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Fiscal expansion and monetary ‘teasing’

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The unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. That said, private estimates in this regard are between 0.2 – 0.4 per cent shy of the governments estimate.

Here are the growth, monetary policy, and bond market aspects of the move:

Growth

With this the government has shown a clear commitment to shore up growth even with its back against the wall, fiscally speaking. Further, it has resisted an easy consumption stimulus which may have had very little multiplier effects and possibly may have eventually contributed to some macro-economic imbalances. Rather, the tax cuts will help improve corporate profits and hopefully improve our global competitiveness. Further, incentives for new units announced may also help with attracting some of the global supply chains reallocations that are underway given escalating trade tensions.

This may, however, not necessarily be a substantial shot in the arm for near-term growth prospects. The tax cuts may be used in a variety of ways, including stepping up investments, reducing debt, cutting product prices, increasing salaries, buyback and dividends, among others.

All told, the immediate pass-through and growth impulses created may be not as strong and thus the tax buoyancy hoped for on the back of stronger growth may have to wait for a while. This is especially true as general competitiveness in an increasingly challenging world requires other aspects of factor input efficiencies to fall in place as well.

Monetary policy

Prima facie, if, unlike earlier expectation of limited further space, fiscal policy has indeed chosen to step up to the plate, then monetary policy need not be as aggressive, all else being equal. That said, the global and local context is weak enough to argue for yet some (though not substantial) incremental role for monetary easing. This is especially true because RBI Governor Das doesn’t appear to be as large a fiscal hawk, currently (indeed welcoming the bold step from the government, after observing one day prior that fiscal space seemed limited).

We would hence look for monetary “teasing” incrementally, as opposed to “easing” that we were expecting before and would expect the repo rate to bottom out in the 5 to 5.25 per cent area. The one caveat to this view is of further global growth deterioration which would then open up room for further easing, whereas liquidity policy is expected to remain one of substantial surplus.

Bonds

As noted, before term spreads have been quite wide for this part of the cycle, largely reflecting the inadequate availability of risk capital versus the supply of bonds (the same inadequacy is being reflected as higher credit spreads in the loan and credit market).

Despite more than adequate liquidity now, risk capital has been cautious possibly due to lack of confidence on market risk, given the fiscal and bond supply overhang. Since a large term premium has already existed, we wouldn’t expect a significant further expansion just because the risk has now materialized.

Further we don’t expect the entire expansion to manifest in the Centre’s fiscal deficit. After sharing this with states and accounting for other levers built in, we are looking for a final fiscal deficit of 3.7 nper cent versus the 3.3 per cent budgeted. This will entail some additional bond supply eventually, but with the cushion that the Centre’s net bond supply was slated to fall substantially in the second half of the year versus the first.

Portfolio Strategy

With the prospects of monetary easing somewhat diminishing in incremental intensity, and accounting for the somewhat higher bond supply, we may expect some amount of curve steepening going forward. This may likely happen as market participants anchor themselves to 3 thoughts: One, liquidity will remain abundantly surplus. Two, repo rate is here or modestly lower. Three, prospects of a very large bond rally are somewhat diminished (although this view will evolve going forward depending also on how much net additional supply actually manifests for local absorption) . This will likely increase appeal for the front end of the curve versus the longer duration, hence creating steepening pressure.

Reflecting the above thought, we have cut our recent duration elongation into the 10-14 year segment and are now refocussing on being overweight 5-7 year for government bonds in our active duration funds. For AAA corporate bonds, the relative value continues in up to 5 years. These segments could better align to what remains an environment of abundant surplus liquidity, a very attractive term spread, still general lack of credit growth, and continued global monetary easing.

(Suyash Choudhary is Head – Fixed Income, IDFC AMC. The views expressed are personal)

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Covid-19 corollaries on the dairy sector: CRISIL

Overall, demand for milk and dairy products would be lukewarm in the near term, so prices are unlikely to boil over, according to the report.

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dairy industry

New Delhi, May 26 : Supply chain disruptions in the early weeks of the nationwide lockdown, and bread-and-butter issues for hotels, restaurants and cafes, have materially reduced demand for dairy products.

This is despite supply of most dairy products continuing during the lockdown, since they are categorised as essentials.

The shuttering of hotels and dine-ins has also dried up off-take of skimmed milk powder and khoya.

According to report by CRISIL Research on the state of dairy industry and supply chains, products that can’t be made at home easily – such as cheese, flavoured milk and also khoya – haven’t found their way back to the dining table in the same quantities as before the lockdown.

Demand for ice creams, which usually peaks in summer (accounting for 40 per cent of annual sales) has just melted away. Rural areas, which are feeling the income pinch more, seem to be staying off butter and ghee, the report by global analytics firm has said.

