India’s benchmark indices ended near two-month lows after an extremely volatile session on Friday triggered by panic selling in NBFCs, particularly housing finance firms, on fears of debt default.
The week started on a lower note after investment bank Goldman Sachs downgraded its investment view on India to “market weight” from “overweight”, citing higher valuation and unfavourable election outcomes in the near-term.
The Nifty closed the week lower by 3.2 percent with mid-caps and small-caps plunging by 6 percent and 6.5 percent respectively. On the sectoral front, the Nifty PSU Bank index declined by 8.5 percent, Realty index fell by 6.6 percent and Nifty Bank fell by 5.8 percent.
The rupee managed to post some strength against dollar on the back of intervention from the RBI and a weak dollar index.
One of the most important event during the week was the contagion effect of the tightness in money markets amid a continuing financial crisis at IL&FS.
This led to stock prices of most housing finance and NBFC companies witnessing heavy intra-day selling and plunging 10-60 percent on Friday.
This was after reports indicated that DSP Mutual Fund was forced to sell commercial papers of DHFL (in the range of 2-3 billion rupees) in the secondary market at a higher yield due to tight liquidity in the system.
Other housing finance companies and NBFCs too witnessed a sell-off as borrowing costs are expected to rise and they could face challenges in raising funds.
Around five percent of banking system loans are made to finance companies, and a deterioration in their credit profiles will have a negative impact on banks as well.
The panic might still not have settled completely. There are concerns over short-term liquidity in the market for commercial papers raised by NBFCs and their ability to raise capital.
I would advise investors not to go for bottom-fishing for now and wait for a clearer picture to emerge.
The board will meet on September 25 to decide on the bank’s future course. With just four months to find a new CEO and receive RBI approval, the board has a tough task.
PSU banks were also in the limelight after the government set the ball rolling towards consolidation in the space with the announcement of a merger between Bank of Baroda, Dena Bank and Vijaya Bank.
Clarity is awaited on the share swap ratio. The merger will take longer than expected given the need for board approval, integration of people, processes and infrastructure.
Bank of Baroda and Vijaya bank are the two relatively better-placed banks and will have to carry the burden of elevated NPAs and low capital ratio of Dena Bank, which is currently under RBI’s prompt corrective action.
There is also strong chatter in the markets about the possibility of a merger between PNB, Indian Bank and Indian Overseas Bank. Another combination could be Canara Bank, UCO Bank and Syndicate Bank.
In the coming week, investors will continue to keep an eye on the NBFC space, which is expected to witness volatility. Markets are also expected to react to reports during the weekend that China has cancelled trade talks with the United States and will no longer send Vice Premier Liu He to Washington next week.
Other important global events lined up are the FOMC and OPEC meet. But these are expected to have a limited impact on markets as most of the outcomes are already discounted.
The OPEC and its allies are unlikely to agree to an official increase in crude output when they meet in Algeria, although pressure is mounting on top producers to prevent a spike in oil prices ahead of new U.S. sanctions on Iran.
As for the Federal Reserve, a rate increase is almost certain on Wednesday. In Europe, Brexit will remain in focus after EU negotiators told UK Prime Minister Theresa May that her Chequers plan “would not work.”
Given the market volatility, the best option for investors at present would be ‘no action’. However, for those who have enough liquidity, this could provide a good buying opportunity.
Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.