Economy and Markets August 2020 - SBI Funds PMS
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Economy and Markets
August 2020
World-wide situation of the COVID-19
18.14 million cases of COVID-19 as of 4th Aug 2020 Mortality rate at 3.8% as of 4th Aug vs. 4.4% in July 2020
• COVID cases across the globe continue to rise even as its nearly five months since WHO declared the disease as
pandemic.
• Total number of confirmed cases stands at 1,81,42,718 as of 4th August 2020. There are nearly 6 million active cases
and nearly 11.9 million have been recovered.
• The mortality rate continued to decline.
• Mortality rate stands at 3.8% as of 4th August 2020 lower than. 4.4% in July, 5.5% in June , 6.7% in May 2020 and
6.3% in April 2020.
(Source : WHO)
Source: WHO; NB: Data as of 4th August 2020US, Brazil, India and Russia account for 55% of COVID-19 patients
Country-wise spread of the disease
6.0 2.5
4.63
5.0 2.0
4.0
2.73
1.5
3.0
1.86
0.28
0.52
0.32
0.24
0.18
1.0
0.25
2.0
0.86
0.44
0.43
0.36
0.31
0.31
0.30
0.28
0.5
0.23
0.21
0.20
1.0
0.0 Mexico 0.0
United Kingdom
Italy
Germany
Peru
Iran
Bangladesh
Argentina
France
Chile
Colombia
Brazil
Russian Federation
South Africa
Turkey
United States
Spain
India
Saudi Arabia
Pakistan
No. of confirmed cases - Millions Confrimed Cases (% of population) -RHS
• United states account for highest number of COVID-19 cases (26%) followed by Brazil (15%), India (10%) and Russia
(4.7%).
• India’s COVID count is third highest in the world. However, when we look at COVID count as % of total population in the
respective country, India’s ranking is much lower at 88.
• At 4%, Qatar has the highest COVID count (as % of population)
• China (the originator of the COVID-19 disease), now ranks 28th in terms of total COVID-19 cases. In terms of cases (as %
of population), the ranking is much lower at 175.
Source: CEIC, World Bank; NB: Cases as of 4th August 2020, Population as of 2018Global monetary response to the crisis Global central banks reacted promptly by reducing rates in order to support growth Other monetary measures undertaken by central banks include: • Asset (securities) purchases • Lowering of capital reserve requirements • Supporting bank lending to medium and small enterprises • Long term refinancing operations, • Broadening the eligible collateral for open market operations, • Temporary forbearance in classification of past due loans, and • Provision of liquidity to mutual funds Source: Bloomberg, IMF SBIMF Research; NB: Indonesia had announced to use new policy benchmark i.e. 7-day reverse report rate as its benchmark policy rate since April 2016
Global fiscal response to the crisis
Massive fiscal stimulus being rolled out across key nations
25.0
21.1
19.7
20.0
15.0
14.0
11.8
15.0
10.8
10.6
8.9
10.0
6.5
6.5
6.5
6.1
5.9
5.0
4.4
4.1
3.4
5.0
1.2
0.0
European Union
Argentina
Indonesia
Canada
Turkey
Australia
India
United States
Saudi Arabia
Italy
Singapore
Japan
Brazil
France
China
Mexico
Russia
Germany
Fiscal stimulus as a % of GDP
Contours of fiscal stimulus rolled out by various countries include:
• Tax relief
• Business loans/grants
• Healthcare oriented expenditure
• Targeted industry support
• Loan guarantees
• Jobs retention schemes
• Increased and directed public investment
• Unemployment insurance
• Direct cash transfers
Source: IMF, NB: As of July 23, 2020, The above figures include all the fiscal stimulus measures announced by various
Central governments (cost of which is to be spread over mutli-year period) and includes all the relief given in the form
of cash transfers, tax reduction, credit guarantees etc.Global economic activity recovers from April-May lows
Feb-20 Mar-20 Apr-20 May-20 Jun-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
US Japan
PMI Manufacturing 50.1 49.1 41.5 43.1 52.6 PMI Manufacturing 47.8 44.8 41.9 38.4 40.1
PMI Services 57.3 52.5 41.8 45.4 57.1 PMI Services 46.8 33.8 21.5 26.5 45
Industrial Production -0.2 -4.8 -16.3 -15.4 -10.8 Industrial Production -5.7 -5.2 -15.0 -26.3 na
Exports 0.4 -10.8 -27.8 -32.1 na Exports -1 -11.7 -21.9 -28.3 -26.2
Imports -4.5 -11.3 -22.3 -24.6 na Imports -13.9 -5 -7.1 -26.1 -14.4
Retail Sales 4.5 -5.6 -19.9 -5.6 1.1 Retail Sales 1.6 -4.7 -13.9 -12.5 na
CPI 2.3 1.5 0.3 0.1 0.6 CPI 0.4 0.4 0.1 0.1 na
UK China
PMI Manufacturing 51.7 47.8 32.6 40.7 50.1 PMI Manufacturing 40.3 50.1 49.4 50.7 51.2
PMI Services 53.2 34.5 13.4 29.0 47.1 PMI Services 26.5 43 44.4 55 58.4
Industrial Production -2.2 -7.5 -23.8 -20.0 na Industrial Production na -1.1 3.9 4.4 4.8
Exports -2.9 -19.5 -27.8 -27.5 na Exports na -6.6 3.4 -3.2 0.5
Imports -13.2 -22.5 -38.2 -38.2 na Imports na -1.1 -14.2 -16.6 2.7
Retail Sales 0.3 -4.5 -18.5 -9.6 na Retail Sales na -15.8 -7.5 -2.8 -1.8
CPI 1.7 1.5 0.8 0.5 0.6 CPI 5.2 4.3 3.3 2.4 2.5
Germany Indonesia
PMI Manufacturing 48 45.4 34.5 36.6 45.2 PMI Manufacturing 51.9 45.3 27.5 28.6 39.1
PMI Services 52.5 31.7 16.2 32.6 47.3
Industrial Production -1.8 -11.3 -25.0 -19.3 na Industrial Production 2.0 na na na na
Exports 1.5 -11.5 -31.0 -25.5 na Exports 10.0 -2.6 -6.9 -29.1 2.3
Imports -1.6 -6.9 -21.7 -18.6 na Imports -7.4 -2.9 -18.6 -42.2 -6.4
Retail Sales 6.6 0.5 -6.0 3.2 na Retail Sales -0.8 -4.5 -16.9 -20.6 -14.4
CPI 1.7 1.4 0.9 0.6 0.9 CPI 3.0 3.0 2.7 2.2 2.0
• Retail sales improved in the US.
• Business Sentiments are in expansionary zone in the US, UK and China.
• Inflation rising across most other economies except Indonesia.
• Trade and production activity is weak except China.
• PMI services in Global economy better than manufacturing PMI.
