Nifty was up 7.53% for the month of June 2020 as rural income and economy showed resilience to virus related lockdown. Also, green shoots in certain sectors like cement and personal mobility were witnessed. Further, global risk on led to rally in emerging market equities. Oil & Gas and Finance sectors outperformed the index while Media and Telecom sectors underperformed in the month of June 2020.
We remain cautious in our short term view as unlock despite rise in cases leads to fear of second wave. Also, Nifty rallied ahead of expectations as economic impact can be prolonged. Fiscal stimulus to have limited demand side impact. Further, labour migration can have an impact on recovery of normal business operations. Additionally, huge supply of equity either through capital raise or Private Equity exits are observed.
We remain positive in our medium term view as global central banks and governments announce liquidity and fiscal measures to buffer the impact from slowdown.
Fitch revised India’s sovereign ratings outlook to ‘negative’, while maintaining the rating at BBB- and S&P reaffirmed India’s rating at BBB- (stable outlook). RBI announced special Open Market Operations (OMO) for ₹ 100 bn to purchase long bonds against the sale of short term treasury bills. Huge liquidity surplus kept the yield curve steep; while credit spreads continued to narrow across all segment.
The government did not release the CPI for May 2020 as well due to lockdown related data collection challenges, but data on its sub-components continue to suggest elevated food inflation. As on June 5, 2020, credit growth was seen at 6.2%, significantly lower than the deposit growth of 11.3%. India’s external trade remained significantly impacted in May as well due to the lockdown and the trade deficit came in at an 11 year low of $3.2 bn. The current account recorded a surplus of $0.6 bn in Q4 FY20 against a downwardly revised deficit of $2.6 bn in Q3 FY20. Manufacturing PMI for June showed significant improvement to 47.2 from 30.8 in the previous month. Indian Rupee remained in a trading range, closing the month at 75.51.
The huge supply from the center and state remains a cause of concern, however RBI’s Special OMO’s and hopes of significant absorption of the additional supply of government securities by the RBI is likely to keep sentiments positive. The huge inter-bank liquidity surplus is likely to sustain the demand for government securities from banks and also keep the yield curve steep. We expect RBI to remain proactive on rates as well as liquidity.