RBI rate cut, government stimulus done. What are the markets eyeing now?

After the government’s aid plan for the poor and marginalized sections of society and a series of Reserve Bank of India (RBI) liquidity measures announced in recent weeks, the central bank has cut its 75 basis points (bps) rate – the most aggressive cut of the past 10 years. Other than that, the RBI has placed a moratorium on all similar monthly installments (NDEs) on loans to ease the pain of the borrower.

For their part, the Indian markets which expected the authorities to deploy measures to stem the fall and stabilize sentiment after the fall by more than 35% compared to the peak levels observed earlier this year, triggered by the sudden and rampant spread of the coronavirus (Covid-19) pandemic around the world, witnessing the reservation of benefits. The S&P BSE Sensex slipped 1,310 points from the day’s high to close slightly negative Friday after the RBI measurements.

With these stimulus measures expected on the sidelines, will the markets continue their journey south? What are the clues on which they will keep a tab?

Over the next few weeks, analysts expect markets to remain volatile and are now following developments in Covid-19 around the world and how quickly and successfully governments are able to fight the pandemic. Back home, the government-imposed 21-day lockout and the possibility of an extension at the same time will influence investor sentiment, they say.

As far as policies are concerned, most expect it to be an ongoing process – at least until the economy is up and running. They warn, however, that the government may soon run out of dry powder in its fight against Covid-19 given the budgetary situation and the fact that the Indian economy was already slowing down before this pandemic.

“We expect that coordinated fiscal and monetary easing will continue. We believe that the next tranche of fiscal measures will help address the cash flow challenges faced by SMEs and other hard-hit sectors. In a context of weak growth, we think that the government could temporarily suspend the FRBM legislation and that the budget deficit of the central government should reach approximately 5% of the GDP during the year 21 against 3,5% budgeted ”, wrote Sonal Varma, Managing Director and Chief Economist of India. at Nomura in a report co-written with Aurodeep Nandi.

They now expect a further 75 basis point drop in the repo rate in the second and third quarters of 2020 (Q2-Q3 / 2020). As regards unconventional policies, they note more aggressive open market operations, new injections of liquidity via targeted longer-term refinancing operations (TLTRO), including the widening of its scope to targets for bank loans.

BofA Securities members also share a similar view and expect the RBI to remain aggressive in its policies. They expect the central bank to cut rates by 25 basis points each in June and October and set the inflation rate at 2.5% in the second half of 2020-21 (H2FY21).

“We are now seeing its 2020 rate cuts totaling 125 bp versus 100 bp. This, in turn, will bring the RBI’s reverse repo rate to 3.5%, near the lowest of 3.25% in 2009. We have reduced our growth forecast for fiscal 21 to 4%, ” wrote Indranil Sen Gupta, Indian economist at BofA Securities, in a report co-authored with Aastha Gudwani.

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