Indian equity markets rallied in early trade on Wednesday as the size of the economic stimulus package announced by Prime Minister Narendra Modi is significantly higher than the Street's expectations. The package of ₹20 trillion, which accounts for 10% of India’s GDP, includes the fiscal and monetary support extended by the finance ministry and Reserve Bank of India earlier.
So, what does the package mean for the markets?
Analysts said details of the package and actual execution of it are far from certain, but the broader intent is positive. They widely believe that the package may have a combination of direct monetary and fiscal stimulus and contingent liabilities. The package may also include direct support to impacted sectors such as micro, small and medium enterprises (MSMEs), income transfers, infrastructure investment, support to financial intermediaries in form of credit guarantee, provisions for bad loans and pay out of unpaid dues by government.
“The announcements support growth, which is positive for the equity markets, in our view. The near-term earnings outlook remains weak, as the spread of covid-19 will continue to impact economic activity. Cases in India continue to rise with a daily growth rate of 6% over past week," said Nomura.
Firm support from the government could help mitigate the risk of significant dislocations in industries and financial system. This supports valuation multiples as risk to medium-term growth abates, in our view. At the margin, the announcements are positive for domestic cyclicals and financials are expected to be the biggest beneficiary, with concerns over asset quality allayed and better medium-term growth prospects, said Nomura.
“The impact of monetary policy is diminishing with structural issues of demand and weaker financial intermediaries. The fiscal push and the government’s actions are critical in addressing these issues and supporting growth. We think broader economic growth is rightly the priority, which could likely be at the expense of higher fiscal deficit. This could involve deficit financing by the RBI, as domestic and foreign savings could be insufficient in funding the deficit," said Nomura.
Analysts at Axis Securities believe that the stimulus is unlikely to be significantly front loaded but it clearly indicates that the government’s is willing to take all the necessary measures to revive the economy. “We believe the stimulus package will be a big positive for the financial sector as it will significantly cushion the impact of non-performing assets (NPAs) with sovereign guarantees. Apart from the financial sector, beaten down sectors across the board will see a short term rally," said Axis Securities.
As the size of the package is quite significant and opening up of economy gathers traction the high beta plays will be back in focus. BFSI sector has seen significant challenges because of loan moratorium, dwindling collections, liquidity issues and capital needs have plagued the sector. Economic revival means typically BFSI will be the first mover as it is leveraged play on the economy.
“In all, details will be key, but it does appear fiscal activism has kicked in, which is welcome," said Edelweiss Securities.