Source : Bloomberg , SBIMF Research.India’s pandemic curve continues to rise Cumulative confirmed cases in India stand at 1.85 million Daily testing rate has risen to ~ 662K patients per day as on 4th August 2020 Increase in recovery rate to 66% as of 4th Aug vs. 59% in Death rate declined to 2.09% as of 4th Aug vs. 3% in June June end, 47% in May end and 24.9% in April end Source: WHO, CEIC; NB: Data as of 4th August 2020
COVID-19 trend in top 10 states
3.50
3.00 Tamil Nadu
Uttar Pradesh
No. of deaths - Cumulative (millions)
2.50
Maharashtra
Andhra Pradesh
2.00
1.50 West Bengal Karnataka
Delhi Size of the bubble is no. of
1.00 cumulative deaths
Gujarat
0.50 Bihar
Telengana
0.00
0 100000 200000 300000 400000 500000 600000
No. of COVID-19 cases - Cumulative
• Maharashtra, Tamil Nadu, Andhra Pradesh, Delhi and Karnataka accounts for nearly 63% of the COVID-19 cases.
• In July, Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka and Uttar Pradesh reported highest fresh additions.
Source: COVID.org; NB: Data as of 4th August 2020Govt. of India’s response to COVID-19
Timeline of social distancing measures by the government
No. of confirmed cases
• Mobility and economic activity restrictions have been further relaxed with Unlock 3.0 – from 1st August. In unlock 3.0 ,re-
opening of gymnasiums and yoga centres and movement of individuals at night has been allowed by the government.
• Containment zones to remain in lockdown till 31st August 2020.
Source:SBIMF ResearchIndia moves to third phase of lifting activity restrictions
Limited restrictions on economic activity outside the containment zone
Activities prohibited (uptil 31st August)
Outside containment zones In Containment zones
International air travel except as permitted by MHA,
metro rail services
Cinema halls, swimming pools, entertainment parks,
theatres, bars, auditoriums, assembly halls
All the activities are prohibited except essential
services
Social/political/sports/entertainment/academic/cultural/
religious functions
Schools and colleges*
Large gatherings^
• All the activities are allowed (except the ones mentioned in the above table) outside the containment zones.
• In unlock 3.0 ,re-opening of gymnasiums and yoga centres and movement of individuals at night has been allowed by
the government.
• Containment zones will continue to see earlier imposed lockdown guidelines at least until 31st August 2020.
• The perimeters of a containment zone are decided based on number of positive cases in area, contact tracing history
and population density.
• States/UTs can add to the activity prohibition list based on their assessment of the situation
Source: MHA, SBIMF Research; NB : *training institutions of the Central and State governments has already started
operating from 15th July 2020 , ^Marriage related gatherings : Only 50 guests, Funeral related gatherings : Only 20 peopleA host of state government imposed localised lockdowns in July
Localised lockdown extension
State District Lockdown Dates
Karnataka Bengaluru 14-22 July
Thane 12-19 July
Maharashtra
Pune, Naded 13-23 July
Uttar Pradesh Entire State 10-13 July and 17-20 July
Tamil Nadu Madurai Till 14 July
Kerela Thiruvanthampuram 6-20 July
Bihar Entire State 16-31 July
Dehradun 17-19 July
Uttarakhand
Udham Singh Nagar 11-13 July
Gujam,Cuttack, Jajpur, Khordha 17-31 July
Gajapati, Jagatsinghpur, Balasore,
Odisha
Mayurbhanj, Keonjhar and Lockdown on weekends
Jharsuguda
Telangana Hyderabad Till 31st July
Rajouri 11 July onwards
Jammu and Kashmir
Srinagar 13 July onwards
Nagaland Entire State Extended further from 17-31 July
Goa Entire State 17-19 July
Jharkhand Entire State till 31 July
Manipur Entire State till 15 July
Itanagar, Naharlagun,Nirjuli,
Arunahcal Pradesh Banderdewa, Doimukh and Papum 6-20 July
Pare
Meghalaya Shillong 13-15 July (till 6 am)
Kerela Poonthura and Pulluvila 18 July onwards
Assam Guwahati 28 June- 19 July
Source:SBI MF ResearchFiscal measures taken since March till June 2020
Round 1 (March) Round 2 : Tranche 1 Round 2 : Tranche 2 Round 2 : Tranche 3 Round 2 : Tranche 4 Round 2 : Tranche 5
Free provision of food grains Emergency credit guarantee Financing facility by NABRAD
Special credit facility for street Make in India for defence Increased allocation towards
and cooking gas, EPF fund and subordinate debt for funding agriculture
workers sector MGNREGA – Rs. 400 billion
support assistance to MSMEs infrastructure projects
Funds of funds equity
Scheme for formalization of Health sector reforms that
Tax concessions on infusion for MSMEs ; E- Reforms for Airport sector ,
micro food enterprises, PM mandated all districts to have
advanced tax, TDS,TCS, STT market linkage for MSMEs ; mining, power and space
Free food for migrant workers Matsya Sampada Yojana infectious diseases hospital
etc , Construction workers' Receivables of MSMEs to be sector (mostly to do with
scheme launched for blocks and integrated public
assistance cleared by Government in privatization in these sectors)
fisheries health labs .
next 45 days
Ease of doing business :
Efficient air space
MGNREGA wage Minimum threshold to initiate
Extended EPF support and Housing credit subsidy for Creation of Animal husbandry management to be allowed
hike,Emergency health insolvency proceedings
reduction in EPF rates middle income development infrastructure by easing restriction on
response package raised from 0.1 million to Rs.
utilization of Indian airspace
10 million.
Promotion of Herbal
National portability of ration
Ex-gratia transfer to Special liquidity window for cultivation ,Bee keeping
cards and Credit facility to Investments towards Social Decriminalisation of
vulnerable population and NBFCs and Partial credit initiatives and Extension of
farmers through Kisan Credit sector infrastructure Companies Act defaults
JAM registered women guarantee scheme for NBFCs operation green to all fruits
Card
and vegetables
Usage of funds in district
Liquidity injection to Streamlining the public sector
mineral fund for medical Interest subvention for Amendments to Essential
DISCOMs via quasi- : by allowing only 4 PSUs per
testing/screening/prevention MUDRA-shishu loans Commodities Act
sovereign entities sector.
of Covid-19.
Liquidity reduction via Special liquidity facility Increased borrowing limit for
Agriculture marketing reforms
reduction in TDS and TCS through NABARD to rural state governments from 3%
PM Kisan frontload payments ; Agricultural produce price
and Extension of due dates cooperative banks and of GDP to 5% of GDP, linked
and quality assurance
for tax returns Regional RBs. to reform actions
• Government recently launched rural works scheme “Pradhan Mantri Gareeb Kalyan Yojana” to provide employment to returning migrants in June.
This scheme is created by pulling together 25 existing programmes under 12 ministries. Hence, does not entail any fresh expenditure. The scheme
will provide employment for 125 days and will focus on 116 district in 6 states.
• In addition, Government announced a 5-month extension of free food grain scheme (uptil Nov 2020). This will cost Rs. 900 billion to the government
(0.4% of GDP).
