2020 was an unprecedented year, and also an year of contradictions. The equity market saw a high at the very start of the year (mid-January), then went into a steep crash and a very short bear market in March before producing one of the most handsome rallies in recent years. Apart from equity market volatility, we also had the sell-off in domestic debt markets in April-May and the oil turbulence globally in April.
Despite the toughest of macro challenges faced through the year due to the pandemic, the financial markets weathered all the storms and came out victorious with reasonable-to-attractive returns by the year-end, across asset classes:
>- Indian equities rebounded handsomely from the March lows and ended with reasonable gains in CY20 (YTD, as of December): Nifty 50: 15 percent, Nifty Midcap 100: up 21 percent, Nifty Smallcap 50: 25 percent).>- Commodities started looking up, post the pandemic (Copper: up 26.4 percent YTD 2020 versus up 6.6 percent in CY19, in USD terms).
Looking back at the domestic economy, the April-June quarter was a complete washout (-23.9 percent GDP) owing to the severest of the lockdowns; but thereafter, several high-frequency indicators have rebounded to take the economy on the recovery path. Towards the middle of the crisis, the government announced a series of relief measures aimed at the parts of the economy that were severely impacted - rural and low income households, migrant workers, NBFCs, real estate and exports, to name a few.
The RBI, on the other hand, provided the much needed stability to the financial markets by unleashing a massive monetary stimulus through emergency rate cuts as well as maintaining abundant liquidity in the money markets and banking system. On the external front, the RBI did well to build up the forex reserves (to an all time high), which should serve the country well in battling any global systemic risks in future.
Going forward, there is incrementally less leg-room with the RBI to stimulate the economy further, given that interest rates are already at all-time lows, CPI inflation has been stubbornly above the RBI's comfort zone and asset prices have sky-rocketed in the last six months. RBI will likely be on an extended pause (rate cut cycle is over), while ensuring sufficient liquidity in the first half of the new calendar year. Hence, the onus on providing incremental boost to the economy lies with the government, through undertaking adequate demand-side measures, incentivising local production and kick-starting the investment cycle.
The challenge before the government would be to maintain a fine balance between increased spending (to invigorate the economic cycle) and keeping the fiscal situation under control. Another key challenge would be to ensure that the banking sector is well-capitalised, so as to prevent any systemic shocks emanating from the pandemic-driven slowdown. An aggressive and time-bound disinvestment programme is much needed in order to avoid any undue stress on the government's finances.
(Unmesh Kulkarni is the Managing Director Senior Advisor at Julius Baer India.)
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