Mumbai: A day after the government unveiled the massive PSU bank recapitalisation plan, coupled with a big push for road construction, stock markets scaled a lifetime high on Wednesday as investors and analysts cheered the moves to lift economic growth.
Separately, Hindustan Unilever Ltd (HUL), India’s biggest packaged consumer goods maker, reported a recovery in rural demand in its second-quarter results and growth in air traffic accelerated in September to 16%.
Not only does the combination of good news reflect a sharp uptick in sentiment, it renews hope that a recovery in economic growth—which had decelerated to 5.7% in the first quarter, the slowest in three years—is imminent and likely to be broad-based.
On Tuesday, the government announced a Rs2.11 trillion recapitalisation package for public sector banks and Rs6.92 trillion of investment in the construction of roads.
The clear belief is that the combination of measures would revive investments, accelerate growth and generate jobs. Several institutions and brokerages have forecast a recovery in economic growth in the second half of this fiscal.
The Sensex on Wednesday surged 1.33% to close at a lifetime high of 33,042.50 points—the first time it has crossed 33,000.
“The government’s booster shot for both public sector banks and road companies will have multiplier impact," said Arun Thukral, managing director and chief executive at Axis Securities. “It will help revive credit growth and generate employment. Building road infrastructure will have spiraling impact on various ancillary industries as well."
In a note to clients, J.P. Morgan welcomed the bank recapitalisation plan and said, “This is a much-needed and bold announcement".
Reserve Bank of India (RBI) governor Urjit Patel described the plan as “a monumental step forward in safeguarding the country’s economic future".
The bank recapitalisation plan is expected to free up banks to boost credit. Loan growth has been stagnating at single-digit levels as public sector banks, which account for close to 70% of advances, shunned lending due to stretched capital positions. Brokerages expect the easing in credit conditions (as banks lend more due to fresh capital) to push up growth in the coming quarters.
“We would emphasize though that while the near-term risks are clearly skewed towards deterioration in the fiscal position, medium-term fiscal fundamentals could actually improve should private sector growth and private corporate investment spending rebound meaningfully following the easing of credit conditions," Goldman Sachs said in a 25 October note.
The market rally was driven by massive gains in state-owned bank stocks. The Nifty PSU index surged 29.63%, its biggest single-day gain, while Punjab National Bank shares gained 48.88%.
According to Bank of America Merrill Lynch, bank recapitalisation will lower lending rates, spur aggregate demand, put idle factories to work, exhaust surplus capacity and spark investment in two-three years. It expects loan growth to turn around on sufficient reserve money, another lending rate cut and demonetization’s base effects.
But some struck a note of caution. UBS Securities India Pvt. Ltd said, “The scheme’s impact on the fiscal deficit, liquidity and inflation is likely to be insignificant in the near term because of the way it’s designed. The new road programme doesn’t alter the growth outlook for road spending or the capex cycle in our view. In the near term, the Nifty may further overshoot our upside scenario of 10,000 for end-2017."