Market cools off after stimulus package; what is weighing on investors mind?

The market has completely cooled off after a Rs 20-lakh-crore stimulus package was announced by Prime Minister Narendra Modi on May 12.

The Sensex jumped 2 percent the next day but erased all gains to settle almost 3 percent lower on May 14. On May 15, the 30-share pack fell over a percent in intraday trade.

At first glance, it appears the market has been disappointed by the two tranches of stimulus announcements done by Finance Minister Nirmala Sitharaman on May 13 and May 14, as on both days there was no major trigger for the market to take a leap.

The coronavirus pandemic is an unprecedented event that would require radical measures to be overcome.

So far, the steps announced by the government have focussed on MSMEs, PSU banks and welfare of the poor, which is the need of the hour.

However, experts are pointing to the disconnect between the market and the policy measures, so far.

"The majority of the measures from the government and the Reserve Bank of India (RBI) have primarily catered to increasing the liquidity. Market participants are expecting the RBI to announce measures to limit the asset-quality stress on banks’ balance sheets," Amit Shah, Head, India Equity Research, BNP Paribas, said in an interview to Moneycontrol.

"The government has used both fiscal and monetary measures to address the liquidity and asset-quality concerns. However, the government is not really spending a lot out of its pocket, as largely all of the MSME relief in terms of loan guarantees, which will not be due at least for the next 12 – 18 months in terms of the first tranche of payment," he added.

The stock market has not been happy with the announcements so far, said Shrikant Chouhan, Executive Vice President, Equity Technical Research at Kotak Securities. “Certainly, it will wait for the remaining announcements but it will jump only on bold measures," he said.

Tejas Khoday, Co-Founder & CEO at FYERS, said that unlike large economies that were “distributing” money like never before, the Indian government had adopted a timely and measured approach to enhance the effectiveness of policy announcements. However, implementation would be closely watched.

"These are some of the supply-side measures announced to revive the old economy– power, infrastructure, and manufacturing–sectors. It is equally important for the government to bring about demand-side policies," Khoday said.

The government should put cash in the hands of consumers, through additional direct benefit transfer for the lower strata of society and relief in taxes for the consumers at large, he said.

The new guidelines expected on May 18 could see relief to many more containment zones in the opening up of industries/manufacturing units, he said.

While the stimulus was a step in the right direction, the market was keeping the hazy road ahead in mind, experts said.

The outbreak has hit the growth prospects of most sectors and the earnings of India Inc are likely to remain subdued for the remaining FY21 too. Some experts have termed FY21 as a washout year.

So far, there is no clarity on the next phase of lockdown too. With no certainty on this front, investors are on tenterhooks.

With the government's Rs 20-lakh-crore stimulus package, the country's fiscal deficit is likely to more than double to 7.9 percent in the current financial year, news agency PTI said, citing an SBI research report as saying.

"After taking into account cash outflow of these measures as well as the previous and the recent excise duty hike and DA freeze (amounting to around 0.8 percent of GDP), we now revise our baseline fiscal deficit (excluding extra-budgetary resources) to 7.9 percent of the revised GDP in FY21 from 3.5 percent earlier, owing to lower revenues and higher expenditure against the backdrop of COVID-19 pandemic," PTI quoted the report as saying.

Date: May 19