Source: Ministry of Finance, SBI MF ResearchFiscal response to COVID-19 in numbers
Measures during Mar-May
Measures Amount (Rs. Billion) % GDP
Cost borne by government in FY21 2,731 1.3
Cost borne by govt in next 3-4 years 1,272 0.6
Credit Guarantee (hence contingent liability) 3,394 1.7
Cost incurred by Quasi sovereign agencies on behalf of Govt 2,980 1.5
RBI support 8,016 3.9
Revenue Foregone 578 0.3
Bank credit 2,000 0.98
Total (March-May) 20,970 10
Measures during June-6th August
Cost borne by government in FY21 (additional free food grain
900 0.4
supply)
RBI support^ 3,021 1.5
Total (March-6th August) 24,891 12.2
• While the package announced so far is for Rs. 24.89 trillion, fiscal impact in FY21 is Rs. 4.2 trillion (2.1% of GDP,
inclusive of revenue forgone). Fiscal outlay over the next 3-4 years is estimated to be Rs. 1.27 trillion.
• Another Rs.3.39 trillion worth of support comes in the form of credit guarantees which are essentially contingent liabilities
and may hit the government fiscal after 4 years.
• Rs. 11 trillion of liquidity support by RBI has been laid out by the RBI so far.
• Remaining support comes in the form of expenditure incurred by the quasi-government agencies (Rs. 2.9 trillion) and
bank credit (Rs. 2 trillion). Thus , the fiscal burden from COVID has been spread over multi- year period.
Source: Ministry of Finance, SBIMF Research; NB : ^RBI support of Rs 3,021 billion includes OMO purchases to the
tune of Rs. 910 billion conducted in AprilRBI has lowered key rates and eased liquidity conditions
Repo and reverse repo rate cut by 115 bps and 155
bps respectively since March 2020
RBI has laid out primary liquidity support worth 5.4% of GDP*
Amount announced Amount announced
Month Measures (Rs. billion) (% GDP)
LTRO 1,250 0.61
USD-dollar swap 203 0.10
Net OMO purchases 430 0.21
From SLF available to primary dealers (available upto
Feb-Mar April 17, 2020) 100
0.05
2020 Others 817 0.40
TLTRO 1,000 0.49
CRR cut (applicable upto March 2021) 1,370 0.67
Increased accommodation under MSF (uptil 30th
1,370
June 2020) 0.67
TLTRO 2.0 (for NBFCs) 500 0.25
CRR reduced from 4% to 3% in Apr 2020 for one year,
Refinancing facility to NABARD, SIDBI, NHB 500 0.25
applicable till Mar 2021 Apr-20 Net OMO purchases 910 0.45
Special liquidity facility for Mutual Funds (uptil May
11, 2020) 500 0.25
May-20 Net OMO purchases 295 0.15
Extension of increased accommodation under
1,370
Jun-20 MSF (till Sep 30, 2020) 0.67
Net OMO purchases 22 0.01
Special liquidity facility NBFCs (for papers issued
Jul-20 before 30th Sep 2020) 300 0.15
Additional Special facility to NHB (available for a
period of one year) 50 0.02
Additional Special facility to NABARD (available for
Aug-20 a period of one year) 50 0.02
Total 11,037 5.43
Source : RBI, SBIMF Research; NB : *Data as of August 5, 2020 , GDP as of FY20 : Rs. 203 trillion,Key regulatory actions by the RBI in response to COVID-19
Standing liquidity facility to financial entities (SIDBI, NABARD, NHB)
Special liquidity scheme for NBFCs/HFCs and Mutual funds
Enhanced borrowing limits under MSF
Moratorium on loans which eventually gets replaced by one time recasting of
loans in select accounts
Restructuring of MSME debt
More activities (like start-up, renewables) gets included in priority sector lending
LTV on gold loans by banks raised from 75% to 90% (applicable till FY21) to help
households under distress
Permitting Banks to Deal in Offshore Non-Deliverable Rupee Derivative Markets
Regulatory relaxations for banks
Source : RBI , SBIMF Research.Sequential improvement in economic activity in June
% growth Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 5 yr avg
Consumption
Domestic air traffic 1.5 9.8 -32.9 -99.9 -97.4 -83.5 11.3
Domestic sale of two-wheelers -16.1 -19.8 -39.8 na -83.8 -38.6 2.5
Domestic sale of passenger Cars -8.1 -8.8 -53.3 na -89.9 -58.0 -1.0
IIP: Consumer durables production -3.7 -6.2 -36.5 -96.0 -68.5 na -0.6
IIP: Consumer non-durables production -0.6 -0.3 -20.2 -48.7 -11.7 na 4.4
International air traffic 0.2 -3.4 -56.2 -99.1 -98.0 -93.0 2.2
Rural
Domestic Tractor sales 3.3 19.6 -50.2 -80.1 0.5 20.2 5.2
Fertilizers production -0.1 2.9 -11.9 -4.5 7.5 4.2 2.1
Rural wage growth 3.8 4.2 4.0 na na na 4.6
Industrial
Bank industrial credit 2.5 0.7 0.7 1.7 1.7 2.2 2.0
Cargo traffic - ports 2.2 4.6 -5.3 -21.1 -23.3 na 3.2
Cargo traffic - rails 2.8 6.5 -13.9 -35.3 -21.3 -7.7 1.1
Consumption of Industrial Fuel 0.5 8.6 -14.8 -49.7 -23.3 -7.8 3.2
IIP: Manufacturing production 1.8 3.8 -22.4 -67.1 -39.3 na 2.9
IIP: Mining production 4.4 9.6 -1.4 -27.0 -21.0 na 3.2
Power generation 3.2 11.5 -8.2 -23.0 -14.8 -11.0 3.9
Total frieght activity 2.6 5.8 -10.9 -30.1 -22.1 na 1.8
Export-Imports
Merchandise exports -2.2 3.2 -34.7 -60.5 -36.2 -12.5 -0.3
Services exports 7.0 6.9 1.2 -8.9 -10.2 na 6.9
Investments/Construction
Bitumen consumption -9.7 3.8 -35.9 -67.5 -17.4 27.6 5.6
Cement production 5.1 7.8 -25.1 -85.3 -21.4 -6.9 3.2
Domestic sale of commercial vehicles -14.0 -32.9 -88.1 na na na 6.2
IIP: Capital goods production -4.4 -9.6 -38.3 -92.6 -64.3 na 0.3
Imports of capital goods 8.1 35.1 -36.8 -54.9 na na 6.8
Steel consumption 4.1 -6.5 -29.2 -85.5 -48.3 -36.1 3.0
Financial sector
AUM of MFs 19.2 17.6 -6.4 -3.4 -5.4 5.1 19.1
Real bank credit growth 3.0 4.8 6.1 6.7 9.5 8.3 8.1
Bank personal loans 16.9 17.0 15.0 12.1 10.6 10.5 16.8
Currency in circulation 11.9 11.5 14.5 15.7 18.4 20.6 12.6
Bank deposit growth 8.5 9.9 9.1 9.0 10.8 10.9 9.3
Bank credit growth 6.6 7.0 6.5 5.1 6.3 6.5 9.4
Source: CMIE economic outlook, SBIMF Research; NB: 1. Green denotes improvement in the growth and Pink indicates a
moderation. 2. We use some subjectivity in categorizing the data by looking at both the trends in the recent months as well as
trends relative to long term average. 3. We have shifted to steel consumption data from steel production data since Jan 2019.Activity momentum plateaued in July after a rebound in June
Economic activity improved in June and stood 24% …Thereafter, it continued to moderate for three
below the pre-COVID levels vs. 45% in May and 62% consecutive weeks in July
in April…
Activity compared to pre-COVID levels (i.e if we
assume Feb 2020=100) Jun-20
Google mobility trend - retail and recreation 40
Vehicle registerations 51
PMI Services 59
Exports of goods (in US $ million) 69
Google mobility trend - workplaces 70
Final Resumption Index 76
E-way GST bill 76
Toll collections 82
GST collections 86
PMI manufacturing 87
Rail freight 88
Consumption of industrial fuel 89
Electricity consumption 90
Employment rate 91
Google mobility trend - grocery and pharmacy 97
• The activity resumption index for June suggests that that activity remained 24% below the pre-COVID levels vs. 45% in May
and 62% in April
• Our weekly activity resumption Index shows moderation in the economic activity for the third consecutive week in July 2020.
