IMPACT OF RBI MOVE ON STOCK MARKETS AND MUTUAL FUNDS
Last Updated : March 27, 2020, 2:08 p.m.
The Indian financial markets – banking, NBFCs, mutual funds, stock markets have been waiting with bated breath for some action by the RBI to tackle the current situation and provide relief. RBI has delivered a major stimulus today with a cut in repo by 75bps & CRR by 90bps, thereby paving way for a fall in lending rates for consumers. Also, EMIs for the next three months have been given a moratorium, though this will be at the discretion of individual banks.
Lower rates and higher liquidity in the system will lead to an increase in both retail and corporate lending. It will also lower the EMI burden of existing loans leaving consumers with more money in their hands to spend. The results might not be seen immediately due to a lockdown (which might get extended) but there will be a higher demand for credit in the coming year owing to these steps. So these are very good measures from the economy’s point of view.
Stock markets, on the other hand, are currently discounting weak economic growth in the financial year 2020-21 which is reflecting in the prices. Over the last three days, the markets have rallied about 20%- Sensex, nifty and frontline stocks are all up. This is largely a result of short-covering owing to futures expiry and might not be a sustainable rally. Today, post these measures by the RBI, the markets have in fact corrected from the day’s high. The reason is that stock markets are more concerned about three factors:
- Increasing no of Covid-19 cases globally, especially the U.S. and impact on the global economy (America reported its worst-ever jobless claim data in its history yesterday)
- Risk of a higher trajectory of Covid-19 cases in India leading to a major economic impact
- No visible signs of a vaccine yet
Mutual funds-especially equity funds mirror stock market performance, hence returns for the last three days have been in line with the uptick in stock markets. The next 6 months to one-year performance will also depend on how stock markets do and how the three factors above unravel. Our advice to mutual fund investors would be to continue with their SIPs if one has the cash to invest in a staggered manner and don’t want to time the markets. If one doesn’t have spare funds, maintain the status quo.
The RBI move today is a welcome step for the economy and will lead to material benefits. Albeit these steps will show results with a lag and help in stemming some of the economic rout. Many international research agencies are already predicting India to grow at about 2-2.5% which is among the lowest growth rates in our history. There is still a lot of uncertainty around how the COVID-19 situation evolves, how long the lockdown remains, what happens to many sectors & corporations. Till that uncertainty remains the markets will remain range-bound with a negative bias.