Sitharaman,PowellandSamuelson

After the announcement of Tuesday about the mighty relief package, it was time to unveil the fine print on Wednesday on how the relief will actually reach the intended recipients. FM Nirmala Sitharaman in her press conference outlined the steps which were mainly in the domain of providing guarantees on the loans given to MSMEs. The expected benefit is that the MSMEs, which are the primary job creation vehicles, would tide over the bankers reluctance in funding them and restart production as well as job market. There are other measures regarding subordinated debt and equity infusion also being planned. In total the announcements covered close to 6 lac crore worth of relief measures.

Now one can debate ad nauseum about the actual outflow for the government in the near to medium term and how the nature of the package is skewed more towards contingency relief. The bond market will be the true test of these arguments. Bond yields have opened left in the opening (Old 10 year @ 6.0450) which reveals that the market is convinced that the announced measures will not represent a huge and immediate burden on the government.

Economist Paul Samuelson in 1938 came up with a theory called the revealed preference theory regarding an individual’s consumption pattern. The theory asserts that if we want to decide what is the best option amongst multiple alternatives, the best way is to observe the purchasing behaviour of the consumer. Even if the consumer can’t explain his choice, the expectation is that he is expected to make the perfectly rational one. Mr Market, as a customer, has made a choice to buy bonds today. The analysts can still argue over contingent guarantees and its impact on fiscal deficit but if Mr Market has made a move it is expected to be the rational one (as of now).

Globally we saw the Dow Jones falling by close to 2% in the trade yesterday. The Fed Chief in a webcast yesterday painted a grim picture of the economic state saying that both the scope and speed of this downturn are without any precedent. He stated that the longer a recession lasts, the more lasting damage it can do to future growth. He then placed the ball in the court of elected representatives saying that more fiscal stimulus will be costly but needed in case it helps avoiding long term economic damage. Powell also stated that “we are not looking at negative interest rates”. Market expectation of a quick V shaped recovery was sobered by the Powell comment. However on the negative interest rates it appears that even if the Fed is not looking at them currently, the Fed funded futures market is definitely pricing them as a high probability event.

The Indian rupee has weakened (75.50 against 75.35 yesterday’s close), the Dollar Index is trading right, the Nifty is down by 1.5%. The market is revealing its preference towards a risk on maybe.