Can a ‘Hindu Growth Rate’ Help You Earn Decent Mutual Fund Returns?

Since March, the lockdown imposed to contain the spread of virus has put the brakes on economic activity, other than those related to essential services. This could have a severe implication on the already slowing demand in urban and rural areas.

[Read: Are You Using Your Emergency Funds Wisely to Tackle the Coronavirus Pandemic?]

India could, therefore, be moving towards a Hindu growth rate -- the growth rate clocked by the Indian economy, when it followed protectionism - before liberalizing it in 1991. The long-term average growth rate was around 3.0-3.5% then.

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RBI has refrained from providing forecast for real GDP growth in India citing highly fluid circumstances. It is awaiting a clear fix on the intensity, spread, and duration of COVID-19 before providing forecast for real GDP growth in India. However, it has showed the possible impact of the global slowdown on India's growth and inflation using the Quarterly Projection Model (QPM) under alternative scenarios.

Scenario 1 assumes global growth in 2020 to be 3 percentage points lower than in 2019. Scenario 2 assumes that the outbreak is contained faster and the loss of global output growth is only 1.5 percentage points relative to 2019.

The QPM has taken into consideration the adverse effect on exports, which can lead to lower domestic demand, growth, and inflation. Secondly, it has taken into consideration the softening international crude oil and other commodities; India, a net importer, can benefit from the lower prices. Further, heightened global financial market volatility can feed into domestic financial markets and impact both growth and inflation, QPM has captured this as well.

The model's simulations suggest that on account of global factors, domestic growth could be lower, at its peak, by 180 bps in Scenario 1 and by 80 bps in Scenario 2. Inflation could be lower by 40-100 bps at its peak under the two scenarios.

(Source: rbi.org.in)

In the wake of pandemic, rating agencies have sharply slashed India's growth forecast.

Moody's has slashed India GDP growth forecast for FY 20 to 2.5% from 5.3% due to the unprecedented shock to the economy.

For FY 21, Goldman Sachs has cut India's GDP estimate to 1.6% from 3.3% (previously); Fitch has cut India GDP growth forecast to 2% from 5.1% projected earlier, while S&P has downgraded the forecast to 3.5% from 5.2%.

Will it be all doom and gloom?

Though the pandemic has lowered India's growth outlook, it could be one of the better performing economies in the world. The United Nations said that world economy will slip into recession, but mentioned that India and China will be the exception.

While the report did not suggest any reasons, here are the possible explanations:

• The slump in international crude oil prices can benefit India, a net importer, as it will lead to lower import bill and, thus, bridge the fiscal deficit gap.

• Western countries could look to diversify their dependence on China for various supplies; India could be a leading contender to take up China's place in the market share. This would provide India an opportunity to scale up exports.

• India's debt to GDP ratio is far lower compared to some of the developed economies like the US, UK, Japan, Italy. This means India has the capacity for higher government spendings towards affected sectors and sections of society without compromising much on growth.

• More importantly, India has been quick to foresee the danger of the outbreak and has responded suitably. Better containment of the virus outbreak due to effective and timely lockdown can aid faster recovery.

Besides, the government and RBI have been quick to come out with measures to combat the virus through stimulus packages and relief measures. More measures can be expected in the near term.

As a result, my faith in India's growth story remains intact. However, the recovery will be slow and gradual. Much will depend how quickly things go back to normal, some sectors will recover faster compared to others.

Will mutual funds fare well?

Corporate earnings across sectors could deteriorate in the next 2-3 quarters. This would weigh on the equity markets and mutual fund performance.

Therefore, mutual funds could generate subdued returns in the next few months. But remember that markets have history of rewarding investors who exercise patience and make the best of such opportunities.

[Read: What Could Be the Potential Impact of a Lockdown on Your Mutual Fund Portfolio? Know Here...]

If the funds that you have invested in have performed well in the past as compared to the benchmark and category peers and if you hold a well-diversified portfolio of funds based on your personalised asset allocation plan, you need not rethink your investment decision. However, if you have any doubts, you need to immediately get a health check-up of your portfolio.

This is a great opportunity to deploy in worthy funds and create wealth for the future at attractive valuations with better margin of safety if you have investible surplus and a long term time horizon.

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The present market condition makes it the right time to get your hands on high alpha generating funds.

Warm Regards,
Divya Grover
Research Analyst

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