• The index fell to 72 for the week ending 25th July vs. 75 as of 18th July 2020 and 76 as of 11th July. The moderation reflects
broad based deterioration across indicators. Worsening of mobility trends for essential services , decline in weekly vehicle
registerations, drop in employment rate and higher contraction in electricity demand led to the fall in activity resumption index
for the week ending 25th July 2020.
• Renewed localized lockdowns in select states and large cities amid rising COVID-19 cases could be a reason for reduced
mobility. States including Karnataka, Uttar Pradesh, Kerala, Uttarakhand, Telangana, Nagaland, Jharkhand, Arunachal
Pradesh, Sikkim have imposed lockdowns.
Source: POSOCO, Vahan, GSTN Network, FASTag, Google Mobility report, CMIE Economic Outlook, SBIMF ResearchPMI surveys point towards weakness in economic activity
Manufacturing and Services PMI remained weak
• July’s manufacturing PMI fell to 46.0 in July from 47.2 in
June Importantly, new-orders revealed a sharp dichotomy
between domestic and global demand. While new export
orders bounced back impressively (suggesting improving
global demand) aggregate new orders declined in July,
suggesting weak domestic demand.
• On the other hand, July’s PMI services inched up to 34.2 in
July from 33.7 in June. It , however, remained week when
compared to pre-COVID levels.
Signs of fatigue in labour recovery
Although unemployment rate has recovered to its pre-
lockdown levels, the labour participation rate has not
recovered as yet. The unemployment rate stood at 7.4% in
July vs. 11% in June and 23% in May. This was almost close
to 7.8% in Feb 2020. However, labour participation rate at
40.66% in July is lower than the pre-COVID levels of 43%.
Source : CMIE, Economic outlook, SBIMF ResearchAgriculture continued to provide a silver lining
Cumulative rainfall at 2% deficit, IMD predicts normalcy Healthy reservoir levels : 1.6 times higher than last year
to return in Aug-Sep
Kharif crop sowing remains robust, 83% of the sowing Gap between nominal and real Agriculture GDP improved
has been completed till July end suggesting improvement in farm income
Sowing Progress as %
million tonnes % Change of Normal Sown area
Kharif Sowing Actual area Actual area
till 31st July sown (2019) sown (2020) 2019 2020 2019 2020
Total Kharif 67.5 88.2 -7 31 63 83
Cereals 30.8 41.5 -6 35 53 71
Rice 18.8 26.7 -5 42 47 67
Jowar 1.1 1.2 -23 14 50 60
Pulses 7.9 11.2 -22 41 66 87
Oilseeds 13.4 17.5 -5 31 73 98
Fibres 10.3 12.8 3 24 80 100
Cotton 9.6 12.1 4 26 80 100
Sugarcane 5.1 5.2 -8 1 106 107
Source : CMIE, Economic outlook, SBIMF Research ; NB : Water levels in reservoirs as on 31st July 2020COVID-19 disruptions has led to significant economic shock
Indian economic growth could further moderate in • We expect India’s growth to moderate significantly in FY21 from 4.2%
FY21 growth in FY20.
12 • Lockdown spread over March-May resulted in output loss. Broad
assessments suggests that economic activity by July end, particularly in
urban areas, was still 20-30% below the pre-COVID levels. Given
8.8
8.5
8.3
8.1
9
8.0
7.9
7.9
7.9
7.9
elevated infection rates, the public fear may result in below-normal
7.7
7.4
7.0
activity for a few more months. Even if demand for durable goods picks
6.4
6.1
5.5
up, consumption of services may stay weak.
5.2
6
4.8
4.2
3.8
3.8
3.1
• As corporate profits are squeezed (weakening operating leverage) they
3
are likely to delay capex plans, lower salaries and cut jobs, which in turn
will weaken consumption demand. In this environment, banking sector
0 NPAs are likely to rise.
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
• Other factors that will weigh on growth are a) increased risks of a global
Real GDP growth (in %) recession, b) grim domestic employment situation for nearly a decade, c)
high leverage in government and household balance-sheet, d) weakness
in financial sector health and e) erosion of wealth due equity price fall.
The projections of growth and inflation for FY21 • The agriculture sector and government spending will be crucial for
would be heavily contingent on the intensity , supporting economic activity in FY21.
spread and duration of COVID-19
• Both government and RBI policy support in terms of fiscal spending, rate
cuts and regulatory actions will have to continue. They will need to on
Several economists are now expecting FY21 standby to step in with regulatory and liquidity measures in case of any
growth to be between -2% to -12%. early signs of financial sector dislocations.
Source: CMIE Economic outlook , SBIMF Research.EQUITY MARKET
Global equity market snapshot : July 2020 Performance in July 2020 (local currency returns) Performance Year-to-Date (local currency returns) Performance in July 2020 (US$ returns) Performance Year-to-Date (US$ returns) Source: Bloomberg, SBIMF Research
Indian equity market snapshot : July 2020 Performance in July 2020 (local currency returns) Performance Year-to-Date (local currency returns) • Nifty and Sensex rose by 7% and 8% respectively in July. Among sectors, IT sector delivered the highest increase (23%) followed by healthcare (12%) and metals (9%). • Large cap delivered the highest returns (7%) followed by Mid cap (5%) and small cap (5%). • On YTD basis, Nifty and Sensex were down by 9% each. On sectoral basis, all sectors (barring healthcare, IT and telecom) delivered negative YTD returns. • Partial easing of lockdown restrictions, hopes over early development of vaccine, marginal increase in foreign investment inflows and de-escalation of border tension with China supported the Indian equity markets in July. However, surge in COVID-19 cases domestically limited the upside. Source: Bloomberg, SBIMF Research
Q1 FY21: NIFTY mid-quarter results review
NIFTY sales decline for fourth straight quarter NIFTY EBITDA contracted 17% y-o-y
• 32 out of 50 NIFTY companies have reported results thus far.
