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The announcement of ‘One Nation One Ration’ card may not bear any fruit in the short run, say experts.  (Photo: Mint)
The announcement of ‘One Nation One Ration’ card may not bear any fruit in the short run, say experts. (Photo: Mint)

Fed caution, unclear govt stimulus spook markets

  • The government’s stimulus package offers liquidity; nothing as yet to grow demand
  • US Federal Reserve chairman Jerome Powell warned of a recession worse than any since WW2

Worries about the US Federal Reserve’s warning on recession and the lack of clarity on the Indian government’s stimulus packages rattled investor sentiment on Thursday. The BSE Sensex ended at 31,122.89, down 885.72 points or 2.77%, while the 50-share Nifty was at 9,142.75, down 240.80 or 2.57%.

Markets in other parts of Asia, including Japan, China, Hong Kong, and Korea were down 1-2% each. World stock markets fell for a third day after the World Health Organization indicated that the covid-19 may never go away.

US Federal Reserve chairman Jerome Powell quashed talk of US interest rates going negative to kickstart investment. Powell warned of a recession worse than any since World War II, while his suggestion that the Fed’s firepower may not be sufficient to avert deep damage also clearly spooked markets.

Economic conditions in the US may have an impact on foreign fund flow to Indian share markets. In this year so far, foreign institutional investors (FIIs) are net sellers of Indian equities worth $4.16 billion while they have bought $2.46 billion in May. Domestic institutional investors have put in 74,119.66 crore in the markets since January.

In India, domestic investors were circumspect about implementation and the effectiveness of the stimulus packages announced by the government. Investors are still looking for measures to boost demand and not just inject liquidity. There is a widespread concern that the relief package may not have any impact without a demand boost.

“Sans a demand boost, the relief package may not be as fruitful. Note that India’s IIP growth pre-corona was the slowest since FY92. We await details on this," Edelweiss Securities said.

“With relief measures announced today, we now await more clarity on reflationary measures (which will entail fiscal costs) and are critical in the recovery process," it added.

“Given the limited fiscal room, the government relied heavily on below-the-line measures, those that do not immediately impact the fiscal deficit but expose the government to long term contingent liabilities," said ICICI Securities. “Government guarantees are a classic example of below-the-line measures and are being used heavily by governments all over the world in the face of covid-19," it said.

The second tranche of the announcement by finance minister Nirmala Sitharaman on Thursday focused on highly-stressed sections such as migrant labour, street vendors, small traders and marginal farmers.

“Today’s announcements were also focused on providing credit support and was mainly an extension of the existing programmes. The concept of ‘One Nation One Ration’ would be beneficial only in the long run as there won’t be any immediate effect. The scenario is similar for most of the measures announced today. Measures such as direct cash transfer are needed to support the low-income earners as they are the worst hit from the current situation," said Deepthi Mathew, economist at Geojit Financial Services.

Reuters contributed to the story.

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