The Signal: The Week Highlights

1. RBI’s accommodative stance leaves repo rate unchanged

RBI left repo & reverse repo rates unchanged at 4% and 3.35% respectively after two emergency cuts in times of economic GDP contraction. Inflation to remain elevated in Q2 and ease in H2CY20. Restructuring of loans and special liquidity announcements to drive credit growth in coming times.

As signs of revival defer and the pandemic is yet to taper significantly, the Central Bank may want to have enough rate headroom as dry powder and err on the side of caution. Improved statistics on containment efforts of the pandemic may nudge the Real GDP situation into the positive trajectory soon. RBI is being judicious with the use of monetary tools which seems like a good idea as world economies continue to stare into the fog.

2. PMI Pressure Piles On

India Manufacturing PMI declined to 46.0 in July 2020 from 47.2 in the previous month, below market consensus of 47.8. It was the 4th straight monthly contraction in factory activity, as some business remained closed amid coronavirus lockdown extensions. However, business confidence improved to a five-month high, but still well below the historical average.

Amidst a corona- filled year, disruption in manufacturing activity was a given, and was reflected in latest figures. However, significantly higher from April and May figures, coupled with bettering business confidence, spells better times for country ahead, next-gen unlocking phase begins.

3. From Credit Crunch To Credit Cushioning?

June retail credit grew by Rs 11,518 crore after shrinking for 2 months. The washout in April, owing to the lockdown, began to show its effect. May was also marked by dull activity, while June and July have shown an upward trajectory. Though these are positive signs, balance sheet strength continues to remains weak. 

After a year of aggressive rate cuts, and 10% GDP relief package, we are on verge of bidding adieu to conservative credit climate. As institutions welcome newer business-friendly regulations and benefit from policy support, the credit cycle can see itself rejuvenate in the medium-term, thus auguring the much awaited V-shaped recovery.

4. “Get Set Go-LD” is the new investor tongue twister

With Covid figures finally out, investors continue to find comfort in commodities. Gold & Silver continue to be investors’ choice of poison, recording newer all-time highs at 55K+ and 78K+ levels! Sentiments have followed suit outside domestic boundaries too, as the yellow metal hits a 9-year high, while the world’s currency – US Dollar, weakens! 

With 2021 arriving in 4 months, coronavirus continues to drive headlines. As Govt’s scramble for temporary solutions, investors sideline investment growth, limiting wealth erosion prospects. The craze for commodity (Gold + Silver), can amplify in near-term, if the hype around vaccines fails to deliver.

5. Covid Report Card Has US get Negative Results

Fitch Ratings affirms United States’ Long-Term Foreign-Currency (LTFC) and Local-Currency (LC) Issuer Default Ratings (IDRs) at ‘AAA’ and revised the Outlooks to Negative from Stable. The expanding of balance sheet, diseased dollar and high unemployment continue to drive short-term stress with strong expectations of a widening fiscal deficit.

Coronavirus has not been kind to the strongest economy of the world. The absence of a fiscal consolidation plan, and ongoing deterioration of the public finances, coupled with politicizing the virus, will continue to put tremendous short-term pain on US, with possible spillage onto surrounding economies.