1. Newsroom
  2. India Risk and Policy Response
Menu
Analisi 31.03.2020

India Risk and Policy Response

India Risk and Policy Response

India’s total infected cases (979) and fatality rate (25) remain low but it has been escalating. According to the World Health Organisation (WHO), this can become overwhelming, if uncontrolled.


The 21-day nationwide lockdown and economic sudden stop may cause a drop in gross domestic growth (GDP) growth to 1-2% year-on-year (yoy) in the second quarter of 2020 (2Q20). Given India’s large services/consumption-driven economy, about 60% of GDP will not be operational. If the lockdown period is prolonged, India’s GDP may dip into negative territory.

Fiscal Limitation

The key concern is that India’s healthcare infrastructure may not be able to handle a large- scale infection.

Fiscal ammunition is also limited given India’s prolonged deficit position. This year’s budget shortfall was initially targeted to widen to 3.8% of GDP to fund Modi’s bold corporate tax cuts implemented late last year. With the urgent need for emergency measures, the fiscal deficit is set to rise to at least 5-6% of GDP in the coming year.

Last week’s announcement of a modest $23bn rescue package accounts for a mere 0.8% of GDP. Immediate measures have been aimed at providing basic necessities (such as food supply and free cooking gas for three months) to poor and low income-earners.

Millions of workers still rely on daily wages of $2/day so an economic hard stop may immediately impact their daily life. Also, India’s large informal economy means that many workers are not covered by the unemployment insurance schemes.

We expect limited fiscal capacity to support small- and medium-sized enterprises and the hard-hit sectors, as can be seen in the measures swiftly implemented in China, US and Europe that have tried to keep business activities afloat pending better news on virus containment.

Swift Monetary Response

India’s weak fiscal position has increased pressure on the monetary side. The Reserve Bank of India’s (RBI’s) swift response last Friday reflected a reversal of its previous prudent stance and has put priority on growth over inflation which has been boosted by high food inflation (and likely to worsen in view of the lockdown’s disruption to the supply chain).

The central bank conducted unscheduled policy easing, cutting repo rate by 75 basis points (bps) to 4.4%, slashing CRR (cash reserves requirement) by 100bps to release INR1.37trn of liquidity, rolling out targeted LTRO (long-term repo operations) to buy IG corporate bonds, CP and NCDs totalling INR1 trillion, and expanding collateralised liquidity adjustment facility (worth another INR1.37trn).

Total liquidity provision amounted to about INR3.74trn ($50bn) should help to temporarily cushion liquidity tightness and backstop credit market. But they are set to expand should corporates’ cash flow positions be further disrupted by a prolonged lockdown.

In addition, RBI has followed the playbook used in other countries with the announcement of regulatory forbearance – deferment of interest payment on working capital loans especially for retail and small businesses.

INR depreciation may potentially constrain RBI’s rate easing.

So far, the collapse of oil prices has helped somewhat underpin the Indian currencies while the current account has improved on weak import demand.

The brighter spot is India’s sound foreign exchange (FX) reserves position ($470bn as of March 20) which can help RBI to provide FX interventions amid interest rate easing. However, FX reserves have peaked at $487bn in early March and are depleted by about $17bn over the past few weeks thanks to FX operations and capital outflows.

Investment Implications

The stock market index, MSCI India, is down 30% from Jan 17’s peak. 12-month forward price/earnings (P/E) ratio has dropped to 15.9x (from 20.5x in Jan) and price/book (PB) ratio is down to 2.1x (from 3.0x). The worst hit sectors are financials, realty, energy (oil), retail/tourism, while the relatively more resilient sectors are healthcare/pharmaceuticals.

Given the high economic uncertainty on virus containment, we advise sticking to quality names with near-term revenue disruptions but with solid long-term business perspectives.

On USD credits, India’s average corporate bond spread – investment grade (IG) and high-yield (HY) average – has surged to 822 bps, a 500bps jump over the past three weeks. India is now trading wide of China’s credit spreads for the first time since 2018 (China is 2-3 notches higher in average credit rating).

Our fixed income team recommends that, on the back of RBI’s liquidity easing, selective non-banking financial companies (NBFCs) with strong profitability, solid capitalisation and good track record should provide buffer to weather the pending downturn.

Read the full document with charts

CHAN-Anthony_150x150.jpg

Anthony Chan
Chief Asia Investment Strategist

Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Le news più lette

Analisi 01.10.2020

COVID-19: UBP vi terrà aggiornati

Dalla comparsa del coronavirus, UBP accompagna e sostiene i suoi clienti nel contesto inedito di questa crisi sanitaria mondiale. La Banca vi aggiorna regolarmente sull’adeguamento dei suoi piani alle regole precauzionali fissate dalle autorità e condivide con voi le più aggiornate analisi dei suoi esperti sulle conseguenze della pandemia per l’economia mondiale e i mercati finanziari.

Analisi 30.06.2020

Aggiornamento delle prospettive di investimento per il 2020

L’economia globale al bivio

Analisi 24.06.2020

Market turmoil brings new opportunities for pragmatic investors

March 2020 was difficult time for many investors, as COVID-19 spread across Europe and the US, leading to sharp sell-offs in fixed-income credit markets. While such market turbulence is not to be welcomed, its occurrence can create opportunities.


Altro da leggere

Analisi 26.11.2020

European Small Caps – Rising Stars

Smaller companies as an exciting source of growth opportunities

Analisi 24.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.

Analisi 21.11.2020

UBP Investment Outlook 2021

Il mondo nuovo