dalton Capital.
The finance ministry’s announcement of an insurance cover for medical personnel helps non-life insurance companies. Three-fourth of the lives covered under such companies' health policies come from government-sponsored schemes. An estimated 22 lakh health personnel will be covered now and the number may go up by next renewal.
The extension of EMI forbearance will give breathing space to people who have taken out automobile loans but face financial difficulties in sticking to the repayment schedule. It won’t encourage more people to buy cars till the economy recovers, but the automobile sector is beset with so many problems that even this limited relief has been welcomed. The Supreme Court provided another relief when on Friday it allowed the sale of 10 per cent of BS IV compliant vehicles for 10 days more beyond April 1, except in Del-hi-NCR. Companies have just under 2 lakh passenger and commercial vehicles as their total stock. The industry estimates a total cash inflow of Rs 700 crore if sales materialise.
In distress, food products priced competitively sell well. Lockdown rules have been eased to allow food delivery companies to continue business. The centre and states may soon have to issue food stamps to feed people who have lost their jobs say government sources. These factors could help the food processing industry.
Demonetisation of high value currency notes in November 2016 boosted India’s nascent digital payment companies. E-commerce companies are in a sweet spot this time. The centre and the states last week rushed to help e-commerce companies that had discontinued supplies after allegations of police stopping and harassing delivery personnel. The government’s attitude for e-commerce firms has changed quickly. India’s fair trade regulator, the Competition Commission of India, announced in February it was investigating e-companies after the brick-and-mortar retail sector complained of unfair business practices. Now, the department of industrial promotion and internal trade has a control room to ensure the logistics operations of e-commerce firms run unhindered. This is one sector that should do well be-cause of the lockdown.
India’s medical devices market is worth more than $5 billion annually and many cross its current CAGR of about 16 per cent, buoyed by Prime Minister Narendra Modi’s plan to spend Rs 15,000 crore to strengthen medical infrastructure. The health ministry is working out the modalities to position India as a supplier for SAARC nations for future medical needs, potentially bringing businesses to companies.
Social distancing is preventing the use of cash, but that’s an opportunity for digital payment and financial service companies. RBI Governor Das ended his monetary policy statement with an exhortation to use digital money, making clear which way the policy support would go.
The RBI asking banks and other lending institutions to allow a three-month moratorium on loans is a major relief for home loan borrowers and developers. Borrowers get some respite on their financial flows while developers can hope their existing loans from banks will not go sub-standard. Though only few projects are ongoing, yet deferral of interest on working capital is also clearly a positive for the sector.
It falls to all banks to ensure that governments, industry and households stay solvent, but that will put pressure on their balance sheets. A big reason for that is the RBI allowing borrowers to defer paying three instalments on all types of loans--from farms, housing, personal, to industry. Interest on working capital loans can be deferred too. The interest rate will increase if borrowers opt for deferrals but over an extended tenor.
Aggregate deposits of banks will go down as the government hands out close to Rs one trillion in cash support to the poor. State governments will withdraw from their balances as they offer cash and food support for the poor. They are short of cash too. As many as 18 states planned to raise money from the market on March 23, but Andhra Pradesh, Bihar, MP and Punjab failed to do so. The other states had to offer high yields to interest buyers. Das pointed out the risks from this drawdown. “I would urge members of public as well as the public authorities, who have deposits in private sector banks, not to resort to any panic withdrawal of their funds”.
Both the asset (loan payment) and liabilities (deposits) of banks and non-bank financial institutions (NBFC) get hit. Banks will not have to provide additional risk capital for deferred loans or classify them as sub-standard or non-performing assets, the RBI has said. That forbearance was needed to prevent a huge capital blockage for the banks, negating the entire liquidity package. The 100 bps cut in cash reserve ratio of net demand and time liabilities should also be read in this context.
The RBI has pushed back the timeline for banks to comply with one more of Basel III norms. According to the forbearance offered, banks can wait for another six months before they raise more Tier I capital to meet Capital Conservation Buffer norms under the Basel III glide path. The five weakest state owned banks shall still fall short, and RBI has not made clear if it will provide any additional forbearance for them.
For the medium term, RBI has taken this chance to allow banking and NBFCs operating from Gujarat International Finance Tec-City (GIFT) to participate in the offshore NDF market, with effect from June 1, 2020. Trade in Indian Rupee, Chinese Renminbi, South Korean Won, Brazilian Real and Russian Rouble account for two thirds of the volume of the global NDF market, and this should raise the fee income of both state-owned and the large private sector banks.
Infra and metals
The centre and the states are working to re-appropriate expenditure from unspent balances under various infrastructure projects to pay for health-related relief packages. Modi has asked states to treat healthcare as their top priority. With fiscal calculations askew because of the coronavirus, the centre and the states may not have funds to invest for approved infrastructure projects. This is bad news for steel, iron ore and even copper and to some degree aluminium.
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A few links for further reading
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