India’s easing of the lockdown in phases has brought a big smile to the markets. Stocks jumped, with the Nifty 50 rising 2.6% on Monday.
Unlock 1, or the first phase, will help raise manufacturing activity all across the country. But some troubling trends remain. While the first phase will open up many sectors, a broader consumption revival across the economy is going to take several months.
“Unlock 1 has improved sentiments. Capacity utilisation and supply chains should start moving, and demand will be better. But normalization will take time. It’s difficult to put an exact timeline to this, but it could even take about six months,” said Harsha Upadhyaya, chief investment officer, equity, Kotak Mutual Fund. In fact, most sectors are expected to beat a slow path to recovery. Also, this time, the recovery is likely to be led by the rural sector rather than urban demand. “With major metros like Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Kolkata, Pune, Ahmedabad, etc. all coming under the red zone, revival in economic activity and urban demand would take time,” said Motilal Oswal Financial Services in a note to clients.
Amid all this, there are other glimmers of hope in the rural economy. The monsoon has arrived on time, and is expected to influence rural demand positively. Further, measures such as an increase in allocation toward Mahatma Gandhi National Rural Employment Guarantee Scheme is expected to improve rural incomes. So, sectors that directly serve the rural economy, such as agri-chemicals, fertilizers, tractors and even two-wheelers could see demand trickle back a little earlier. In the auto space, analysts see passenger and commercial vehicles revival to be slow and gradual, and much will depend on a pick-up in financing and business activity.
While collections and loan disbursements could improve for the banking and financial space, trends in asset quality will be known only after the current moratorium is lifted.
As logistics and inter-state movement of goods have been allowed, demand for diesel consumption will improve, which will aid oil marketing companies. Consumer durables may see some resumption in sales, much will depend on pent-up demand. Hospitals should benefit a bit as outpatient departments have been allowed in various zones. The power sector could see an improvement in plant-load factors, though construction and infrastructure activity could be slow to revive.
Nevertheless, the short-term market reaction is driven by liquidity and sentiments. “Global cues have been strong, and almost all asset classes have been bouncing back from lower levels. But from an economic perspective, it will take a few more months for the economy to normalize. To that extent, it is advisable not to chase momentum,” added Upadhyaya.