Stocks
Markets likely to gain after surgical strikes
Following the news of surgical strikes by the army across the line of control (LOC), the Indian equity market plunged. Both the benchmarks NSE Nifty and BSE Sensex ended the day lower by over 1%. However, according to a research report, despite a negative initial reaction, Indian markets are likely to gain post these strikes.
 
State Bank of India (SBI) in its Ecowrap report says, "While the initial response of the financial market has been negative, we believe such attacks are unlikely to have any material impact on the markets. Indian economy is currently on a sound footing with favourable macro numbers."
 
"For example," it said, "the Kargil war was fought between India and Pakistan in Kargil, during May to July 1999. During the aforesaid period, the leading indices of Indian stock markets show an initial decline but recovery thereafter. The Sensex and Nifty has declined by 286 points and 79 points in three trading initial days respectively, but recovered thereafter and ended higher by 652 points and 191 points when the conflict ended. The overall impact of the Kargil war was actually positive. The economy grew at the same pace in 1999-2000 as the year before - a healthy 6.5%."
 
 
During the period, Rupee has depreciated by 1.2% against dollar, while a minor change of 2 basis points in 10-Year G-secs. It may be noted that India had a fiscal deficit of close to 6% in FY2000. Interestingly, the rupee stayed at the nearly the same level during the rest of the FY2000 indicating that the value of the rupee is more determined by external factors.
 
The Sensex ended Thursday 1.6% or 465 points down at 27,827, while the Nifty closed the day 1.8% or 153 points lower at 8,591 points. 
 
"We also believe that the impact of the surgical strikes will have no impact on the markets as like the Kargil conflict. For one thing in common, these conflicts are more localized in nature. Also, now that India has clearly reaffirmed that its patience cannot be taken as granted, these will in fact act as a positive for the markets for the  decisiveness in India’s foreign policy," the Ecowrap report says.

 

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COMMENTS

Vannala Keervanamma

2 months ago

Thanks sir for giving us confidence.

Deepika Chatterjee

2 months ago

Did the market fall after Uri? Why now? Speaks volumes of the patriotism of Indian business class

Ramesh Poapt

2 months ago

reaction/impact may be higher than anticipated. too early to forecast.
already negatives are looming large that has been underestimated by the market.

G R Chari

2 months ago

Action speaks louder than words and Modi govt. has proved that it's a government that acts. From the market point of view the timing may have been bad, but expect a "V" shaped recovery.

Leslie Menezes

2 months ago

The Modi government has been smart this time. After talk of 1000 year war on poverty this news is really refreshing.

SRINIVAS SHENOY

2 months ago

The Government has taken the right approach in the present circumstances. Our patience should not be taken for granted at all times.

SRINIVAS SHENOY

2 months ago

The Government has taken the right approach in the present circumstances. Our patience should not be taken for granted at all times.

Nifty, Sensex may rebound from the fall in a day or two – Thursday closing report
We had mentioned in Wednesday’s closing report that Nifty, Sensex might rally a bit. The major indices of the Indian stock markets suffered a sharp correction on Thursday after the government revealed that it struck at terrorist camps across the Pakistan border. The trends of the major indices in the course of Thursday’s trading are given in the table below:
 
 
Indian equities tumbled sharply on Thursday after the army said it conducted surgical strikes on terror camps along the Line of Control (LoC) in Jammu and Kashmir, inflicting "significant casualties". The barometer 30-scrip sensitive index (Sensex) of the BSE, which was ruling strong in the morning after the unexpected production cuts agreed to by oil producing countries, took a fall of more than 500 points after the relevant briefing by the Indian Army. However, value buying arrested the steep falls and led to a bounce back. Nonetheless, speculative selling, profit booking and derivatives expiry dynamics again dragged the key indices lower during the late-afternoon trade session. The BSE market breadth fell prey to the bears -- with 2,297 declines and 442 advances.  On the NSE, there were 77 advances, 1,415 declines and 31 unchanged.
 