NIFTY PAT was down -18%
Earnings declined 18% y-o-y (and -10% ex Tata Motors, earnings
declined 10% y-o-y.
• Cost control was one of the key focus areas this quarter. It
resulted in margin expansion of 330bps points for the Nifty. Cost
control was driven by lower raw material costs and lower ad
spends.
• Companies pointed to sequential demand recovery between April
and June, however, risk of intermittent lockdowns persist. Labor
issues are being progressively resolved.
• Most banks reported a decline in GNPA. Loans under moratorium
declined from 25-50% in April 2020 to 10-20% in June.
Source: Capitaline, SBIMF Research; Data as of 5th August 2020FY21 earnings estimates have seen sharp downward revision
NIFTY EPS de-grew by -1.3% in FY20
600 40
• NIFTY EPS de-grew by -1.3% in FY20
479 471 465 35
500
402 402 423 30 • Downgrades continue at a very sharp pace. Market
380 25
400 351 350
321 20 expectations for Nifty earnings have been cut by 26.5% y-o-
300 252 239 249 15
219
10 y for both FY21. Key sector to track would be financials
200 152 164 5
126 where earnings downgrade risks are higher.
100 0
-5 • Disruption due to COVID pandemic has pushed out
0 -10
earnings recovery by at least a year.
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
• Markets are looking beyond FY21, aided by global recovery
NIFTY EPS (in Rs.) % growth- RHS
and gradual return to normalcy.
FY21 earnings continue to see sharp downgrades
• Amidst the overall challenging macros, one silver lining is
the ‘Rural’ economy, which has seen lesser damage from
the COVID pandemic. Drivers for rural income remain
robust with the strong start to monsoons, robust Kharif
sowings, and sharp hike in allocation to MGNREGA.
• Further revisions, in our view, now rests on the inter-play of
health crisis and restoration of normalcy in the economy.
Source: Bloomberg, SBIMF Research; NB: Earnings downgrades are from BloombergRBI’s Financial Stability Report: Asset quality of banks to deteriorate
Baseline Gross NPA to rise to 12.5% by March 2021 Asset quality of NBFCs
(14.7% in worst scenario)
16.3
18 15.5
15.2
14.7
16
13.5
12.5
14
11.3
12
8.7
8.5
10
7.7
7.3
8
5.8
4.5
6
4.2
3.9
4
2 2.3
0
Mar 20 Mar 21 Mar 20 Mar 21 Mar 20 Mar 21 Mar 20 Mar 21
PSBs PVBs FBs All SCBs
Actual Baseline Medium stress Severe stress Very severe stress
System level moratorium is about 50% of the outstanding loan book as on April 30, 2020
Corporate MSME Individual Others Total
Sector
% of total % of total % of total % of total % of total % of total % of total % of total % of total % of total
customers outstanding customers outstanding customers outstanding customers outstanding customers outstanding
PSBs 28.8 58 73.9 81.5 80.3 80 48.8 63.7 66.6 67.9
PVBs 21.6 19.6 20.9 42.5 41.8 33.6 39.1 40.9 49.2 31.1
FBs 32.6 7.7 73.3 50.4 8.4 21.1 75.8 4.8 21.4 11.5
SFBs 78.8 43.7 90.5 52.3 90.9 73.2 64.6 12.3 84.7 62.6
UCBs 63.4 69.3 66.5 65.5 56.8 62 35.6 59.2 56.5 64.5
NBFCs 39.7 56.2 60.7 61.1 32.5 45.9 37.3 41.4 29 49
SCBs 24.7 39.1 43.1 65.3 52.1 56.2 45.7 55.7 55.1 50
System 30.8 41.9 45.8 65 50.4 55.3 45.7 54.6 48.6 50.1
Source: RBI, SBIMF ResearchValuations attractiveness has receded in July Nifty 12M trailing PE ratio increased from 24.5 in June to Nifty 12M trailing PB ratio is at 2.6 in July vs. 2.4 in Jun’20 25.9 in July Spread of 10-year G-sec vs. BSE 500 earnings yield in line Market capitalization/GDP (%) improved in July vs. June with long-term average Source: Bloomberg, CMIE Economic outlook , SBIMF Research; NB: In market cap to GDP, FY20 GDP of Rs. 203 trillion has been taken
Liquidity: FIIs bought and DIIs sold in July FIIs purchased US $1.28 billion in July vs. $2.47 billion in DIIs sold $1.34 billion in July vs. $0.32 billion of purchase in June in June Mutual Fund sold US$ 1.03 billion in July vs. US$ 0.49 Monthly SIP inflows moderated a bit in June billion purchase in June 2020 Source: Bloomberg, SBIMF Research
Equity Outlook • NIFTY was up 7% in June and is up 28% from its 2020 low. Its relative performance vs. global peers is improving, although year-to-date, it is still in line with the global average. Small and mid-cap index outperformed, with risk-on factors dominating performance this month. • Net FII inflow into equities was around US$1.28 billion in July. Domestic mutual funds turned into net sellers, although local retail investment Nifty 12M trailing PE ratio increased from 24.5 in through SIPs (systematic investment plans) remained somewhat resilient. June to 25.9 in July Direct participation from retail has also surged. • Q1 FY21 earnings thus far reflect weakness in revenue and profit, broadly in line with expectations. Cost rationalization has been the main theme playing out. Consensus FY21 earnings estimates have been downgraded 27% since start of April. Financials will be a key sector to watch. The RBI’s latest financial stability report projects Banks’ NPA levels to rise to 12.7% (+14% in adverse case) from 8.5% estimated for FY20. In the latest move, the central bank has permitted one-time recasting of loans conditional to certain eligibility criteria. • Our high-frequency earnings tracker suggests plateauing of domestic recovery momentum in July. To that extent, global economic activity and hence export orders are faring better than domestic demand. The pace of the rural recovery is positive, with monsoons and sowing faring reasonably well. Also incremental vaccine news will be keenly watched. • With the rise in index, downward revisions to future earnings and lack of clarity in strength of future demand, valuation attractiveness has receded in July. Implications: With continued increase in COVID-19 cases and slower economic growth, we remain selective. Outlook for forward earnings stays uncertain. As such, we stay bottom-up in our approach by focusing on resilient businesses that should emerge stronger on the other side. Source:Bloomberg, SBIMF Research
