Nifty was down 23.25% for the month of March 2020 as Coronavirus has escalated into a pandemic leading to lockdown of markets globally. Further, India announced a 21 day lockdown on March 24th and the resultant loss of income to SME/Mid-corporates/daily workers to impact economy and financial sector. Consumer and pharma sectors outperformed the index while finance & media underperformed in the month of March 2020.
We remain cautious on our short term view after observing sharp jump in Coronavirus cases in US and Europe also anticipate the global economy to enter a recession as a result of lockdown. Further, spread of Coronavirus in India and extension of lockdown has materially impacted income and affected financially leveraged individuals and corporates.
On the flip side: We remain positive on our medium term view as sharp correction in equity markets makes valuations attractive also global central banks and governments announce liquidity and fiscal measures to buffer the impact from slowdown.
RBI announced a comprehensive set of policy measures to combat the impact of COVID-19. RBI cut the repo rate by 75 bps to 4.40% and the reverse repo rate by 90 bps to 4.00%. It also cut the CRR by 1.00% for a period of one year, releasing ₹ 1.7 trillion into the banking system. RBI maintained the monetary policy stance as ’Accommodative’ as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target. RBI also announced targeted long term repos of upto three years against investments in corporate bonds and commercial papers, for upto ₹ 1 trillion.
CPI inflation for February 2020 was seen at 6.58% (against 7.59% in January 2020), led by a drop in food inflation. As on March 13, 2020, credit growth was seen at 6.1%, significantly lower than the deposit growth of 9.1%. Trade deficit fell to a 12 month low of $9.9 billion in February 2020 (against monthly average of $13.3 billion for FY20). Manufacturing PMI for March was seen at 51.8. Heavy FPI selling in both equities and debt led to the Indian Rupee depreciating through the month to close at 75.34.
The COVID-19 pandemic is likely to keep the global risk-off momentum. Concerns over fiscal stimulus to counter the impact of the lockdown due to the COVID-19 pandemic will weight on bond yields. The large supply of central and state government securities is likely to put pressure on yields. Corporate bond spreads could compress due to demand from banks under the targeted LTRO. We expect RBI to remain accommodative and maintain surplus liquidity in the banking system.