RBI's bazooka to tackle coronavirus impact gets muted response from markets

Bleak growth outlook, lack of steps to revive economy remain concerns

Even as experts termed the Reserve Bank of India’s (RBI’s) announcements as ‘bazooka’, ‘bold’, ‘unprecedented’, and ‘a complete package’, the equity markets’ response was, at best, muted.
 

The Sensex and Nifty gave up most gains seen in early trade on Friday. After scaling a high of 9,039 intra-day, the Nifty closed just 0.22 per cent higher at 8,660.25 against Thursday’s close of 8,641.45. The Sensex ended with a loss of 0.44 per cent. The Nifty Bank index, too, fell nearly 7 per cent from its intra-day high of 21,462.4 to close at 19,969 — a gain of 1.8 per cent over the previous day.
 

So, what calls for the Street’s dull reaction? For one, leading indices such as the Nifty and Nifty Bank had rallied 18.8 per cent and 26.9 per cent, since Monday’s close to Friday’s intra-day high. Therefore, some profit-booking was inevitable.
 

However, what’s important is that the market is still worried about the impact of COVID-19 on growth and corporate earnings, as well as the asset quality and financials of banks and NBFCs.
 

These worries also stem from the lack of clarity on future growth. In its outlook, the RBI said: “Apart from the continuing resilience of agriculture and allied activities, most other sectors of the economy will be adversely impacted by the pandemic, depending on the intensity, spread, and duration. If COVID-19 is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India.”

The RBI’s measures are in addition to the government’s package of Rs 1.7 trillion, announced on Thursday.

However, despite these, estimates paint a bleak near-term outlook. In a report India’s RBI thunders — Leaving No Stone Unturned, Pranjul Bhandari (chief India economist) and Aayushi Chaudhary (economist) of HSBC note: “We expect growth to halt in H1FY21, but rise sharply in H2 as inventory restocking demand kicks in.”
 

A slightly more optimistic estimate of a domestic brokerage suggests that while  Q1FY21  will be hit, a gradual recovery is expected from the September quarter.
 

For FY21, the GDP growth rate is expected to fall to 2.5-3.5 per cent, compared to around 5 per cent estimated for FY20. Though the RBI stated that it is constantly monitoring the situation and will take further action as needed, equity markets were not convinced.
 

Vikas Jain, senior research analyst at Reliance Securities, says: “The bleak outlook from the RBI brought the market down as investors booked profits after three days of gains. The uncertainty will keep markets nervous, who will now focus more on global cues and fresh news flow regarding COVID-19.”
 

Friday’s monetary announcements will cumulatively infuse liquidity of Rs 3.74 trillion and lower interest rates by 75 basis points.
 

Jimeet Modi, founder and CEO of Samco Securities, however says: “In such uncertain times, what entities want is to save their skin, instead of fresh funds. RBI’s relaxation of only three months instead of six for moratorium on interest on loans and working capital has disappointed many. No doubt, the RBI is playing every card in its pocket to prevent a crisis-like situation, by giving banks the ability to lend more. But as such, no direct helping hand has been given to ailing industries.”
 

An analyst at a domestic brokerage says the next six months will be difficult for most NBFCs and weaker banks, despite the RBI’s measures. This will impact the Nifty Bank, besides profit-booking. As a result, and given the high weighting (40 per cent) of financial stocks in the Nifty, it could keep the benchmark under check.
 

Vishal Kampani, MD of JM Financial Group, termed the measures as the first step in the right direction, and said they would go a long way in stabilising the markets, providing relief to companies and individuals on debt servicing, and ensuring liquidity.

“There needs to be more concrete measures for each sector, including NBFCs. The cautious outlook by the RBI itself warrants for bigger steps,” he said.