FIXED INCOME MARKET
Global and Emerging market Bond Snapshot: July 2020
10 Year Gsec m-o-m YTD change
2017 end 2018 end 2019 end Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20
Yield (% mth end) (in bps) (in bps)
Developed market
US 2.41 2.68 1.92 1.51 1.15 0.67 0.64 0.65 0.66 0.68 2 -124
Germany 0.43 0.24 -0.19 -0.43 -0.61 -0.47 -0.59 -0.45 -0.45 -0.40 6 -21
Italy 2.02 2.74 1.41 0.94 1.10 1.52 1.76 1.48 1.26 1.27 1 -14
Japan 0.05 0.00 -0.01 -0.07 -0.15 0.02 -0.03 0.01 0.03 0.05 2 6
Spain 1.57 1.42 0.47 0.24 0.28 0.68 0.72 0.56 0.47 0.50 4 3
Switzerland -0.15 -0.25 -0.47 -0.73 -0.82 -0.33 -0.52 -0.46 -0.44 -0.40 4 7
UK 1.19 1.28 0.82 0.52 0.44 0.36 0.23 0.18 0.17 0.21 4 -61
Emerging Market
Brazil 10.26 9.24 6.79 6.71 6.68 8.62 7.19 7.19 6.95 6.85 -10 6
China 3.90 3.31 3.14 3.00 2.73 2.59 2.52 2.69 2.85 2.85 0 -30
India 7.33 7.37 6.56 6.60 6.37 6.14 6.11 5.76 5.89 5.84 -5 -72
Indonesia 6.29 7.98 7.04 6.65 6.91 7.85 7.83 7.30 7.18 7.21 3 17
South Korea 2.47 1.96 1.67 1.56 1.33 1.55 1.52 1.37 1.39 1.40 1 -27
Malaysia 3.91 4.08 3.31 3.13 2.83 3.36 2.87 2.81 2.87 2.85 -2 -47
Russia 7.49 8.70 6.36 6.27 6.48 6.75 6.12 5.55 5.91 5.91 0 -46
Thailand 2.32 2.48 1.48 1.29 1.06 1.40 1.14 1.15 1.19 1.24 5 -24
Turkey 11.67 16.42 12.21 10.23 13.00 13.55 11.69 13.21 13.21 13.21 0 100
Mexico 7.66 8.66 6.91 6.63 6.87 7.12 6.61 6.16 5.84 5.74 -10 -117
Poland 3.30 2.83 2.12 2.14 1.79 1.68 1.46 1.18 1.39 1.42 3 -70
South Africa 8.72 8.72 9.03 8.98 9.12 11.00 10.30 8.93 9.26 9.23 -3 20
Colombia 6.48 6.75 6.34 5.95 5.80 8.42 7.09 6.06 6.09 6.09 0 -25
Hungary 2.02 3.01 2.01 2.07 2.17 2.65 1.95 1.91 2.15 2.22 7 21
• Global Bond yields witnessed a marginal uptick on a m-o-m basis.. On Year-to-Date basis, global and emerging market bond
yields continue to remain low. Aggressive rate cuts by central banks helped the rally in yields across countries.
• 10-year US Treasury yields have fallen by 124 bps on YTD basis. Increased safe- haven assets buying by investors on account
of growth concerns and ultra-loose monetary policy amidst coronavirus scare helped the rally in US yields.
Source: Bloomberg, SBIMF ResearchCommodity price snapshot: July 2020
Most of the commodity prices continued to fall on the fear of low demand
• Iron ore and copper prices declined earlier
this year due to demand concerns amid
COVID-19 outbreak.
• However, supply constraints caused due to
halt in production of both the metals led to
sharp increase in the prices.
• In addition, robust demand for iron ore and
steel from China’s steel mills further
supported the steel and iron ore prices
Increase in safe haven demand and prospects of negative real rates
led to rise in gold prices
Source : Bloomberg, SBIMF Research.India Rates Snapshot: July 2020
m-o-m YTD
Dec-17 Dec-18 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 change change
(in bps) (in bps)
1 Yr T-Bill 6.40 6.94 5.30 5.29 5.16 4.94 3.70 3.41 3.54 3.52 -2 -178
3M T-Bill 6.20 6.65 5.03 5.13 5.08 4.36 3.64 3.19 3.19 3.30 10 -173
10 year GSec 7.33 7.37 6.56 6.60 6.37 6.14 6.11 5.76 5.89 5.84 -5 -72
3M CD*** 6.38 7.05 5.08 5.38 5.40 4.83 4.43 3.38 3.20 3.25 5 -183
12M CD*** 6.75 8.08 5.98 5.98 5.73 5.48 5.23 4.28 3.95 3.95 0 -203
3 Yr Corp Bond* 7.66 8.50 6.95 6.83 6.34 6.54 6.41 6.07 5.62 5.06 -55 -189
5 Yr Corp Bond* 7.68 8.43 7.17 7.15 6.80 7.02 6.83 6.38 6.16 5.67 -49 -149
10 Yr Corp Bond* 7.90 8.51 7.63 7.83 7.43 7.51 7.47 7.28 7.05 6.53 -52 -109
1 Yr IRS 6.44 6.56 5.34 5.26 4.97 4.30 3.80 3.76 3.64 3.69 5 -165
5 Yr IRS 6.75 6.62 5.54 5.42 5.02 4.73 4.27 4.21 4.15 4.17 2 -137
Overnight MIBOR Rate 6.20 6.73 5.26 5.05 5.09 4.81 4.41 4.04 3.89 3.86 -3 -140
INR/USD 63.9 69.8 71.38 71.36 72.18 75.63 75.10 75.62 75.51 74.82 1^ -5^
Crude Oil Indian Basket** 62.3 57.8 65.50 64.31 54.63 33.36 19.90 30.60 40.63 43.40 7^ -34^
• 10year G-sec had been range bound in July. 3m- Treasury bill, on the other hand, inched up by 10bps.
• Maximum rally was seen in corporate bonds across the tenor.
• Crude oil prices rose by 7% on m-o-m basis in July to US$ 43.4/bbl. Improved demand following easing of lockdown
restrictions along with extension of production cuts by the OPEC supported the rise in oil prices.
• Rupee appreciated marginally in July at Rs. 74.82/$. De-escalation in the border tension with China, sustained FPI inflows
along with overall weakness in the US dollar supported the currency.
Source: Bloomberg, PPAC, RBI, CEIC, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the
data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks’ CD rate; ^ INR and Oil price
changes are % change;COVID-19 disruptions has led to significant economic shock
Indian economic growth could further moderate in • We expect India’s growth to moderate significantly in FY21 from 4.2%
FY21 growth in FY20.
12 • Lockdown spread over March-May resulted in output loss. Broad
assessments suggests that economic activity by July end, particularly in
urban areas, was still 20-30% below the pre-COVID levels. Given
8.8
8.5
8.3
8.1
9
8.0
7.9
7.9
7.9
7.9
elevated infection rates, the public fear may result in below-normal
7.7
7.4
7.0
activity for a few more months. Even if demand for durable goods picks
6.4
6.1
5.5
up, consumption of services may stay weak.
5.2
6
4.8
4.2
3.8
3.8
3.1
• As corporate profits are squeezed (weakening operating leverage) they
3
are likely to delay capex plans, lower salaries and cut jobs, which in turn
will weaken consumption demand. In this environment, banking sector
0 NPAs are likely to rise.
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
• Other factors that will weigh on growth are a) increased risks of a global
Real GDP growth (in %) recession, b) grim domestic employment situation for nearly a decade, c)
high leverage in government and household balance-sheet, d) weakness
in financial sector health and e) erosion of wealth due equity price fall.
