A volatile week saw the Nifty trading in a range between 10,450 and 10,600, and the Bank Nifty index being dragged down by the $1.77 billion Punjab National Bank fraud case. The rupee ended at 64.21 against the dollar, compared to 64.39 last week. FIIs were net sellers to the tune of 28.5 billion rupees ($44 million) while DIIs were net buyers to the tune of 23.7 billion rupees.
The highlight of the week was the bank fraud case involving jeweller Nirav Modi. The case may have a wider impact on the banking sector given the possibility that other jewellers could have exploited the letter of credit and bank guarantee facilities to fund their business operations. A pertinent point to note here is that the quantum of fraud is so huge that the likely recapitalisation amount that PNB is supposed to receive (54.7 billion rupees) from the government may be completely wiped off.
In another development, the RBI announced new rules around bank loan defaults and abolished a number of existing loan restructuring mechanisms like S4A, CDR and SMA to create a “harmonised and simplified generic framework” to resolve NPAs. This will affect credit markets and is expected to be negative for banks in the near term, especially large private banks who have reported huge divergence in the past (PSU banks have the comfort of knowing that there is always the possibility of further capital infusion by the government). In addition, rising bond yields are also forcing more provisioning on investment books, apart from NPA provisioning. This is expected to dent bank earnings going ahead.
The automobile sector was also in focus as the policy to scrap vehicles older than 15 years is almost finalised and will be implemented once it is approved by the cabinet. It is positive for companies like Ashok Leyland, M&M and Tata Motors as the government plans to cover commercial vehicles in the first phase because the segment accounts for the majority of the targeted vehicles.
Global index provider MSCI Inc on Thursday “strongly suggested” that India’s three main stock exchanges reconsider their anti-competitive measures after the National Stock Exchange, BSE Ltd and Metropolitan Stock Exchange said they would stop licensing products and data to foreign exchanges.
The index provider also warned of a “potential change in the market classification of the Indian market in the MSCI Indexes”.
On the macro front, CPI inflation for January eased to 5.07 percent, compared to a 17-month high of 5.21 percent in December. Factory ouput continued to record strong growth for a second straight month at 7.1 percent in December. IIP growth is expected to trend higher in January as commercial vehicle sales have expanded by 36.6 percent. The positive contribution of cement, diesel and even two wheelers augurs well for growth recovery, especially for the rural economy.
Merchandise exports increased 9.1 percent to $24.38 billion in January compared to a year ago, while imports surged 26 percent to $40.68 billion. Trade deficit jumped 64.6 percent to $16.30 billion in January.
The coming week is expected to be volatile due to expiry of derivatives contracts on Thursday. With the results season almost out of the way, investor focus will be on global cues and the unfolding bank fraud saga. The minutes of recent monetary policy meetings of three major central banks will be keenly tracked when they are released as they will provide important clues to the central banks’ monetary policy stance, potential interest rate trajectories, and outlook on inflation and economic growth.
The last few weeks of correction in Indian markets has resulted in massive losses, especially for retail investors who were chasing momentum in mid and small-caps. There seems to be a pattern of distribution where frontline indices are holding steady within a band while the mid and small-caps continue to correct heavily. However, this should provide a good opportunity for an entry in the near future.
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.