The market is hoping for a strong and wide-ranging economic package from the government of Indian to help stabilize and manage the economic loss from Covid-19. The government may relax the fiscal target by 1 percent due to loss in tax revenue led by relaxation and additional benefit to individuals and corporates. Relief may be provided to forgo some revenue on account of GST on automobiles, durables and others. Methods may include direct cash transfer to daily workers, unorganized sector and farmers. Relaxation is expected for banks like classification of NPA and repayment by MSME and individuals. Provision is also expected for segments which are highly impacted like tourism, hotel, transportation and aviation. The idea is to maintain organized and unorganized jobs. Government will also work with other authorities and PSUs to provide relaxation in regulation, fees and rates to reduce cost of services and production. As per various estimates, the size of the fiscal aid could be about 1 percent of the GDP of $30bn, which should push government’s fiscal deficit higher by 1 percent for FY21 to 4.5 percent from 3.5 percent targeted. Of this, a good portion is likely to be used in providing relief to daily workers and farmers for a period of one quarter with assumption that the situation will be brought under control in three months. A package is needed in India because lockdown is going to change the pattern of consumption and investment. Many companies and segments in India are heavy with debt and low outlook. Other countries like US and Europe have provided huge fiscal and monetary relief. US has agreed for $2trn package, Britain $385bn and France $50bn rescue package.
Yesterday, FM gave extension on key deadlines related to income tax and allied finance matters with respect to regulatory and compliance matter. However, the need of the hour is a well-defined fiscal package. Promise to consider suspending insolvency proceeding against new defaulters for six months if the situation doesn’t improve by April 30 was encouraging. We expect the market to stay focused on fiscal action from the government rather than these regulatory action in the near term.
This week, high volatility was also due to higher stringent measures announced by SEBI to reduce the risk of the equity market by increasing margin funding. This was also to reduce the short position in the system which had built-up. SEBI has revised the marketwide position (MWPL) limits for certain F&O stocks and has increased margin for certain non-F&O stocks also in the cash market. Any breach in the open interest of MWPL will invite a penalty. This is expected to impact around 10-15 percent of stocks in the F&O segment. Institutions could also be impacted because of restrictions in short positions in index derivatives are not allowed to exceed Rs.500 crores, if they do not own underlying shares. Markets were also impacted because there was a lot of delivery selling due to the high uncertainty, high margin and cut in position.
Market seems to be in a relief in the last two days, after the crash on Monday, in sync with the global markets. This is in addition to the expectation of relief package from Indian government, the huge relief package given by the US Fed, and expectations of a fiscal package by the US government. Market is on a weekly high awaiting announcement on economic package.