But states, companies may be slow to resume activity; forecast of normal rainfall augurs well for inflation
Partial relaxation of lockdown from 20th April comes as a positive although it’s limited to select manufacturing activities and E-Commerce. Greater freedom has been allowed in rural areas. Our initial checks with corporates indicate that production ramp-up will be slow and constrained by demand. Another positive for rural activities is a forecast of a normal monsoon. Both these developments should be a partial relief for investor sentiments.
Normal monsoon rainfall forecast
The Indian Met Department’s (IMD’s) monsoon season rainfall forecast for 2020 suggests that rainfall is expected to be likely normal at 100% of Long Period Average (LPA). Indeed, with 71% probability estimated to normal or higher rains, the risk is balanced to the upside. This would then be the second consecutive monsoon season with good rains.
Inflation to edge down supporting RBI’s monetary boost
A normal monsoon forecast should come as a relief to the RBI as well which had cut the benchmark repo rates recently by 75bps. RBI’s recent inflation trajectory assumes CPI to decline from 5.9% now to about 3.2% by Q3FY21. A record winter crop output, followed by good monsoons will likely cool down food inflation from the current 7.8% level.
Lockdown relaxation a relief
The Centre has proposed some relaxations to the lockdown from post 20th April. Key among these measures are
(a) opening up goods transport across country for all goods
(b) waiver to the entire agricultural segment and its supply-chain;
(c) allowing industries in rural areas and in SEZs & designated industrial areas to function
(d) starting construction works where labour is at site; and
(e) allowing e-commerce full goods transport mobility.
These measures come as a relief to the strict nation-wide lock-down in force since 25th March.
States, companies may slow restart. There are several caveats to the above relaxations triggering immediate economic revival. Key among these being state governments taking a much stricter line given their local COVID outbreak situations. Meanwhile, social distancing rules such as spacing of workers in transport, separation of shifts and no public transport would still apply. Urban areas are also struggling with loss of migrant labour.
Our feedback from companies suggest that restart of activities could be slower with likely sub 50% capacity utilisation. Some corporates are putting employee safety first and are unlikely to resume operations soon. Also, lack of opening up of retail channels, barring online and existing high inventories means that several industries would prefer not to open up immediately.