Indian market welcomed the long-awaited fiscal stimulus with much cheer. However, eliminating the initial excitement, the market remained largely flat. Many traders also used the opportunity to book profits but every mild dip was ferociously bought into.
Market fell off the high but Sensex closed 2.03% up at 32,008.61 while Nifty gained 187 points to close at 9,383.55. Axis Bank (up 7.02%), Zee Entertainment (up 6.51%) and Larson & Toubro (up 6.28%) were the major gainers of the day while Nestle India (down 5,44%), Sun Pharma (down 2.49%) and Britannia (down 0.89%) were the major losers of the day.
The market was clearly waiting for the details of the package and going by the first tranche of it, the finance minister didn't disappoint. The mega Rs.20 lakh crore stimulus package, which works out to roughly 10% of the GDP, is among the most substantial in the world. Only the United States and Japan offered more lucrative packages at 13% and 21% of their respective GDP.
Stimulus package: More than just a blank note
Former Finance Minister P Chidambaram described the PM's announcement of Rs 20tn package as just 'a headline with a blank note'. However, the provisions of the package, addressed by the finance minister made it clear that not just the headline, the content is also equally powerful.
The package announced collateral-free loans worth Rs 3 lk cr with 100% credit guarantee for MSMEs. Stressed MSMEs are allotted Rs 20,000 crore with a partial guarantee up to Rs 4,000 crore.
Here, the government has fulfilled a major demand of the financial institutions. The banks, despite having ample liquidity, were unwilling to lend until the government provided the guarantee. With today's announcements, the government has largely managed to address their demands.
Will NBFCs find liquidity now?
The NBFC sector has been at the forefront of all the RBI actions ever since the IL&FS crisis occurred. With constant rate cuts and other policy measures, RBI has been trying to incentivize the banks to lend to NBFCs. Alas, the shaken trust could never fully return.
Now, under this package, the government has provided a special Rs 30,000 crore window to buy investment-grade debt papers, again under full guarantee. A partial guarantee window of Rs 45,000 crore is also opened for 'AA' rated and unrated papers of the second rug of NBFCs where the first 20% loss will be borne by the GoI.
Similarly, for discoms, emergency liquidity of 90,000 crore will be available through PFC and REC. This will be under state-issued guarantee and rebate will be provided to those discoms that pass the benefits to end-customers.
And at last, the common man has received tax benefits with TDS and TCS rates reduced by 25% till 31st March 2021. This is expected to result in additional liquidity of Rs 50,000 crore in the hands of the people.
Indian banks are currently sitting on ample liquidity worth Rs 7tn, unwilling to lend in the absence of government guarantee. By providing the guarantee for loans to MSMEs, NBFCs, HFCs and MFIs, the government has taken a major step to bridge the shaken trust.
The banks now need to keep aside their apprehensions and play their part in reviving the economic engine (by starting to lend again.)
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