Informist, Wednesday, Apr 7, 2021

By Apoorva Choubey, Joe Milton and Ankika Biswas

MUMBAI – The Reserve Bank of India's assurance to keep monetary policy accommodative and its unchanged economic outlook did give a sentimental boost to domestic equities today. The dovishness notwithstanding, the central bank's message on uncertainty related to COVID-19 resurgence was absorbed, and it may result in bouts of profit-taking.

Investors are keeping a watch on the disruptive impact of the recent rise in COVID-19 infections and the expected rise in five states, where polls are underway, as government officials return from election duties and start compiling data, said the head sales trader of a foreign bank-owned brokerage.

Equities extended gains after the RBI promised to retain a dovish policy stance as long as necessary for economic growth to recover, announced measures to stabilise bond yields, and maintained its forecast of 10.5% rise in India's GDP this financial year.

However, the central bank said the renewed jump in COVID-19 infections and localised lockdowns could dampen the demand for contact-intensive services, restrain growth, and prolong the return of the economy to normalcy.

The Nifty 50 gained nearly 1% and the Nifty Midcap 100 index rose 1.3% today, but both indices ended off highs as some profits were booked.

The RBI's latest consumer survey also pointed to a muted view for demand, as confidence has dipped with the recent surge in coronavirus cases in some states, leading to uncertainty over the economic outlook.

This uncertainty, of how severe the impact of the second wave will be on the economy, is troubling several fund managers and market experts too.

"We have lowered the valuation multiples for equities to factor in the rise in bond yields and some impact of the spike in coronavirus cases," said Saion Mukherjee, head of equity research at Nomura Financial Advisory and Securities India.

One cannot ignore the possibility of the second wave becoming bigger and more states having to impose lockdowns, he said.

The underperformance of the Nifty 50 to the MSCI Emerging Markets and MSCI All Country World indices over the past fortnight suggests that foreign investors are also starting to worry about the fallout of the resurgence in cases and fresh lockdowns.

With most positives from the RBI policy, such as status quo on interest rates, already factored in, equities are likely to stay in a narrow range in the near term, said Amit Kumar Gupta, portfolio manager at Adroit Financial Services.

Several fund managers believe commentary of companies on demand and supply chain disruptions, at the time of detailing Jan-Mar earnings over the next few weeks, will be extremely crucial in shaping up the flow of investments, especially in the backdrop of a rising dollar.

"Investors want a clearer picture of the risks to a particular business before putting any incremental money in equities…so that makes the trends on demand and impact of the cost inflation quite important," said the head of equities at a bank-sponsored mutual fund house.

Incremental equity inflows are thus expected to favour defensive sectors such as information technology and pharmaceuticals in the near term, as profits are being booked in several cyclical plays that have rallied after the Budget.

As investors await corporate commentary to assess the damage from the second wave, positive factors such as measures announced by the RBI, expected ramp-up in India's vaccination drive, and abundant global liquidity will keep equities afloat and prevent a sharp sell-off.

The RBI's decision to suck out some short-term liquidity and bring more liquidity in longer-term papers in the near term will augur well for the massive borrowing programme of the government, said Anish Teli, managing partner at QED Capital Advisors.

It is also expected to ensure an orderly evolution of the yield curve, said experts. Several fund managers, including Gupta of Adroit Financial, believe this should alleviate some concerns in the equity market related to the sharp rise in bond yields.

Funding to financial institutions and the decision to extend the on-tap targeted long-term repo operations by six months till Sep 30 are also seen aiding businesses in several sectors, which led to a rise in shares of non-banking finance, banks, and real-estate companies today.  End

Edited by Ashish Shirke

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