The trigger came after reports of Carlyle Group taking a stake in Axis Bank worth $1 billion changed the sentiments surrounding banks. Banks also benefited from the expectation that the lifting of the lockdown should result in better credit off-take and thus help to reduce the gross NPAs as industry gets back into action. However, the real kicker came from the fact that banks were oversold. With an F&O expiry slated for 28 May, traders did not want to be caught on the short side of financials. Most private banks rallied on Wednesday.
The Petroleum minister, Dharmendra Pradhan, confirmed that the Indian economy had benefited to the tune of Rs.25,000 crore due to the lower crude prices. Brent Crude had fallen from a high of $68/bbl to a low of $16/bbl before the prices recovered almost 100% from the lows of April 20, 2020. India relies on imports for close to 80% of daily crude oil needs and hence any fall in oil prices directly leads to a favorable wealth transfer. Pradhan also pointed out that strategic reserves capacity of 5.33 million tons was almost full and India planned to expand its storage capacity by another 20% from current levels.
As economies struggle with deflation in the post-COVID 19 lockdown, Japan has gone ahead and announced a massive $1.1 trillion stimulus package. This includes significant direct spending to avoid Japan slipping into recession. This is the second part of the stimulus package and takes the total Japanese stimulus to a whopping $2.18 trillion or close to 40% of its GDP. This is almost as large as the US stimulus package of $2.35 trillion. Japan has an experience in the late 1980s when ultra conservative policies forced Japan into a lost decade of negative growth in GDP, pushing it back substantially.
As the Modi government completes 1 year of its second term, the COVID-19 may actually prove to be a blessing in disguise for the government. De-growth in 2021 is now an accepted axiom but the COVID-19 has allowed the Modi government to seamlessly change its narrative from “Achhe Din” to “Atma Nirbhar”. Also, the growth slump means that rating agencies and economists may not be overly worried about fiscal deficit as long as the measures are growth accretive. That will allow the government to announce massive stimulus even at the cost of fiscal prudence. Recovery may be the icing on the cake.
GDP estimates for FY21 are coming thick and fast and all of them are showing deeply negative de-growth in GDP. It may be too early to say how deep it will be. However, contraction appears to be on the cards as the first two quarters may end up being lost quarters. For starters Goldman Sachs has pegged the GDP contraction in FY21 at (-5%) and CRISIL also talks about a similar level of contraction in GDP. That is not great news. Both have held the view that the Rs.20 trillion stimulus packages may impact more in the medium term than in the short term. ICRA also concurs with the (-5%) contraction but believes that stimulus could have been more effective had to focus more on fiscal handouts. In the case of most research agencies, there has been a sharp downgrade of FY21 growth in the last 1 month.
In the midst of the furore over the stimulus and negative growth, the government is going ahead with its next round of coal block auctions on June 11. Nearly 50 commercial mines are expected to go under the hammer on that date. The government has already approved a methodology for commercial mining of coal on a revenue sharing basis. The idea is to make coal production attractive in India and to reduce the dependence on coal imports. The floor price will be 4% revenue share and miners can bid in multiples of 50 basis points till 10% and in multiples of 25 basis points above 10%. There are not sale restrictions.
