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Water everywhere, not a drop to drink?

Chandraprakash Padiyar

Chandraprakash Padiyar
Senior Fund Manager

Water everywhere, not a drop to drink?

“Water Water everywhere not a drop to drink” is a very famous phrase used originally in “The Rime of the Ancient Mariner” by Samuel Taylor Coleridge. In his book a sailor was stuck on his boat deep inside the ocean without any drinking water. He could see water all around him but could not drink the same as it was saline water and not fit for human consumption. If I replace the word water with liquidity/money/cash, it would be apt to use in the current economic situation in India. Indian banks are flush with liquidity, on an average banks are parking more than US$90 bn with the RBI (Reserve Bank of India) every day. On the other hand, the so called shadow banks (NBFC/MFI) are suffering deep liquidity crises. RBI announced loan moratorium for all borrowers for 3 months starting March 1, 2020 and followed it with another extension of 3 months till August 31, 2020. However, this moratorium could not be availed by the shadow banks. The issue got accentuated since the shadow banks were asked to give a moratorium to all their borrowers but could not get the same on their liabilities to banks/bond markets. We understand Banks are now considering only select NBFC/MFI proposals for moratorium.

Apart from this, on April 23 2020, one of the mutual fund in fixed income specializing in high yield credit announced closure of 6 of its schemes amounting to > US$ 4bn on the back of high redemption pressure and very low trading activity in the Indian Bond markets. Fixed income investors in Mutual Funds have panicked across the industry and have chosen to move a very large part of the corpus to Banks. This has put further pressure on NBFC/MFI to raise funds going forward.

Lockdown for 69 days in India till May 31, 2020 is not helping either. The spread of Covid-19 has been managed well by the government till now, however the economic impact is likely to be high in FY21. Small and medium enterprises which form approximately 29% of the economic activity in the country will need fresh working capital just to restart their business. With the financial system in freeze, banks hesitating to lend, government spending down significantly – the near term does look challenging.

Government has announced a financial relief package for the MSME segment on May 13, 2020 whereby banks/NBFC will provide Rs 3 lac crore of fresh loans for a period of 4 years with a 1 year moratorium. These loans will be 100% guaranteed by the government of India for any potential NPA. This package will certainly go a long way in helping the MSME segment restarting its business without being classified as NPA in the financial sector.

RBI too has taken various measures to improve liquidity and push banks to lend. Liquidity has certainly improved with banks – infact as mentioned earlier, banks are placing >US$90 bn every day with the RBI. Investment in Government securities by banks at 27%+ is much higher than the mandated 18.25%. RBI has also reduced the reverse repo rate to 3.35% (reverse repo rate is the rate at which banks park surplus liquidity with the RBI) in order to push banks to lend. All eyes are now on how the government decides to boost short term economic activity. Starting May 4, 2020, approximately 70% of India from a population perspective has been moved out of a full lockdown and economic activity will normalise gradually over the next few months.

These are interesting times with no past experience to suggest the path forward. Each country is choosing to inflate and boost economic activity in various proportions. During this time, we at Tata Mutual Fund, are focused on businesses which are run by capable professionals (strong management teams), strong balance sheets (free cash with low or zero debt) and reasonable valuations.

Long-term structural drivers like demographic advantage, low household debt, limited penetration across different consumer categories, increased potential for financial savings and urbanization makes India a compelling equity story from medium to long term perspective. We believe investors would be well advised to invest with medium to long term perspective and systematically increase exposure to Indian equity markets.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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