The projections of growth and inflation for FY21 • The agriculture sector and government spending will be crucial for
would be heavily contingent on the intensity , supporting economic activity in FY21.
spread and duration of COVID-19
• Both government and RBI policy support in terms of fiscal spending, rate
cuts and regulatory actions will have to continue. They will need to on
Several economists are now expecting FY21 standby to step in with regulatory and liquidity measures in case of any
growth to be between -2% to -12%. early signs of financial sector dislocations.
Source: CMIE Economic outlook , SBIMF Research.Supply side factors may prevent sharp disinflation
• CPI inflation continued to remain above the RBI’s upper band of 6%
CPI inflation does not pose any major risk during the lockdown (Apr-June).
• As per the data, headline CPI jumped to 7.2% y-o-y in April (vs.
5.8% in March) and moderated from there to 6.3% in May and 6.1%
in June.
• Looking ahead, despite sharp slowdown in demand which would
sniff out any demand led inflationary pressures, we expect inflation
to be volatile and relatively higher than RBI’s expectation.
• The continued prevalence of COVID-19 would lend logistical and
other supply challenges now and then.
• Further, there are risks of higher wage inflation, higher electricity
Inflation seen in essential commodities and transportation cost which would inhibit price fall.
• Global money supply is rising at a rapid pace which stoke
inflationary risks.
• Further possibility of trade embargoes to Chinese goods also raises
the possibility of higher prices of substitutes till the alternative
sources are fully established.
• That said, weak demand and technological innovations will provide
the disinflationary forces.
• Amidst these push and pull factors, while we expect higher inflation
volatility in coming months, we do not expect it be a major concern.
• RBI should most likely continue with its growth supportive stance.
Source: CMIE Economic Outlook, SBIMF Research;Policy rate Outlook
• RBI left key policy rates unchanged in August meeting (Repo: 4.00%, Reverse
repo: 3.35%; MSF: 4.25%) and maintained the accommodative stance.
• RBI chose to wait for uncertainty around the inflation prints to reside and ensure
that the long-term structural benefits of adhering to the inflation-targeting
framework are protected. With two quarters of average inflation being more than
Policy rates on hold : 115 bps reduction in repo
6%, some caution on the inflation front is warranted. The central bank expect
inflation to remain elevated in Q2 FY21 but moderate in 2H FY21. It refrained rate since Mar 2020
from projecting the GDP from for yet another meeting but did spell out an
expectation of contraction in growth.
• In the regulatory measures, RBI let the moratorium facility expire on 31st August
2020. Instead a rule-based loan recast plan will be drawn out. Given that RBI’s
own assessment (in latest financial stability report) projects banks Gross NPA to
shoot up from 8.5% in FY20 to 12.7% by end FY21 (in base case), one-time
regulatory forbearance was warranted.
• Some of the other key steps undertaken were enhancement of LTV of gold
loans from existing 75% to 90% with the relaxation available up until the fiscal
year end, restructuring of MSME loans and additional Rs. 100 billion of liquidity
facility for NHB and NABARD
• Heavy liquidity injection necessitated due to robust foreign capital inflow and
banks’ buying of SLR securities, which has capped the yields, is helping the
central bank to buy some more time on the subject on absorbing increased
supply of Government securities in FY21.
• Looking ahead, we are still pencilling in scope for additional rate cuts in FY21
once the inflation outlook becomes clearer. The battle with the virus itself could
be a long-drawn one, necessitating more policy action in the future. We expect
that the central bank should remain in surplus liquidity mode throughout the
year.
Source :Bloomberg, SBIMF Research.Rupee appreciated marginally in July
Rupee appreciated to Rs. 74.8/$ in July vs. Rs. 75.5/$ DXY depreciated by 3% in July from 97.4% in June to 93.3
in June in July
Rupee continued to perform better vis-à-vis the other currencies
Source: Bloomberg, SBIMF ResearchEconomy moved towards current account surplus in Q4FY20
BOP posts the highest surplus in 12 years.. ..due to lower current account deficit and higher capital
account balance in FY20
Current account in Q4FY20 turned into surplus ..due to lower trade deficit and lower outflow of primary
income
Source: Bloomberg, SBIMF ResearchOutlook on Rupee
Rupee to remain range bound
• Strong Forex reserves to work in • Rise in crude oil prices
favour of rupee.
• US $ and other safe haven currencies
• Current account surplus to further to maintain its appreciation bias , that
Favourable can weigh on Indian currency
lend support to rupee.
factors Risks
• The coordinated global policy • Rupee likely to come under pressure
easing may stem the portfolio if number of new virus cases sharply
outflows but may take a while for rise in India and growth is impacted.
risk appetite to fully recover.
Foreign Exchange reserves at an all time high
Source : RBI , CMIE economic outlook, SBIMF Research; NB : Forex reserves uptil 24th July 2020Banking system liquidity continues to be in surplus
RBI reduced the repo rate by 115 bps since Mar 2020 and Banking system liquidity continues to be in surplus..
reverse repo by 155 bps
A snapshot of rate transmission across markets (since end Jan-19)
Source: RBI, CEIC, SBIMF Research; NB : Data on Savings deposit rate, MCLR (1 year) and WALR is available uptil
June 2020Credit growth continues to moderate
Credit growth moderated further to 5.8% in July 2020 vs. Credit deposit ratio moderated for the second
12% in July 2019 consecutive month
Key ratios Mar-20 Jul-20 3 yr avg
Cash-Deposit Ratio 4.4 3.7 4.8
Credit-Deposit Ratio 76.4 72.9 74.6
Incremental Credit-Deposit Ratio 60.2 -33.4 82.2
Investment-Deposit Ratio 27.2 29.9 29.8
Incremental Investment-Deposit
31.3 97.1 106.1
Ratio
Credit to services and retail sector further moderated in June vs. May
% y-o-y Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 June-20
Industry 1.6 2.5 0.7 0.7 1.7 1.7 2.2
Micro & Small 0.1 0.5 -0.4 1.7 -2.2 -3.4 -3.7
Medium 2.5 2.8 3.9 -0.7 -6.4 -5.3 -9.0
Large 1.8 2.8 0.7 0.6 2.7 2.8 3.7
Services 6.2 8.9 6.9 7.4 11.2 11.2 10.7
NBFCs 27.6 32.2 22.3 25.9 30.3 29.0 25.7
Personal Loans 15.9 16.9 17.0 15.0 12.1 10.6 10.5
Housing 17.6 17.5 17.1 15.4 13.9 12.9 12.5
Vehicle Loans 7.2 9.8 10.3 9.1 8.6 6.3 7.1
Source: RBI, SBIMF Research; NB : Credit and deposit growth uptil 17th July 2020, Key ratios uptil 24th July 2020Weak tax collections and increased expenditure led to high fiscal deficit
Weak tax collections in FY21 (uptil June 2020) • Centre’s fiscal deficit for June stood at Rs. 6.6 trillion i.e.
83% of full year budgeted deficit. Cumulatively till June,
Apr-June
% growth FY16 FY17 FY18 FY19 FY20 2020 the fiscal deficit has risen by 53% y-o-y.
