Bleed­ing Oc­to­ber: Fall­out from do­mes­tic and global fac­tors

Rise in crude oil price, IL&FS row and RBI de­ci­sions put a dent in the stock mar­ket

Financial Chronicle - - FRONT PAGE - RAVI RAN­JAN PRASAD

GLOBAL and do­mes­tic fac­tors con­verged in the first week of Oc­to­ber lead­ing to may­hem in the In­dian mar­kets as crude oil prices surged to new highs in re­cent me­mory, the ru­pee plunged, the IL&FS cri­sis had a con­ta­gion im­pact on other sec­tors, RBI acted tough on Yes Bank and Band­han Bank and the govern­ment asked oil mar­ket­ing com­pa­nies (OMCs) to bear Rs 1 per litre price cut on petrol and diesel. All this led to a drop in share prices of com­pa­nies fac­ing th­ese events – and even the en­tire sec­tor at times.

The bench­mark Sensex is down 10.84 per cent or 4,228.76 points from an all-time high of 38,989.65 touched on Au­gust 29, 2018, the broader mar­ket is down even more pri­mar­ily due to heavy sell­ing worth Rs 25,000 crore by for­eign port­fo­lio in­vestors in Septem­ber-Oc­to­ber so far.

Due to high val­u­a­tions with­out earn­ings sup­port wors­en­ing macros of In­dian econ­omy, even do­mes­tic in­sti­tu­tions have not been step­ping in to negate for­eign fund out­flows lead­ing to the mar­ket fall­ing sharply from the be­gin­ning of Oc­to­ber, a process that started from early Septem­ber.

Sharp fall

How­ever, there has been some short cov­er­ing on Wed­nes­day af­ter mar­ket bench­marks Sensex and Nifty gained 1.35 per cent to 1.54 per cent. The sharp fall in the mar­ket so far in Oc­to­ber is ex­plained by Rs 14,098 crore pull out by the for­eign port­fo­lio in­vestors in first 10 days of the month. This ex­cludes Rs 1,096 crore net sell­ing on Wed­nes­day by the FPIs as per pro­vi­sional ex­change data which makes it more than Rs 15,000 crore sell off so far in Oc­to­ber.

In Septem­ber too FPIs had sold eq­ui­ties worth Rs 10,825 crore as per NSDL data. Pankaj Pandey, head of Re­search, ICICI Se­cu­ri­ties said, “Mar­ket has been fall­ing on global con­cerns, the year-long trade war, but for In­dia crude oil price rise is the ma­jor con­cern as it has led to fall in ru­pee which has led to for­eign fund out­flow. What we are sens­ing is that crude oil prices may not re­main at this level for long and there is lim­ited up­side to it. There has been a bounce back on Wed­nes­day as the mar­ket is draw­ing com­fort from govern­ment step­ping in to ar­rest NBFC cri­sis and good earn­ings from Zee En­ter­tain­ment and Band­han Bank.” Mean­while, the rise in in­ter­est rate in US and Europe could also raise rates and easy mone­tary pol­icy has led to flight of cap­i­tal from emerg­ing mar­ket which is cur­rently im­pact­ing In­dian eq­ui­ties.

“In global mar­kets, cost of money has risen and liq­uid­ity has be­comes tighter. US cen­tral bank raised in­ter­est rates by 0.25 per cent for the third time in 2018. There are ex­pec­ta­tions that it will hike the rates once more in the cur­rent year. Bet­ter wage growth and lesser em­ploy­ment are lead­ing to tighter mone­tary pol­icy in US econ­omy which is grow­ing strongly. Europe is also look­ing to re­duce its as­set pur­chases and rise in in­ter­est rates could be around the cor­ner. Other de­vel­oped coun­tries such as UK have also been rais­ing in­ter­est rates,” said Atul Ku­mar, head of eq­uity funds, Quan­tum As­set Man­age­ment Com­pany.

“As in­ter­est rates rise there is risk of for­eign­ers with­draw­ing from emerg­ing mar­kets. Most as­set classes were in­flated due to surge of liq­uid­ity at zero in­ter­est rates in de­vel­oped mar­kets post Lehman cri­sis. There could be de­cline in eq­uity and other as­set classes as for­eign­ers pre­fer their home mar­kets,” he added.

