Overview of current markets
During the morning trading session on March 23, 2020, the S&P BSE Sensex crashed 2,991.85 points (10%) to hit 26,924.11, while the Nifty 50 fell 842.45 points (9.63%) to slip to 7,903.00, triggering a circuit breaker and suspension of trading for 45 minutes, for the second time this month.
Market indices across the globe have fallen at record rates following the World Health Organization’s declaration of the COVID-19 outbreak as an international public health emergency on January 30, 2020, and then as a global pandemic on March 11, 2020. Add to that the collapse of Yes Bank earlier this month, with a moratorium crippling liquidity, along with the sharp decline in oil and crude prices, and the Indian market indices have taken an unprecedented hit.Key markets, including the United States, Hong Kong and Singapore have seen significant declines in the last couple of months. From January 2, 2020 to March 23, 2020, the DOW dropped from 28,868.80 to 18,618.07 and the Hang Seng Index dropped from 28,543.54 to 21,696.13. While the Securities and Exchange Board of India (SEBI) issued a press release on March 13, 2020, stating that India’s Sensex and Nifty saw a comparatively lower decline of 19.51% and 19.83%, respectively, to that of other key markets with declines of almost 36.30%, this offers cold comfort in the current scenario, especially seen in conjunction with the decline of the Indian Rupee from 71.34 against the US Dollar on January 1, 2020, to 76.35 against the US Dollar as of March 23, 2020.
Economists have continually cut their growth outlook and increased recession forecasts in most major economies. A Goldman Sach’s report titled “US Daily: A Sudden Stop for the US Economy” released on March 20, 2020, projects a substantial decline in US growth with quarter-on-quarter annualised growth rates of -6% in Q1, -24% in Q2, +12% in Q3, and +10% in Q4, leaving full-year growth at -3.8% on an annual average basis and -3.1% on a Q4/Q4 basis. Moody’s has also revised its 2020 baseline growth forecasts downwards for all G-20 economies, along with China, through first half of 2020 on economic growth world-wide.
Key factors behind the decline in India
COVID-19 – Its spread in China and then Europe, US, Iran, Japan and UAE, and subsequent declaration as a pandemic, called for immediate remedial measures. Lockdowns and restrictions on travel and transportation of goods and commodities have resulted in significant disruption of supply chains, weak demand and increased costs, with a high possibility of the Indian economy facing issues of liquidity crunches, isolation from other world economies and increased debt.
Collapse of Yes Bank – On March 5, 2020, the Department of Financial Services, Ministry of Finance, notified a moratorium on Yes Bank Limited, which had collapsed on account of significant exposure to non-performing assets, non-recovery from loans and governance issues. The moratorium, which was subsequently lifted on March 18, 2020, restricted the bank from releasing funds exceeding Rs 50,000, in aggregate, to any person. With the liquidity limitations caused by the moratorium and uncertainty around the restructuring, Yes Bank share price fell from Rs 36.80 to Rs 16.15 on March 6, 2020. In fact, after news about a possible bailout by the State Bank of India (SBI), the public sector bank’s share price fell from Rs 288.50 to Rs 212.60 on March 12, 2020.
Weak global market performance – In addition to the COVID-19 outbreak and Yes Bank collapse, other broader factors, which had been simmering for some time also took a toll on Indian markets. Global market performance had been weaker in recent times, with underwhelming listings of even big public offerings such as Uber and Xiaomi. The crude oil price war between the OECD and Russia led to an almost 24% decrease in crude oil price, and the S&P BSE India Infrastructure Index also experienced a hit of over 20%. Foreign currency assets decreased following heavy outflow by foreign portfolio investors from the domestic market. India’s foreign exchange reserves fell for the first time in almost six months, reaching USD 481.89 billion in the week ended March 13, 2020, from a record high of USD 487.23 billion on March 6, 2020.
The financial sector was undergoing difficulties even prior to the spread of COVID-19 due to a combination of governance and liquidity issues in non-banking financial companies. The recent struggles of Yes Bank resulted in increased volatility in the markets and caused intermittent restrictions for its account holders, and increased uncertainty among account holders of financial institutions involved in the bailout.
A fall of over 20% in the S&P BSE India Infrastructure index over the last three weeks and restrictions on movement to contain the spread of COVID-19 have led to decreased economic activity in the sector, and disruptions in supply chains and shortages in procurement of labour and raw materials, respectively. Infrastructure companies now find themselves with limited availability of funds and resources, which in turn could render them unable to comply with their financial and commercial obligations.
Economic and practical limitations because of the COVID-19 outbreak and alleviation measures to contain it have also affected several other industries. In the transportation and tourism sector, airlines have been particularly affected, with restrictions being imposed on all international and domestic flights. Indian railways has also discontinued operations beginning March 25, 2020. Passenger and goods traffic on roads have also reduced significantly, impacting toll collections and key supply chains. The shipping industry’s forecast has become negative for the next 12-18 months, with decreased Chinese manufacturing output and falling demand for coal and iron ore in China.
The manufacturing sector is at risk of being unable to meet market demand, with increased cost of raw materials, limited supply of labour, and lockdowns on multiple manufacturing operations. Imports and exports have also been restricted, impacting key sectors such as pharmaceuticals and retail. A UN report titled “Global trade impact of the coronavirus (COVID-19) epidemic” estimates the trade impact of COVID-19 in India at about USD 348 million. Forecasts show a sustained decline for at least the next two quarters, shaving growth in the 1-2% range for India.
Regulatory/ Government measures
The Indian Government and regulators have been working on stabilisation of the declining economic activity for some time now, taking measures, including removing the enhanced surcharge on foreign portfolio investors, and corporate and individual tax cuts. Now with COVID-19, the global scenario has been fluctuating on a daily basis, adding to market volatility, and the need to ensure focus on the health of citizens.
Interest rate cuts, relief packages, bond buying programmes, currency swaps, deferment of tax collections and decrease in associated penalties are some of the measures adopted in the United States, United Kingdom, Europe and Singapore to arrest the fall in markets, while allowing citizens and corporations to deal with the multi-level impact of COVID-19 outbreak.
In India, the Central and state governments have initiated a series of measures to stabilise markets and the Rupee, including setting up a COVID task force, a relief package of Rs 1.7 lakh crore, a Rs 20,000-crore aid by the Kerala Government, policies to promote manufacturing of drugs, etc. The Ministry of Corporate Affairs and SEBI have also provided several exemptions from regulatory compliances and reporting requirements for corporate and listed entities, respectively. RBI has allowed US Dollar- Rupee swaps of USD 2 billion and restructuring of Yes Bank is also being undertaken on priority, with SBI and other investors including HDFC, ICICI and Axis Bank.
To take control of the abnormally high volatility in the market, SEBI has imposed curbs on short selling and steep increase in margins, increased penalties 10-fold and reduced outstanding positions for derivatives trading for a month starting from March 23, 2020. Estimates suggest that about 12% of derivative stocks would be hit by the changes, with a possibility of stocks like NCC, Indiabulls Housing, Adani Enterprises, Vodafone Idea and YES Bank going into a “ban period”.
Strong recession forecasts continue despite corrective and stabilisation measures and a relative increase in the Indian market indices since March 24, 2020. It is imperative to understand the short and longer-term impact of a sustained decline in the Indian and global markets, and to evaluate potential issues and defaults under existing and under-negotiation arrangements to ensure regulatory and commercial compliance.
Part – II of this post will elaborate on the corporate and individual level impact of the current market conditions and recommended next steps.