Impact of COVID 19 Pandemic on Markets (2nd April’2020)

With COVID-19 coming into the picture, the Indian economy is going through a major slowdown, which was evident
over the recent quarters even before the crisis struck. The outbreak has presented new roadblocks for the Indian
economy now, causing disruptive impact on the world of work. With such a crisis in the country, Government of
India and RBI has given breather to fight with the COVID 19 Pandemic through following Measures:

 Finance Minister Mrs. Nirmala Sitharaman has announced Rs 1.7 Lakh crore COVID relief package to poor and
those who need immediate help includes Direct fund transfer, Food grains, wage increase, free LPG & more.
Govt has also announced Compliance relief in Tax (GST, Direct/Indirect Tax), custom and corporate affairs by
extending their deadline to 30th June 2020 from 31st March 2020.

 India will be under complete lockdown for 21 days: Narendra Modi

 PM Narendra Modi declared a three-week nationwide lockdown starting midnight Tuesday 24th March 2020,
explaining that it was the only way of breaking the Covid-19 infection cycle. Quoting “Social distancing is the
only way to break the cycle of infection”.

 Mega merger of state-run banks comes into force from April 1: RBI
 Finance Minister Nirmala Sitharaman had clarified that the mega bank consolidation plan (amalgamation
schemes for 10 state owned banks into four) is very much on track and would take effect from April 1 despite
the onslaught of coronavirus pandemic throwing the country out of gear.

 Monetary Policy Review:

 RBI has released a total additional liquidity of INR 3.74 lakh cr for the banking system. Repo rate Cut by 75
basis points by bringing down to 4.4 per cent. Reverse repo rate too was lowered by 90 basis points. Cash
Reserve Ratio cut by 100 basis points to 3 per cent and daily CRR balance maintenance reduced from 90 per
cent to 80 percent effective from first day of the reporting fortnight beginning March 28, 2020. This is only
valid till 26 June 2020.
 All commercial banks, co-operative banks, all -India Financial Institutions and NBFCs are being permitted to
allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on
March 1, 2020. The accumulated interest on the Working Cap loan will be paid after the expiry of the
deferment period for all the working cap facilities which were outstanding as on 1 March 2020.

 Small saving schemes Interest rates

 The Department of Economic Affairs, Ministry of Finance, on Tuesday (March 31) announced an interest rate
cuts on small savings schemes for the first quarter (April to June) of Financial Year 2020-21. Interest rates have
been reduced on various savings schemes between 70 basis points and 140 basis points as the RBI had recently
reduced the repo rate.
 According to the government notification, interest rate on Small Savings like Public Provident Fund (PPF), Kisan
Vikas Patra, National Savings Certificate (NSC), Senior Citizens Scheme, Monthly Income Scheme have been
reduced.

 Government’s FY21 Borrowing Plan

 FM Nirmala Sitharaman had proposed gross borrowing of Rs 7.8 lakh crore for FY21 versus Rs 7.1 lakh crore
estimated for FY2020. The central government plans to borrow Rs 4.88 lakh crore in the first half of the
financial year 2020-21 (FY21) to mitigate the impact of Coronavirus pandemic on the economy. This amounts
to 62.56 % of the total proposed borrowing of Rs 7.8 lakh crore for FY21 as compared to 62.25% in the first
half of FY 2020.
 Borrowing plan has been drafted keeping in view the Anticipated demand because of the fully accessible route
being opened for non-residents investors. Government has also planned to roll out the borrowings through
Debt Exchange Traded Funds (ETFs).
 Impact of COVID-19 on Markets

 Impact on Gold
 Gold is both a liquid, counter-cyclical asset and a long-term store of value. In times of a crisis, investors globally
view gold as a safe haven just the way they treat US government bonds and currencies such as the US dollar,
Japanese yen and the swiss franc. A weak rupee often pushes up gold prices, as India meets bulk of its gold
demand from through imports. A rise in gold prices, however, hits local demand for physical gold. Besides, any
slowdown in global growth, muted inflation and fears of a recession cause central banks to pivot towards an
accommodative stance, which buoys gold prices.

 Market Indicators

Latest Key MACRO Indicators

CPI 6.58% (Feb 2020)
WPI 2.26% (FEB 2020)
GDP Growth Rate 4.70% (Oct -Dec 2019)
IIP 2% (Jan 2020)

Rs. Crore Revised Estimates FY20 Actuals upto Feb 2020

Revenue deficit 5,00,337 7,82,924
Fiscal deficit 7,66,846 1,036,485

Source: Ministry of Finance, Government of India

 Tax collections stood at 74.1% of the revised estimate during April-February’19, marginally higher than 73.7%
registered during the corresponding period a year ago. However, in absolute terms, the collection under gross
tax revenues at Rs 16.8 lakh crs during FY20 were 0.8% lower from a year ago.

 Highest ever sell-off by FII

 Around $15 billion foreign money was taken out of Indian markets in equity and debt in March, making it the
highest-ever sell off by foreign institutional investors in a month. Foreign Investors rushed to dump equities
typically considered risky assets as Covid-19 spread across geographies, while the 21-day nationwide lockdown
in India added to the concerns of economic disruption. The panic sell-off by FIIs led to dragging benchmark
indices down by more than 25% in March (fall of 9000 points in Sensex from 38,144 on 2nd Mar’20 to 29,468
on 31st Mar’20). FIIs sold Indian shares worth $7.54 billion, while another $7.36 billion was sold in debt
instruments in March. In 2020 so far, FIIs are net sellers of $14.69 billion, the highest annual outflow, both in
equity and debt. They had to forcefully unwind their positions amid the high volatility as the VIX index (the
Indian volatility index) touched record highs. Global ETF flows indicate investors are adding to positions in
markets where Covid-19 has seemingly peaked while reducing positions in other markets such as India where
there’s uncertainty.