To be sure, since the third week of April, supply chains have turned smoother, so demand for staples such as milk, curd, paneer and yogurt are expected to see a quick rebound, leading to on-year expansion in sales, CRISIL said.

The pandemic, however, may sour the business for unorganised dairies because of pervasive contamination fears.

Conversely, as consumers shift, revenues of organised dairies and packaged products should fatten.

Overall, demand for milk and dairy products would be lukewarm in the near term, so prices are unlikely to boil over, according to the report.

Large brands such as Amul and Mother Dairy had already hiked retail milk prices by 4-5 per cent last fiscal. They may not serve an encore.

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445 people died from Australia bushfires smoke: Experts

Melbourne, Sydney and Canberra all had periods where they had the worst air quality in the world as a result of the smoke.

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Arogya Setu App

Canberra, May 26 : Smoke from Australia’s devastating 2019-20 bushfires killed at least 445 people, health experts revealed on Tuesday.

Fay Johnston, a public health expert from the Menzies Institute for Medical Research at the University of Tasmania, told the bushfire royal commission on Tuesday that her team estimated that 445 people died as a result of the smoke that blanketed much of the nation’s east coast, reports Xinhua news agency.

It takes the total death toll from the 2019-2020 bushfire season, which has been dubbed the “Black Summer”, to nearly 480 after 34 people lost their lives directly.

According to modelling produced by Johnston and her colleagues, 80 per cent of Australians were affected by the smoke at some point, including 3,340 people who were hospitalized with heart and lung problems.

“We were able to work out a yearly cost of bushfire smoke for each summer season and… our estimates for the last season were A$2 billion in health costs,” Johnston said.

“There’s fluctuation year to year, of course, but that was a major departure from anything we had seen in the previous 20 years.”

Melbourne, Sydney and Canberra all had periods where they had the worst air quality in the world as a result of the smoke.

Commissioners also heard on Tuesday that the increasing frequency of significant bushfire events in Australia meant that survivors no longer feel safe during the recovery phase.

“Disasters are no longer perceived as rare events, they are often seen as climate change, and they’re part of our new reality,” Lisa Gibbs, a child welfare expert from the University of Melbourne, said.

“We don’t know how that is going to affect recovery because the seeds of hope are a really important part of people’s ability to deal with what has happened and to get back on track.”

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Rising urbanization likely cause of heavy rainfall in South: Research

Their findings were reported in the ‘Quarterly Journal of Royal Meteorological Society’ on May 18, 2020.

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IMD heavy rains predict

Hyderabad, May 26 : A team of researchers at the University of Hyderabad (UoH) have discovered a link between heavy rainfall in several parts of south India and a growing urbanisation in the region.

A team led by Prof. Karumuri Ashok from the Centre for Earth, Ocean and Atmospheric Sciences of the University of Hyderabad, examined whether a common factor, the changing ‘land use land cover’ (LULC) in these states, has any implications for the heavy rainfall events.

Over the past few years, many heavy rainfall events have been reported in cities of south India. Prominent among them are the extreme rainfall that created havoc in Chennai and nearby areas of Tamil Nadu in December 2015, the heavy rainfall over Hyderabad and adjoining regions in Telangana in September 2016, and the extreme rainfall event in Kerala in August 2018.

Notably, these three states differ in their geographical locations, and also the season in which they receive rainfall. Kerala, located on the southwest Indian coast off the Arabian Sea receives heavy rainfall during the summer monsoon from June-September.

Tamil Nadu, off the Bay of Bengal, receives rainfall mainly during the northeast monsoon (October-December). The land-locked state Telangana receives the bulk of its annual rainfall during the summer monsoon season.

A UoH statement stated that their study showed the precipitation during heavy rainfall events in these states has significantly increased from 2000 to 2017. Using the LULC data from ISRO, and by conducting 2 km resolution simulation experiments of twelve heavy rainfall events over the states, the researchers found distinct LULC changes in these three states, which led to higher surface temperatures and a deeper and moist boundary layer. These in turn caused a relatively higher convective available potential energy and, consequently, heavier rainfall.

The study also suggests that increasing urbanization in Telangana and Tamil Nadu is likely to enhance the rainfall during the heavy rainfall events by 20%-25%. Prof. Ashok feels that improving the density of observational rainfall and other weather parameters may help in forecasting extreme rainfalls at city level.

Their findings were reported in the ‘Quarterly Journal of Royal Meteorological Society’ on May 18, 2020.

Prof. K. Ashok and his Ph.D. student Mr. A. Boyaj who is the first author, are both from the Centre for Earth, Ocean and Atmospheric Sciences of the University of Hyderabad. The work was done in collaboration with Prof. Ibrahim Hoteit and Dr Hari Prasad Dasari of King Abdullah University of Science and Technology (KAUST), Saudi Arabia.

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