Unenthusiastic second stimulus announcement and weak GDP, impacting the market…

During the announcement of the first economy stimulus, which was taken positive by the market, FM had indicated two more meetings to announce further steps to revive the economy, in the coming weeks. The market was eagerly waiting to know about those upcoming steps and its implication. Well, the second announcement was about the merger of PSUBs. It had no real effect on the market, at least in the short-term, since these were well predicted measures which did not have any add-on to revive the slowing economy.  It did not change the sentiment of the market since they were qualitative factors to the recap plans of PSUBs as indicated during the first announcements and budget. As a result, market circumvented this announcement and moved negatively as per the momentum of the global market and economic data of India which had turned weak.

Having said that this measure is a well thought decisions for PSUBs, which will bring significant improvement in the country’s financial system since it is accompanied by a good amount of PSUB recap. It will take about one to two years for the respective banks to complete the merging process and get back on track to attain the benefits of synergy and integration. In the short-term market is interested to know about the final details of swap ratio, degree of dilution, change in business outlook and asset quality of the merged entities. Based on previous experiences, merger of SBI with its associates and BoB with Dena and Vijaya bank, had a limited effect on the stock prices and valuation in the short-term. And it was also noticed that the performance of weaker PSUB improved during the short-term as they were merging into a better entity. Regarding NPA issue of PSUBs, it is being worked-on and will improve as IBC (Insolvency & Bankruptcy Code) cases resolve, synergies of merger and economy improves in the coming quarters. Few highly graded PSUBs can be considered as an investment for the long-term but only for a very minor part of your portfolio.

The low GDP data that came out on Friday had a bad effect on the market. They were well below the market expectation and increased the risk of further downside in economy outlook. It also stated that economy will take more time to revamp in spite of the supportive measures announced by the government. We will need more supportive measures from the government like higher spending and stimulus to industries. Post the release, Rupee has depreciated by 60paise to Rs72.04, 4^th Sept closing to USD. Depreciating rupee expresses the weak outlook on Indian economy and since FII outflows are high it is having a significant impact on the market, being multiplied by the low liquidity in domestic equity market today.

We can anticipate for moderate improvement in the Indian economy by the third quarter of FY20 led by stability in the country’s financial liquidity as NBFCs and PSUB recovering from the NPA issue, support from government spending, good monsoon, demand from festival seasons and reduction in interest rate. For a strong recovery, there should be an improvement in exports which is currently stuck due to trade-war, Brexit, high bond yield and geo-political issues.

Posted: September 2019.