Supply to improve post Unlock 1; demand pick-up may be slower.

The temporary easing of the blockade in India has brought a big smile to the markets. Stocks have jumped, Nifty 50 increased by 2.6% on Monday.

Unlocking 1, or Phase 1, will help to increase production activities across the country. But there are still some disturbing trends. While many industries will be open in the first phase, a broader recovery in consumption will take several months.

Release 1 improved the mood. Capacity utilisation and supply chains need to get going, and demand will be better. But it will take time to get everything back to normal. It is difficult to determine the exact timetable, but it may even take about six months, said Harsha Upadhya, investment director, share capital, Cotak. Indeed, progress towards recovery is expected to be slow in most sectors. Moreover, this time the recovery is likely to be driven more by rural than urban demand. As major metros such as Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Calcutta, Pune, Ahmedabad, etc. all fall into the red zone, the recovery of economic activity and urban demand will take some time, Motilal Oswald Financial Services said in its customer memo.

Behind all this there are other glimmers of hope in the rural economy. The monsoon came on time and should have a positive effect on demand in the country. In addition, measures such as the increase in the allocation under Mahatma Gandhi’s National Rural Employment Guarantee Programme are expected to increase rural incomes. For example, industries that directly serve the rural economy, such as agrochemicals, fertilisers, tractors and even two-wheelers, may see demand return a little sooner. In the automotive industry, analysts expect a slow and gradual recovery of passenger and commercial vehicles, and much will depend on the recovery of financial and business activity.

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Although fees and disbursements of loans may improve the banking and financial space, the development of asset quality will only be known after the lifting of the current moratorium.

As logistics and interstate freight traffic is allowed, the demand for diesel oil will increase, which will facilitate the work of the oil companies. There may be some recovery in sales of consumer durables, which will largely depend on the lag in demand. Hospitals should be a little simpler because polyclinics are allowed in different regions. In the energy sector, pressure on plantations could improve, although construction and infrastructure activities are only slowly recovering.

Nevertheless, the short-term reaction of the market is due to liquidity and sentiment. The global signals are strong and almost all asset classes have recovered from the lower levels. But from an economic point of view, the normalisation of the economy will take another few months. It is advisable not to continue with the momentum at this point, Mrs. Upadhya added.

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