Over the next few weeks, analysts expect the markets
to remain volatile and now track developments related to Covid-19 across the globe and how fast & successfully the governments are able to combat the pandemic. Back home, the 21 day lockdown imposed by the government and the possibility of an extension in the same will sway investor sentiment, they say.
As regards policies, most expect this to be an ongoing process – at least till the time the economy is up and running. They, however, caution that the government could run out of dry powder soon in its fight against Covid-19 given the fiscal situation and the fact that the Indian economy was already slowing down ahead of this pandemic.
“We expect coordinated fiscal and monetary easing to continue. We believe the next tranche of fiscal measures will address cash-flow challenges faced by SMEs and other hard-hit industries. Amid weak growth, we believe the government may temporarily suspend the FRBM legislation and the central government’s fiscal deficit is likely to rise to around 5 per cent of GDP in FY21 versus 3.5 per cent budgeted,” wrote Sonal Varma, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi.
They now expect a further 75 bps cut in repo rate in the second and the third quarter of 2020 (Q2-Q3/2020). On unconventional policies, they see more aggressive open market operations, further liquidity injections via targeted longer-term refinancing operations (TLTROs), including expanding its scope to target banks loans.
Those at BofA Securities, too, share a similar view and expect the RBI to remain aggressive as regards its policies. They expect the central bank to cut rates by 25bp each in June and October and peg the inflation rate at 2.5 per cent in the second half of financial year 2020-21 (H2FY21).
“We now see its 2020 rate cuts totaling 125bp up from 100bp. This, in turn, will take the RBI reverse repo rate to 3.5 per cent, close to 2009's 3.25 per cent low. We have cut down our FY21 growth forecast to 4 per cent,” wrote Indranil Sen Gupta, India economist at BofA Securities, in a co-authored report with Aastha Gudwani.