The CNX Nifty and Bank Nifty traded down on selling pressure. IT (information technology) stocks witnessed some recovery at lower levels tracking firm USD/INR futures prices. Banking, pharma and auto stocks traded down on selling pressure. Aviation stocks traded down tracking higher crude oil prices. Oil-gas, textile and FMCG stocks also traded down on over all selling pressure in the market.
 
The Indian rupee on Thursday tumbled to its lowest level in the last one week after the army announced that it had carried out "surgical strikes" on terror camps across the Line of Control (LoC) with Pakistan. The Indian currency, which opened at 66.44 to a US dollar, had already depreciated in the initial hours of the day's trade in line with the weakness in Asian currencies. The sharp fall occurred around 1.00 p.m. when the rupee depreciated to 66.95 to a US dollar. This level was last seen on September 22. However, the Indian currency bounced back marginally to 66.85 to a greenback before speculative selling dragged it lower to 66.90 at 4.10 p.m. 
 
Indian content conglomerate Zee Entertainment Enterprises Limited (ZEEL) on Thursday announced its foray into the radio industry with the acquisition of UAEs Hum 106.2 FM radio station. After being a pioneer with the launch of India's first Hindi satellite channel, Zee TV in 1992, Zee Entertainment was the first to launch a Bollywood TV channel, Zee Aflam in 2008 for the Arab audience as well introduce the Arab world to Hindi programs dubbed in Arabic with Zee Alwan in 2012. Commenting on the latest acquisition, Amit Goenka, CEO - International Broadcast Business, ZEEL said in a statement: "Radio has been an area of interest for ZEE for quite some time and after extensive planning and studying of the brand values, ratings and revenue generated by various stations, we felt that an investment in Hum FM was the best option." According to Goenka, Hum FM has a legacy of almost two decades and with a current market share of 26%, it is the top Hindi radio station in the UAE. "ZEE is confident that it can leverage its very strong South-Asian brand connect onto Radio, and offer a synergy of television, radio and digital that could revolutionize the entertainment industry in the UAE. The company’s shares closed at Rs544.70, down 0.69% on the BSE.
 
The government has hiked the annual cap of coal for sale through state-nominated agencies to 10,000 tonnes per annum from 4,200 tonnes per annum (TPA). "Union Ministry of Coal has issued an order with respect to the amendment to the New Coal Distribution Policy (NCDP), 2007 to increase the annual cap of coal from 4,200 tonnes per annum for sale through state-nominated agencies (SNA) to 10,000 tonnes per annum," a Coal Ministry statement said. The New Coal Distribution Policy, 2007 lays down the guidelines for distribution and pricing of coal to various sectors. The ministry has also amended the phrase "small and medium sector", as mentioned in the NCDP, to "small, medium and others". The order said the new guidelines will also be applicable to the distribution of coal from Singareni Collieries Company (SCCL). Coal India’s shares closed Rs327.30, down 0.43% on the BSE.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 

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Lack of oversight on credit guarantees raises concerns
Just a year back, Pradeep Malgaonkar, the chief executive (CEO) of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme was extolling the great strides it made in the geographical space of such guarantees. The Trust has issued cumulative guarantees to 23.23 lakh MSE loans involving an aggregate credit of Rs1.08 lakh crore over the past 16 years. Its corpus grew to Rs4,328 crore as of 31 March 2016. About 133 member lending institutions are participating in the scheme. 
 
But the Reserve Bank of India (RBI) in its Annual Report for 2016 expressed concerns about overleveraging of corpus and the way the guarantee scheme is functioning. Information asymmetry and adverse selection on the part of member lending institutions seem to worry the regulator. More worrisome issue is the absence of regulatory oversight on this institution. 
 
The structure of the Fund is such that government contributes four times that of Small Industries Development Bank of India (SIDBI). The Funds from this corpus are invested in several long-term securities with accumulated returns. Any default payout is adjusted using these funds and returns from them.
 
Since the Corpus for the Trust is contributed by the Government of India (GoI) and SIDBI, the guarantee for the leveraged loans is treated as sovereign guarantee and therefore under Basel II regulations. Banks are exempt from making provisions against the loans guaranteed by the CGTMSE when they become non-performing assets (NPAs). Such exemption is available because the guarantees are also shown as contingent liabilities of the GoI in its Budget annually.
 
