Capital Markets Give Thumbs Up To Economic Survey 

The Union Finance Minister, Nirmala Sitharaman, tabled the Economic Survey report 2021-22 in the Lok Sabha today, December 31. The government believes that the economy is likely to grow by 9.2 per cent in this fiscal after a contraction of 7.3 per cent in 2020-21. “The range of 8.0-8.5 per cent growth for FY2023 assumed by the Economic Survey appears to have built in a cushion for any disruption caused by future waves of Covid,” says Aditi Nayar, chief economist, ICRA. The continued thrust on government capex portended by the Economic Survey is enthusing, as it offers the best likelihood of instigating a durable growth recovery. This growth projection will boost investors’ confidence and improve market sentiment.  

Capital Markets Provide Driving Force  

The Indian stock markets gave a thumbs up to the Economic Survey report. On Monday, January 31, both the major indices, the BSE Sensex and the NSE Nifty, closed in the green territory with a gain of 1.42 per cent and 1.39 per cent, respectively. 

The report highlights that 2021-22 has so far been an exceptional year for the capital markets. There was a boom in fundraising through initial public offerings (IPOs) by many new-age companies, tech start-ups and unicorns. In the April-November 2021 period, Rs89,066 crore was raised via 75 IPO issues; much higher than in any year in the last decade. 

“The Sensex and Nifty scaled up to touch (their) peak at 61,766 and 18,477 on October 18, 2021,” the Economic Survey stated. Among major emerging market economies, Indian markets outperformed peers in the April-December 2021 period, it added.  

The Economic Survey also pointed out that risk capital financed much of the economic revival. “In 2021-22, the risk capital (money raised from capital markets) has so far been more important than the banks in providing finance to the revival,” the report stated. The money raised via IPOs has been higher than ever raised in a single year in the last decade by a wide margin. However, the amount raised through rights issues declined by 62.6 per cent to Rs22,659 crore in April-November 2021, as compared to Rs60,608 crore during the corresponding period of previous year. Overall, during April-November 2021, Rs1.81 lakh crore was raised through equity issues through diverse modes such as public offerings, rights, Qualified institutional placements and preferential issues. 

Monetary Developments 

The report says that the Monetary Policy Committee (MPC) maintained status quo on the policy repo rate April to December 2021 after a substantial cut of 115 basis points (bps) during the February-May 2020 period and a cumulative cut of 250 bps. At present, the repo rate (the rate at which the central bank lends to banks) stands at 4 per cent, which is the lowest in the last decade. Before the pandemic outbreak, this rate was at 5.15 per cent and the spread between repo rate and reverse repo rate, which stood at 25 bps, is now 35 bps on the back on higher liquidity in the system. 

“Liquidity has remained in surplus in the system since mid-2019 in sync with the easing of monetary conditions. The liquidity conditions were further eased during the year 2020-21 after the Covid pandemic, and RBI has since then maintained ample surplus liquidity in the banking system to support growth,” the Economic Survey report stated. 

The yield on 10-year Government securities (G-Sec) has increased to 6.45 per cent as on December 31, 2021. This was at 5.75 per cent in June 2020, far lower than 8.2 per cent as on September 26, 2018. However, the term spread (the gap between 10-year and 1-year G-Sec yields) is still wider than in the pre-pandemic years. But it has started narrowing, which is a good sign for the economy and the financial market.  

Non-performing assets (NPA) of public sectors banks (PSBs) are always a cause of concern for investors. The Economic Survey, however, reported improvement in this direction, which came despite pandemic-led disruptions. PSBs’ net NPA reduced to 2.2 per cent from a high of 6 per cent in 2017-18. 

Investors will keep a close eye on the Union Budget announcement tomorrow, February 1. It is to be seen how the finance minister provides a roadmap for the government’s disinvestment plans, along with the fiscal deficit target, sector-specific announcements and tax relief for tax payers.