In a note on the market outlook, Munot said that the easy global liquidity will not last forever.
The current recession will ensure unprecedented monetary accommodation over the next several quarters, but monetary policy is reaching its limits in effectively reviving the economy globally and is leading to rising wealth inequality as an unwelcome side effect, he said.
“To top it all, the current crisis has hit the bottom strata the most. The stage, therefore, is set for massive fiscal stimuli globally to complement the monetary effort,” he said in the note. It could set the stage for an end of the 40-year-old bull market in bonds, he said.
“When inflation perks up and global rates begin to rise in years to come, capital may not stay as abundant and become much more discerning. We are a country deficient in risk capital and must, therefore, act quickly and decisively.”
The statement further said that while the government is addressing the first-order impact on the poor, a lot more needs to be done to help businesses and avoid second-order impacts and social agenda needs resources that can only be generated by reviving growth and expanding the pie.
Compared to most countries, he observed that India has been high on the stringency of the lockdown and low on fiscal support.
“While our fiscal room may be limited, we must be cautious of the ‘paradox of thrift’. Given the environment, both the corporate sector and households may remain thrifty and risk-averse, the onus is on the government to lever up and spend,” said the statement.
With tax collections expected to fall, non-tax sources will have to be explored ranging from asset monetisation to perhaps government-backed municipal bonds — ‘Pandemic bonds’ just like ‘War bond’.
Munot said that while direct support to poor was critical during the lockdown, as the economy opens fiscal multiplier should be the driving force in prioritising expenditure. Infrastructure projects such as rural roads, urban infrastructure, slum redevelopment, and the likes should be prioritised to create immediate employment and support consumption as well as build productive assets.
“Fortunately, rural economy is in decent shape and must be shielded from supply chain disruptions as well as from the virus that returning migrant workers may bring along,” he said.
He added that the Reserve Bank of India on its part has been aggressive in policy response so far and is doing an even better job at communicating that it stands ready to do whatever it takes to revive the economy.
However, Munot said that it has only met with partial success in achieving the desired outcomes and the big disconnect between macro and micro level liquidity stays.
“The yield curve has continued to steepen, and corporate spreads stay elevated. Muted growth and high nominal rates can lead to debt ratios spiraling out of control. The tepid response to TLTRO 2.0 suggests lack of risk appetite and therefore the real economy stays starved for funds,a he said.
Government providing first loss guarantee, further relaxation in prudential norms, and RBI capping absorption through the reverse repo window along with aggressive OMOs are some measures that should help transmission, he added.