Finance minister Nirmala Sitharaman’s announcements after market-hours on Friday gave traders and investors one thing they were looking for—hope. The combination of measures to improve short-term liquidity and demand has improved sentiment for equities.
In line with the upbeat mood, key benchmark indices, the Nifty and Sensex, ended Monday’s session up more than 2% each. Consequently, the fear gauge, NSE’s India volatility index (VIX) fell nearly 4% to 16.75.
But this bounce is likely to be short term. This is simply because the current slowdown in the Indian economy is not merely a cyclical one, but also structural, according to economists. Although the government’s move is said to be well-timed, coming ahead of the festive season, the slowdown won’t fade away in a hurry, said analysts. Also, note how auto stocks hardly shared any of the excitement on the Street, even though the finance minister announced a slew of measures for the sector.
Besides, Abhiram Eleswarapu, head of equity research at BNP Paribas Securities India Pvt. Ltd, said in a note to clients on 24 August: “A revival in earnings growth is needed for a more sustainable rally." This is because valuations remain high, even while earnings have lagged far behind. “The Nifty trades close to its historical average valuations (12-month forward price-to-earnings of 16.4 times), but we see downside risks to Bloomberg consensus estimates (Nifty estimated earnings per share growth: ~21% in FY20 and ~14% in FY21). The 1QFY20 earnings season was lacklustre and high frequency indicators suggest income uncertainty and, hence, weak spending intentions among consumers," he added.
As things stand, June quarter earnings have not been very impressive, with a number of downgrades.
Further, in the absence of adequate tax collections, a big-bang stimulus is not something that the market would like since that would require compromising on the fiscal position. This raises the downside risks to growth.
“While the government has reaffirmed its confidence of meeting its fiscal deficit target for FY20, we remain concerned due to the slip on revenues in a weak growth environment. On the margin, the measures should be positive for sentiment and growth, although we continue to retain our gross domestic product (GDP) growth projection of 6.5% for FY20," economists at Nomura Financial Advisory and Securities (India) Ltd said in report on 23 August.
Meanwhile, on the global front, until Friday, things were gloomy with China announcing another round of retaliatory tariffs on US goods. However, latest developments of renewed trade negotiations between the two nations have calmed the nerves to some extent. That said, going by past experience, it may be foolhardy to bank on a quick resolution to the trade war, till there is concrete development on a solution.