CAPITAL INFUSION SOOTHES MKT, FOR NOW
NEW DELHI: Stocks of banks and non-banking financial companies (NBFCs) received a boost on Wednesday after a series of measures appeared to have at least temporarily halted fears of an impending crisis in equity and debt markets, outpacing a broader recovery in benchmark indices that have been on shaky footing for around three weeks.
The Nifty Bank Index, a gauge that represents large capitalised stocks from the banking sector listed on the National Stock Exchange (NSE), rose 3.24%, double the 1.54% growth in the broader 50-share index.
The immediate trigger for the recovery, experts said, was an announcement by the stateowned State Bank of India after trading hours on Tuesday that it is stepping up its target of buying “good quality” asset portfolios from NBFCs.
“SBI’s move to infuse more capital into the market has soothed investors’ nerves for now,” said AK Prabhakar, the head of research at IDBI Capital, while explaining that last week’s volatility was due to fears over asset-liability mismatches (ALMs) in NBFCs, especially after the Infrastructure Lending and Financial Services Ltd (IL&FS) episode.
The BSE Sensex, after opening of 34,493.21, rallied to hit a high of 34,858.35 before ending 461.42 points, or 1.35%, higher at 34,760.89.
The Nifty reclaimed the key 10,400 mark, showing a significant gain of 159.05 points, or 1.54%.
THE RUPEE ALSO AIDED THE RECOVERY IN STOCK MARKETS, AS IT SNAPPED ITS SIXSESSION LOSING STREAK TO END 18 PAISE HIGHER AT 74.21 AGAINST THE US DOLLAR AFTER THE AMERICAN CURRENCY WEAKENED OVERSEAS
A second expert said Wednesday’s recovery suggests that the crisis was one more of sentiment than of liquidity.
G Chokkalingam, founder and MD of Equinomics Research, also attributed the recovery to SBI’s announcement. “NBFCs are facing a problem of confidence, overvaluation and ALM, even though they are better placed than PSU banks in terms of capital...The SBI move could boost NBFC stocks in just a day because it’s a problem of sentiment,” he said.
State Bank’s decision came days after the government took control of IL&FS (only the second time it has taken over a company), after it defaulted on shortterm loan obligations and threatened to spread a contagion among other financial companies. The takeover was meant to signal that the government would go to lengths to stabilize financial, money and capital markets. It was also meant to address fears among small investors and subscribers of mutual funds, and address criticism from the opposition that the IL&FS crisis could turn into India’s “Lehman moment”.
While announcing a new board to supersede IL&FS’s previous management, the government pledged fresh funds for the lender once a new revival plan is drawn up. Within days, India’s largest state-run insurer, Life Insurance Corporation (LIC), indicated that it will not allow IL&FS to collapse. LIC chairman VK Sharma told reporters on September 25 that all options, including increasing LIC’s stake in IL&FS, were open.
In addition to interventions by the government, directly and through SBI and LIC, the Reserve Bank of India too stepped in to help infuse more liquidity, a decision that traders said helped support the recovery in stock markets.
On Tuesday, the central bank said it would inject ₹12,000 crore into the system through purchase of government bonds on October 11 to meet the festival season demand for funds. The result of these interventions was that NBFCs logged a faster recovery in share prices compared to the indices on average. Dewan Housing Finance Limited (DHFL), which was among the first to show signs of a contagion from the NBFC crisis, gained 16.08% in Wednesday’s trading. Bajaj Finserv, Edelweiss Finance and Shri Ram Transport Finance Company recorded double-digit gains in percentage terms.
The rupee also aided the recovery in stock markets, as it snapped its six-session losing streak to end 18 paise higher at 74.21 against the US dollar after the American currency weakened overseas. The gainers included auto stocks, banks, infrastructure, metals and pharmaceuticals. Both experts quoted above, however, said that analysts and traders will “wait and watch” the evolving situation in the NBFC sector.