Second COVID Wave and Localised Restrictions Creating Uncertainty for Supply Chains and Short-Term Capital Flows: Report
The recent spike in COVID-19 cases and associated lockdowns, though localised, could disrupt supply chains, foreign portfolio investments and domestic credit markets, warns India Ratings and Research (Ind-Ra).
 
India’s second round of COVID outbreak is moving in a direction different from the global trend. The cases seem to have abated in major countries and the massive vaccination drive is expected to anchor any meaningful surge. Therefore, the counter trends coupled with spurt in daily cases would be the cause for concern in the near term. While the mortality rates have remained benign, the infection rate is increasing at a much faster rate than earlier.
 
Though Ind-Ra says it expects India’s vaccination drive to minimise the impact, the duration would be a function of its pace. 
 
 
According to the ratings agency, the renewed surge in cases has brought to fore the fear of localised lockdown, if not nationwide with varied restrictions, which could pose a moderate challenge to the supply chains of various sectors. 
 
"We believe that the ecosystem of handling a partial lockdown has reasonably geared up in the last one year. Corporates have developed inventory management practices and accelerated automation in handling supply chain logistics amid a restricted environment. However, the cost of transportation is bound to further rise, which has already been facing challenges owing to high fuel costs. In this regard, anecdotal evidence suggests that corporates are now choosing supply chain providers based on their ability to adapt to changing circumstances rather than cost alone," it added.
 
Ind-Ra feels merchandise trade to largely remain resilient during these times. It says, "Massive fiscal and monetary stimuli by various advance economies on the top of higher per capita income have been the key driving factor for the consumption in advanced economies. Consequently, strong consumption growth has pushed the domestic merchandise trade ahead of domestic demand." 
 
Sectors such as cotton, chemicals, and other consumer discretionary have shown a faster-than-expected recovery in aggregate export demand, Ind-Ra says adding it believes these segments would remain largely unaffected against a partial to full lockdown in various pockets. 
 
The ratings agency expects container freight rates to remain elevated amid shortage. Amid a shortage of containers globally, container freight rates in January 2021 rose 192% disrupting trade flows across the world. 
 
Even as the port recovery continues, Ind-Ra says, "trade flows may take a few months to normalise, leading to elevated freight rates, especially in first half (1H) of FY22. The container shortage is attributable to regular trade flows being interrupted due to the global lockdowns."
 
"While the lockdowns have been eased since then, adequate container availability in key locations has still not been achieved. Also, the pace of recovery has varied across regions like Chinese economy and its exports rebounded from the pandemic much earlier than the rest of the world, leading to an imbalance in the imports and exports from China," the ratings agency added.
 
Ind-Ra says it believes mounting COVID-19 cases in India as opposed to benign conditions in advance economies or originating countries for foreign investments could have an adverse effect on the investors’ risk appetite. Also, it says, a sharp economic recovery and reflationary trend have already been causing a rise in global yields. 
 
"This also is a negative factor for risky assets such as equity. Foreign portfolio investments (FPIs), especially into the equity, have been reasonably strong in recent months (see image below); any reversal from the trend however could destabilise the ongoing favourable conditions across the financial markets," Ind-Ra says.
 
 
According to the ratings agency rising uncertainties amid recovery phase could pull back some of the gains made in the credit markets especially for low rated instruments. Amid a cautious financial system, it says, the condition was improving, allowing low rated issuers to access capital though at a significantly high cost and some of these gains could reverse and risk aversion could increase. 
 
Ind-Ra says it believes conducive financing options is necessary, and volatile capital market condition impinges such proposition. It however also believes the enormous banking system liquidity and proactiveness from the Reserve Bank of India will alleviate the risk of a market failure. 
 
"The domestic G-Sec market is likely to stay benign on the renewed hope from a further monetary easing in case the situation worsens considerably. At the same time, any outflow from the capital market or pressure on balance of payment would open room for the regulator to conduct open market purchases," Ind-Ra concludes.
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    COMMENTS

    yerramr

    1 week ago

    What I find is loss of fear of Corona as we see crowds surging for all the electoral meetings. PM downwards, everyone asks for following covid restrictions like wearing mask, maintaining social distance and proper sanitization while all the meetings they addressed were without conformance to the preachings. What we espouse, we do not follow. That is the biggest tragedy in India. Regarding the economy, Yes - the supply chains would get badly hit. The vulnerable would be the most affected. Several States have done one good thing - free bites in all fields to the poor and hopefully at least 60-70 percent have received them and this the balance that keeps Indian economy going. But the surge in demand we see, is not from the lower middle class and the sensible middle class but the higher earning groups. FMCG rise is not from the salaried class earning less than ten lakhs per annum.

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