Ja­pan re­mains the only ma­jor econ­omy which is un­likely to end loose mone­tary pol­icy in the near fu­ture. “Tar­iff war be­tween US and China con­tin­ues and higher du­ties have been im­ple­mented for goods worth $200 bil­lion. This has a dis­pro­por­tion­ate ef­fect on Chi­nese econ­omy and led to sig­nif­i­cant fall in its stock mar­kets. There are ex­pec­ta­tions that the two coun­tries could com­pro­mise af­ter China make con­ces­sions. Brexit ne­go­ti­a­tions are also hang­ing in bal­ance. Un­favourable out­come of the same could im­pact global fi­nan­cial mar­kets,” said Quan­tum AMC.

Do­mes­tic fac­tors have also con­trib­uted to the fall in In­dian eq­uity mar­ket as IL&FS cri­sis had a con­ta­gion ef­fect on other sec­tors as well.

“De­fault made by IL&FS on in­ter­est pay­ments to some of its cred­i­tors led to down­grade of its rat­ing by sev­eral notches overnight. Many mu­tual funds were caught hold­ing its pa­per in their debt schemes – liq­uid as well as long-term schemes. They were forced to take a write down. Sub­se­quent to this, there was news of a mu­tual fund sell­ing pa­per of an­other NBFC at very high yield or low price. This set ru­mours in debt/eq­uity mar­kets that there could be de­faults/liq­uid­ity crunch. Many NBFC stocks saw their stock price crash­ing,” said a monthly re­port by Quan­tum AMC.


“The con­ta­gion spread to stocks of other sec­tors as well. Many stocks which were quot­ing at rich val­u­a­tions wit­nessed larger de­cline. MD of a de­cent size pri­vate sec­tor bank saw non­re­newal of his term by the reg­u­la­tor. An­other bank which listed on stock mar­ket few months ago was con­strained by RBI from open­ing new branches as it didn’t meet its share­hold­ing cri­te­ria. This was pre­ceded by reg­u­la­tions from Sebi for mu­tual funds. Sebi an­nounced a num­ber of mea­sures in in­vestors’ in­ter­est in­clud­ing ban­ning of up­front com­mis­sion by AMCs,” the re­port said.

Reg­u­la­tory risks came to the fore in the month and spooked in­vestor wealth in those stocks,” said Quan­tum AMC. Crude Oil price surge as high as $86.74 per bar­rel on Oc­to­ber 3 spooked both ru­pee and In­dian eq­uity mar­ket as it would hurt econ­omy badly.

“On the macroe­co­nomic front, crude oil price sur­passed $80 per bar­rel as sup­ply was con­strained. Sanc­tions on Iran led to surge in oil price. This doesn’t au­gur well for In­dia given the de­pen­dence on oil im­ports. RBI’s mone­tary pol­icy in early part of Oc­to­ber has main­tained sta­tus quo in in­ter­est rates. In­dia’s macro sit­u­a­tion has wors­ened even as mi­cro (com­pa­nies’ level) con­tin­ues to im­prove,” said Quan­tum AMC.

Ex­pec­ta­tion of wors­en­ing cur­rent

The sharp fall is ex­plained by Rs 14,098 crore pull out by the FPIs in the first 10 days of Oc­to­ber

count deficit is credit neg­a­tive for e coun­try which also seems to have d to FPI sell­ing in eq­uity mar­ket ong with the weak­en­ing of the ru­pee. Deepak Jasani, head - re­tail rearch, HDFC se­cu­ri­ties said, “In­dia’s rrent ac­count deficit is likely to be mpacted this fis­cal if global crude oil ice con­tinue to rise and more for­eign change spent on procur­ing them. he govern­ment has taken sev­eral ea­sures to stem the de­mand for dolr like rais­ing im­port du­ties on non­sen­tial items, lib­er­alised for­eign rrow­ing for oil com­pa­nies to raise up $10 bil­lion etc. The govern­ment reuced its mar­ket bor­row­ing by Rs ,000 crore in the sec­ond half of the rrent fis­cal. How­ever, the re­cent cut ex­cise duty on petroleum prod­ucts ould im­pact its rev­enue for the year. on­tin­u­ous spi­ral in prices may negate e im­pact of ex­cise duty re­duc­tion ompt­ing the govern­ment to take furer mea­sure in an elec­tion year.” Rat­ings agency Moody’s said the rent re­duc­tion in ex­cise duty on fuel the govern­ment will af­fect fis­cal ficit and is credit neg­a­tive for the un­try.

The bench­mark Sensex is down 10.84 per cent or 4,228.76 points from an all-time high of 38,989.65 reached on Au­gust 29, 2018

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