Falling in tandem with the stimulus


The bear rally was holding in anticipation of fiscal stimulus and re-opening of the economy by the Government of India. The announced package will help the country to manage nutrition, minimum income especially for the section below the pyramid and liquidity in the financial market. It will help the sustenance to segments like FMCG, MSME and NBFCs but not add growth to corporate earnings. The vulnerability in some sections of the economy are high like banks, transportation, hospitality and discretionary spending segments. As a result, the strength of the market is diminishing unless we find development in the world’s health crisis, tax benefit to equity and able to re-open the economy in a better fashion to minimise impact to corporates.

The total package is 10.5% of the forecasted GDP of FY21, estimated at Rs~20 trillion. The stimulus is divided into fiscal and other benefits, accounting for 2.6% and 7.9%, respectively. Fiscal benefits will lead to actual outflow by the government increasing the fiscal deficit. As per various reports, the actual fiscal impact from the total package is in a range of Rs1.5lac cr to Rs3.0lac cr, increasing fiscal target to 4.25% – 5% from earlier forecast of 3.5% for FY21. The fiscal spending is largely for priority subsidy, MGNREGA, MSME, Discom, reduction in TDS and TCS rates and healthcare. Whereas, monetary benefit is for MSME, Agri, NBFC, Banks, Housing Finance and Mutual Funds, to provide financial needs. 

The real winner is rural and urban underprivileged section, job in rural market, small re-finance, agriculture, MSMEs and NBFCs. Package will add sustainability to the poor section of the economy while corporates will have no direct benefit. Market was hoping for more fiscal and government spending to bring some growth in the domestic economy. No support to the sectors which are highly sensitive to consumer discretionary spending will have a huge impact from covid crisis. Though Banks are supported with liquidity, the outlook of sector will come down due to rise in NPA in-spite of moratorium as willingness to repay and credit will fall.

Regarding re-opening of the economy, the market is concerned today about the effectiveness of the new economy and given rise from second-wave, fall in global and domestic demand. Q4 results are much below the expectation, though it is not a big negative surprise for the market the commentary and outlook is bleak adding confusion in forecasting next 2-3 quarters of performance. The market has downgraded the forecast by 10 to 20% in top line and bottom-line which may be fairly factored in the market, but the accuracy to forecast is dim given the evolving status. In which Q1 is expected to be a washout in many segments.

As expected the market is trading in a range and today is at the lower level of the band. We have to note that the final direction of the market could be higher or lower depending on the world’s health developments. We should not presume much with a safety of last low and continue to be vigilant, not greedy or optimist. It will be better to accumulate in dips and maintain SIP. We should be reasonable, assuming that this period of accumulation could be for a period of more than a year too. The stable places to hide and add are Pharma, FMCG, Chemicals, IT and strong domestic oriented companies like finance and consumption while the outlook for the market being defensive.


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