The equity indexes have moved up, covering a major part of the big fall, and this recovery is mainly facilitated by a sense of optimism about the impending economic recovery. The numbers that we have seen from the last couple of months including the index of industrial production, the purchasing managers index, and the employment numbers, reflect the extent of the distress at the ground level. It is likely that the numbers would continue to be negative over the next two to three months till it displays fully the dent to the economy caused by the pandemic and the lockdown.
Beyond the coming three months, is the time we may start seeing the impact of the measures initiated by the government and the RBI encompassing liquidity and employment measures. The liquidity measures from the RBI has helped the interbank market to remain stable and infuse confidence in the market participants. The cost of funds or the cost of financing, going by the rates for one-year CDs and CPs, and also the other short-term rates. That the cost of borrowing is coming down gradually is also an indication of improvement in the transmission of the beneficial effect of cut in the base rates by the RBI.
The MNREGA allocation was raised to ₹1.00 Lakh Cr, that is ₹40,000 Cr higher than the budget allocation. There has been an additional allocation of ₹50,000 Cr recently for infra-related employment programmes. These programmes are definitely beneficial for the rural economy and it will have a positive impact on rural employment and rural demand. The numbers post the three months’ time period is likely to capture the improvements brought about by the programmes and initiatives. Employment guarantee programmes have a cascading impact on various segments and sectors of the economy.
For the economy to come back on to the growth track may require at least a significant containment of the pandemic not only in India but also in other countries like the US where it is still raging and requires measures targeted at containment. That alone would help reverse the lockdown and lead to a pick-up in economic activity. But it is in the nature of the markets to run ahead of the economy, and one needs to be careful about excessive optimism being priced in. A rally that has its genesis in the liquidity that is there in the system may lose some steam as liquidity dwindles in the system over a period of time. But there is no denying the fact that lower interest rates and sufficient liquidity supports the markets.
Though we had seen a good amount of selling from FPIs earlier on in this year, the intensity has subsided, and we have seen some inflows coming in. Though the Fed is likely to put into the system an amount close to US$4 trillion, unlike as it was in the 2007-08 period, not much of liquidity from the advanced economies is likely to reach the emerging markets as there is an increased accent on the domestic liquidity being spent in domestic projects and firms.
There may be increased volatility in the markets, mainly from the friction between the US and China, on the trade, pandemic related issues, and the status of Hong Kong, friction in the South China Sea. The border face-off between India and China, the US presidential elections due early November this year are also factors that may be reckoned with in the medium term. Therefore, investment preferences should ideally focus on insulating portfolios against undue volatility. This is attained to a significant extent by concentrating more on quality stocks as we have indicated from time to time. These companies have strong balance sheets, leadership position in their respective sectors and have good governance standards. This would help avoid excessive volatility as stronger companies and their prices may be better resilient in times of deep corrections and also on occasions of exuberance.
The choice of funds and portfolios should take cognizance of the above factors, and investments should be undertaken in a phased manner over the next six to nine months, which would also leave some space for additional purchases, in case of corrective downward movements.
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