InvestNow News – 13th Mar 20 – India Avenue – Is India immune to the Coronavirus?
Where to from here for India?
Globally markets around the world peaked on February 20th, 2020 and since then have fallen roughly 20% in local currency terms (S&P500). Currencies have also been moving around in a volatile fashion. Typically, in this environment the USD is the most resilient currency. However, the DXY has also fallen 4% over this 2-week period. Safe-haven currencies over this period have been Gold, Yen and Swiss Franc, to name a few hiding places.
In India, markets have fallen approximately the same amount. This has been accentuated somewhat by a fall in Rupee against the AUD (about a 2.5% depreciation). This is disappointing for investors given that there were green shoots emerging after a cyclical slowdown which lasted close to 2 years. India’s GDP growth was recorded at 4.7% for the December 2019 quarter. However, a corporate tax cut, bank recoveries, improving GST collections and a pick-up in PMI’s indicated most positive news was on the way in FY21 (India’s financial year is April-March).
The Coronavirus won’t stop India’s structural growth resuming its path at some point in FY21, however, it will impact global growth in at least the first half of 2020 and therefore India’s growth. Whilst India doesn’t have significant links to the global supply chain (exports are only 11% of GDP), it benefits when global growth is strong given comparative advantages in exports of refined petrochemicals/oils, gems/precious stones, textiles, electronics, pharmaceuticals and automobiles.
However, the key risk for India is the virus making itself a home amongst India’s significant population of 1.3bn and the potential for it to spread quickly, without appropriate healthcare systems and medication for all. Whilst COVID-19 resembles the common cold / flu, its potential to slow down an economy like India is significant.
We cannot estimate what the damage will be to markets, but we see the following positives:
- Central Bank potential to cut cash rates significantly from the current 5.15%
- US$475bn of forex reserves to defend the currency if required
- A substantial fall in the oil price which will reduce inflationary pressures in India (India imports over 80% of its oil usage)
- Fiscal stimulus likely to be forth coming
- Potential to replace China in certain aspects of the global supply chain, given most are now seeking diversity of supply. Foreign direct investment in India has increased significantly over the last 12 months (US$175bn vs US$87bn previous year)