Gross tax revenue 16.9 17.9 11.8 8.4 -3.4 -32
• Shortfall in revenue collections coupled with double digit
Income tax 8.5 21.5 19.9 13.1 4.0 -36
growth in capital expenditure resulted in an increase in
Corporate tax 5.7 7.0 17.8 16.2 -16.1 -23
Customs duties 11.9 7.1 -42.7 -8.7 -7.3 -61 fiscal deficit.
Excise duties 51.1 32.5 -32.0 -10.7 3.7 -4 • Net tax revenue and non-tax revenue declined by (-)46%
Total GST 68.8 3.8 -35 y-o-y and (-)55% y-o-y respectively in Q1FY21. However,
net tax revenues witnessed a significant improvement on
Capex grew by 40% y-o-y in Q1FY21 ; Top 5 ministries a sequential basis, growing by over 700% m-o-m.
contribute 90% of the total capex until June • Within the direct taxes, income tax de-grew by (-)36% y-
o-y and corporate tax by (-) 23% y-o-y.
• Among the indirect taxes, collection in GST has fallen by
(-)35% y-o-y, customs duty by (-)61% and excise duties
by (-)4%. However, GST collections witnessed sequential
improvement for the second consecutive month, growing
by 37% m-o-m. Excise tax too witnessed a sequential
uptick by over 100% m-o-m.
• Revenue expenditure grew by 10.5% y-o-y and capital
expenditure by 40% y-o-y during Q1FY21.
Source: CMIE Economic Outlook , SBI MF ResearchConsolidated fiscal deficit likely to reach 10%+ of GDP in FY21
Near doubling of Government Bond supply in FY21 Combined fiscal deficit estimated to be 10%+ in FY21 vs.
likely 7.5% in FY20
20 18.1
in Rs. trillion
12.0 % of GDP
10
15
8.5
8.2 9.4 7.5
8.0 6.9 6.7 6.7 6.9 6.9
10 8.4 8.3 6.4
6.3 7.3 7.3 5.8
1.5 6.6
3.4 4.6
1.6 2.1 3.6 4.6 3.5
5 9.6
6.6 4.0
4.6 4.4 3.7 3.8 4.9 3.9 4.7
-
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E 0.0
State Govt Borrowings (net of redemptions) FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 E FY21 E
Central Govt Borrowings (net of redemptions) Combined fiscal deficit (state and centre)
RBI and Banks will likely absorb the majority of government security supply in FY21
Case 1 : Case 2 :
28% SLR 29% SLR
Rs. billion FY17 FY18 FY19 FY20 FY21E FY21E
Demand Sources
1. Banks 2,198 3,709 1,528 4,381 8,500 10,000
2. Insurance Companies 2,679 2,932 2,618 3,018 2,400 2,400
3. Provident/Pension/ Gratuity 1,360 1,267 1,441 923 1,400 1,400
4. RBI's Net OMO 1,092 -924 2,784 780 4,800 3,300
5. Others 1,035 1,268 355 1,442 1,000 1,000
A. TOTAL DEMAND 8,365 8,253 8,726 10,543 18,100 18,100
Supply Sources
Central Govt Sec (net of redemptions) 3,785 4,858 5,242 5,656 9,600 9,600
State Govt Securities (net of redemptions) 4,579 3,395 3,484 4,888 8,500 8,500
B. TOTAL SUPPLY 8,364 8,253 8,726 10,543 18,100 18,100
Source: RBI, SBIMF Research; NB : Central government borrowings based on revised borrowing calendar, SLR =
Statutory Liquidity RatioGSec vs. Repo : Valuations are attractive in a monetary easing scenario Spread of 10- year GSec vs. Repo higher than long term Surplus liquidity in banking system is leading to sharper average, despite monetary easing scenario rally in shorter end of the curve Source : Bloomberg , SBIMF Research.
Valuation attractiveness from FII perspective receding Indian real rates have turned negative US real rates near zero During most parts of 2016-2019, India-US G-sec yield Spread of 10-year G-sec (India-US) adjusted for 1-year adjusted for respective inflation was a large positive currency premium at 1.4% (investors look for 2% plus) Source: Bloomberg, SBIMF Research; Data as of 20th Jul 2020
Valuations attractiveness receded for Corporate bonds and SDL in July Spread of 10-year SDL vs. G-sec broadly in line with long- Spread of 10-year Corp Bonds vs. G-sec lower than term average long-term average Source: Bloomberg, SBIFM Research
Debt Outlook
10-year GSec has been broadly stable and range bound since mid May.
The current crisis is that of a health crisis but eventually leading to shutdown of economic
activity across the globe. Growth and trade is expected to plunge even sharper than 2008
crisis. Consequently, a few central banks and governments has come to support the economic
activity in quantum never seen before. 10-year G-Sec is trading at 176 bps spread to repo
rate
In India, while the government has been calibrated in its approach, given the challenges in its
balance-sheet, RBI has been forthcoming to do ‘whatever it takes’ to support growth and the
financial system by keeping the cost of fund low, injecting liquidity, allowing regulatory
forbearance and incentivizing banks and financial institutions to lend.
Coming to the markets, favorable crude oil and hence external account dynamics, risk of
lower growth and expectation of continued monetary easing support the fall in yields.
However, concerns surrounding the likely fiscal slippages to combat the impact of COVID-19
and FPI outflows limit the fall.
Inflation may see volatility but does not pose any major risk in 2020. As such growth inflation
dynamics are supportive of continued monetary policy easing.
Rupee appreciated marginally to Rs. 74.8/$ in July vs. Rs. 75.5/$ in June A favourable
external account dynamics (emanating primarily from low crude prices) and strong FX
reserves balance should keep the rupee supported.
Government balance-sheet is stressed and pose significant risks of slipping the stated deficit
target. The GoI has already revised up its FY21 gross market borrowing to Rs. 12 trillion and
permitted states to take their net borrowing up to 5% of their GSDP subject to certain
conditions. RBI may have to come forward and monetize the fiscal deficit via OMO purchase.
Robust bank demand for SLR securities is buying some time to the RBI for now. In the other
fixed income assets, challenge is of massive liquidity on one hand and deteriorating credit
conditions on the other.
Implications: We stay long duration as we think that the current situation clearly portrays that monetary policy rates are likely to stay
low for long. Ultimately the central bank will continue to take alternate policy actions so as to keep the rates across the asset class
low. However, we remain selective in taking credit risks.
Source: Bloomberg, SBIFM ResearchThank you
Disclaimer This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included here constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice. Mutual Funds investments are subject to market risks, read all scheme related documents carefully. Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI and AMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.
Contact Details
SBI Funds Management Private Limited
Call: 1800 425 5425
(A joint venture between SBI and AMUNDI)
SMS: “SBIMF” to 56161
Corporate Office:
9th Floor, Crescenzo,
Email: customer.delight@sbimf.com
C-38 & 39, G Block,
Bandra Kurla Complex,
Bandra (East), Mumbai - 400 051
Tel: +91 22 6179 3000 Visit us @ www.facebook.com/SBIMF
Fax: +91 22 6742 5687/88/89/90/91
Website: www.sbimf.com Visit us @ www.youtube.com/user/sbimutualfundYou can also read