 Liquidity Crunch driving Debt markets nut

 Days before RBI’s monetary easing announcement, the risk aversion, liquidity crunch along with technical
challenge of working from home was such that it was difficult to find a buyer even for high quality AAA Bonds,
raising the yields to unseen high levels. The MTM losses in short as well as long term debt securities across
credits was visible. The yields moved drastically up by 75-140bps across maturities. The Liquid funds have
given negative returns for consecutive 3 days from 23-26th March and the loss for one week was to the tune of
8-12% annualised.
 PRP’s View and Suggestion on Markets & Investments

 These are the challenging times for the world, and we are also not insulated from that. Coronavirus has pushed
the global economy into a one of the toughest times of historic proportions and halted the longest-lasting equity
bull market on record. As infections spread globally, economic activity collapses, markets recoil and
policymakers respond, the depth and duration of the economic and market downturn will depend on the
duration and severity of COVID 19 Pandemic.

 Coronavirus outbreak has assembled new roadblocks for the Indian economy now, causing disruption on both
demand and supply side elements which has the potential to derail India’s growth story. The sudden stop
experienced by businesses ranging from airlines and hotels to automobiles could mean heightened credit risk for
companies in these sectors even after the three-week lockdown imposed by authorities is lifted. Certain sectors
with elevated risk like Airline & Airport operators, tourism, hospitality, Automobiles will impact further Real
estate & construction, Steel, Energy, Bank’s & NBFC’s. Also Sectors dependent on global markets are expected to
take longer time to recover and may have to wait for their global markets to be completely recover from the
effects of pandemic. It will be difficult for the high leverage companies to sustain that long and we may see
major layoffs or shut down of some in these sectors. The overall recovery may take longer time than we can
think of. Multiplexes, commercial malls and office complexes have already started to defer and renegotiate the
rentals which will impact the commercial real estate’s ability to repay their loans.

 Pre-COVID India’s GDP growth estimate was at 5.2%. We feel that FY21 GDP Growth should be around 2.5%-3%.
Government is likely to undertake additional fiscal stimulus measures to combat the impact of the coronavirus
on the economy. The fiscal deficit so far this year has already been pressured by lower tax collections and
disinvestment proceeds. Govt will be left with additional Borrowing as the only option for financing its additional
expenditure for FY21. It is yet to be seen which source of borrowing Govt will choose between COVID bonds
issued to RBI, Global Markets or Domestic market.

 We can expect another repo rate cut in the June policy review and further OMO/primary auctions by the RBI.
Given the lower policy rate, RBI’s announcement regarding allowing NRI to invest in G-sec through ‘Fully
Accessible Route’ and other liquidity measures we can expect the 10yr G-sec bond yields to decline further with
intermittent volatility due to chances of having liquidity crunch which may lead to yields getting elevated. It is
expected that recent RBI measures like TLTRO will open up credit channels, improve bank’s income and possibly
reduce corporate bond spreads over G-secs. Banks have a lot of space to lend but they are risk averse because of
the past NPA history. Rates can remain low for a long time because of low inflation, slow economy and high
fiscal deficit going forward. The RBI will also use its considerable reserves to make sure INR does not depreciate
in a hurry especially with CAD being at lows because of low crude prices.

 The COVID pandemic can impact the Banking Sector which was already battling weak credit growth and was
trying to recover bad loans. It is expected that bad loans may surge, and it may increase the NPA’s of Public and
Private sector Banks and NBFC’s. As business activities will be impacted and Businesses won’t be able to achieve
revenue targets and will not generate enough cash it will lead to default on their loan obligations and add to the
deterioration in asset quality. MFI segment may also face further challenge in collection from small borrowers,
traders, self-help group as their income levels are severely impacted and may take some time to get back to their
original levels. Post 3 months moratorium we could see the substantial rise of NPAs in Consumer as well as
business loans.

 Amidst FIIs mass selling to the tune of $15 Billion in March’20 we have seen some stability amongst our Retail
and domestic institutional investors which has bought 7.7Bn$ in March’20. In fact, that’s the silver lining which
was missing in 2008 fall. Higher retail investments through MF and PF’s participation in Equities have given
stability at this time of panic when global investors have shunned our country and gone back to their safe
heaven. We may see panic in the retail investors in case the Corona situation goes out of hand. Complete
lockdown for 21 days by Govt is a step taken in right direction and is expected to keep community transmission
and overall numbers in control. Next 2 weeks numbers will indicate the further direction of the Indian markets.
 India is a part of global down cycle and it cannot decouple itself from it! Broad call is to stay on side-line as
uncertainty is at its peak and earnings uncertainty is worrying the market even at such cheap valuations! We
should stay away from taking bold calls into equities and let the dust settle however we should continue with
our SIPs. We don’t see any reason to be optimistic in the current market situation! It’s very unpredictable time
and a perfect storm is blowing across the globe with complete mayhem in equities, debt & currencies specially in
emerging markets. Once this storm subsides then only some balance can come.

 For treasuries, it is advisable to stay in Liquid funds and not take duration call on their short-term funds.

 Long term Debt investors of 3-5 years horizon should pick up Sovereign, AAA PSU & High credit Bond Funds as
the yields spread is expected to come down due to high system liquidity chasing good assets unless there are
major credit defaults happening in AAA borrowers.

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