In a development that is likely to disappoint markets, the prime minister asked all the chief ministers of states to get ready for Lockdown 4.0. This hint was given as the number of COVID-19 cases rose rapidly to beyond 71,000 in India. Health observers are expecting the number of afflictions in India to cross 100,000 before the end of this week. However, the prime minister also dwelt on the need to create an enabling environment to restart business without compromising on social distancing. The Indian railways are expected to start passenger trains this week and more services could be added soon.
The bad bank is finally expected to happen in this financial year as the COVID-19 has again raised the bogey of weak economic growth spilling over to bank NPAs. A bad bank acts like a mega ARC that takes over the toxic assets of the banks and allows the banks to run a clean balance sheet. This was done quite effectively in the US during the Lehman crisis of 2008. The ARC is likely to start with a base capital of Rs.60,000 crore with the government contributing Rs.10,000 crore. Normally, bad banks also accept capital contributions from other institutions too and they are also permitted to raise debt.
With the government borrowing target likely to go up from Rs.7.8 trillion to Rs.12 trillion, first impact was felt on bond yields as they spurted by 22 bps in a single day to 6.19%. Higher borrowings would mean higher cost of funds for corporates and that could add to financial risk. But the bigger hit would be on the bond portfolios owned by banks and mutual funds. A sharp spike in yields would mean a fall in bond prices and that could lead to further losses for bond holdings. Higher borrowings are also likely to crowd out private borrowers and even put India’s sovereign ratings at risk; as confirmed by Moody’s.
In the last two months since the Coronavirus pandemic took roots, global economies have already sunk in $15 trillion in the form of economic stimulus to ensure that the growth engines are not halted. Of course, the growth damage is done so the effort is more towards ensuring recovery. This stimulus is more than 17% of the world GDP. This is only the direct stimulus. In addition, there is an unlimited liquidity window that central banks are making available in the form of bond purchases. Back in 2008, the massive liquidity infusion managed to revive markets. It remains to be seen if it could repeat.
With the lockdown continuing and the lag effect to last for some time, auto manufacturers in India have already warned about a likely fall of 45% in auto sales this year compared to the previous year. The SIAM has estimated that in a worst case scenario, if the Indian economy contracted by 2% in FY21, then it would translate into a 45% fall in auto sales. That, the SIAM has warned, would be disastrous for auto companies and for jobs in the sector. SIAM has highlighted that even if the Indian economy were to grow at 2% in an optimistic scenario, the auto sales would still see 20% negative growth. The SIAM represents four wheelers and two wheeler companies in India. In FY20, the sales of automobiles are already down by 18.5% and a further 45% cut could have deeper implications for the economy.
One of the pioneers of shale oil in the US, Chesapeake Energy, is likely to file for bankruptcy. Shale companies have been hit by weak oil prices making shale drilling almost unviable. Chesapeake has nearly $9 billion of loans and has called for a loan structuring as part of the bankruptcy filing. It has nearly $250 million due this year has admitted that it could be forced to default. Shale was built over the last 15 years in the US and Canada on the back of access to cheap bank funding. However, sustained low crude prices spoilt the party. This could be bad tidings for the US shale sector as a whole.