India Ratings and Research (Ind-Ra) believes that the recent spike in COVID-19 cases and associated lockdowns, though localised, could disrupt supply chains, foreign portfolio investments and domestic credit markets. 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 the agency expects that India’s vaccination drive would minimise the impact, the duration would be a function of its pace. 

Supply Chain Disruptions:
The renewed surge in cases has brought to fore the fear of localised lockdown, if not nationwide with varied restrictions. This could pose a moderate challenge to the supply chains of various sectors. The agency believes 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.

Merchandise Trade to Largely Remain Resilient:
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 believes these segments would remain largely unaffected against a partial to full lockdown in various pockets. 

Container Freight Rates Remain Elevated amid Shortage:
Amid a shortage of containers globally, container freight rates in January 2021 rose 192% yoy, disrupting trade flows across the world. Even as the port recovery continues, Ind-Ra believes trade flows may take a few months to normalise, leading to elevated freight rates, especially in 1HFY22. 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 e.g. 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. (refer our monthly update Logistics Monitor)

Capital Markets:
Ind-Ra believes mounting COVID-19 cases in India as opposed to benign conditions in advance economies (originating countries for foreign investments) could have an adverse effect on the investors’ risk appetite. Also, 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 (Figure 2); any reversal from the trend however could destabilise the ongoing favourable conditions across the financial markets. 

Debt Credit Market:
Ind-Ra believes that the 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, the condition was improving, allowing low rated issuers to access capital though at a significantly high cost. Some of these gains could reverse and risk aversion could increase. The agency believes conducive financing options is necessary, and volatile capital market condition impinges such proposition. The agency 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 up room for the regulator to conduct open market purchases.

 Figure 1


 Figure 2
 Monthly FPI Flows


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Analyst Names

  • Soumyajit Niyogi

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356111

    Prashant Tarwadi

    Director
    +91 22 40001772

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121