The CGTMSE’s self-image is that it has reached a level of maturity in handling the processes enabling it to extend the cover within a week of receipt of applications as also release the claims within a fortnight.
 
Although it expressed willingness to work with state governments through special schemes the first state that expressed willingness, Kerala had to backtrack as the CGTMSE wanted it to be a contingent liability of the state government. This condition in effect means that there is virtually no risk sharing by the CGTMSE. Further, for the state government such provisioning would affect the fiscal responsibility and budget management (FRBM).
 
The National Credit Guarantee Trust Co under the Union Ministry of Finance has released different loan products for Micro Units Development and Refinance Agency (MUDRA), low cost housing loans of National Housing Corp (NHC) and education Loans and these are on the same technology platform of CGTMSE. The CGTMSE charges a service fee of Rs0.35%. In effect, the CGTMSE is managing the entire gamut of risks attached to the micro, small and medium enterprises (MSEs), retail loans under MUDRA, education and housing with no regulatory oversight. This should be naturally a cause for worry.
 
Other Guarantee schemes are that of the Industrial Finance Corp of India (IFCI) that opened exclusive cover for the entities set up for the scheduled caste entrepreneurs. While more than 90% of MSMEs, according to the Fourth MSME Census constitute proprietary units, and only 0.2% is in the corporate domain, it is doubtful whether the scheme would ever take off.
 
International Experiences in Guarantee and Credit Insurance
 
Taiwan stands out in the support to the SME sector. Its guarantee fund has been functioning effectively because it works in an ecosystem unique in the world. The Guidance System under its Ministry of Economic Affairs covers eleven portfolios to reinforce the guarantee mechanism. It has only a few risks to cover: start-up and incubation, management, finance, quality up gradation, production technologies, marketing support, information management, mutual aid and collaboration, pollution prevention, industrial safety and research and development. SME Agency, Bureau of Industrial Development and Bureau of Foreign Trade and Department of Commerce, and the Department of Industrial Technology are held responsible for SME Development – the prime engine of the country’s growth.
 
Other countries that are extending credit guarantee and credit insurance mechanisms are – Chile, Malaysia and Italy. For example, Chile has CEPRI (Centro De Productividad Integral) as the first private second-tier institution consisting of manufacturing associations and companies, covering about 10,000 companies of a broad variety of sectors. The CFPRI receives 25% commission from the government and it provides the Government a guarantee through a bank or insurance company covering all funds received until each project is completed and accepted. Mexico and Brazil implement more support services programmes for the development of SME sector and not specifically provide guarantees. But they ensure that the services generate responsible entrepreneurship.
 
Other countries like Italy that has a large cluster based lending programme supported by the United Nations Organization for Industrial Development (UNIDO), Sri Lanka and Malaysia operate guarantee schemes at a guarantee fees of 1% to 3% of the loan to guarantee up to 80%. One major problem noticed has been sustainability as the funds are provided either by the donors or the governments. Most guarantee funds cover investments in production facilities and few are prepared to guarantee the financing of working capital. 
 
In many cases SMEs have been granted financing for investment but have not been able to raise funds to implement the investment because guarantees for the financing of working capital were considered too risky, says a report from the UNCTAD: Development Strategies and Support Services for SMEs (2000): Issues concerning SMEs’ Access to finance)
 
Hopefully the one-man Committee, the Prabhatkumar Committee, appointed by the Prime Minster would look at the issues comprehensively in consultation with the RBI, SIDBI and the GoI and consider emulating the Taiwanese model.
 
(Dr Yerram Raju Behara or Dr B Yerram Raju  is a former senior executive of SBI and an economist and risk management specialist. He is also MSME Lead Consultant for the Government of Telangana. The views expressed in the article are his personal.)

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COMMENTS

Amar Chand Chug

2 months ago

Yes, I fully agree with Dr. Yerram Raju. Bankers take the credit guarantee cover in a very casual way and ignore its terms and conditions causing its implementation and enforcement very difficult. Borrowers are also not briefed about the scheme

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