Stocks
Nifty, Sensex may dip a bit – Thursday closing report

We had mentioned in Wednesday’s closing report that Nifty, Sensex were in no-man’s land. The major indices of the Indian stock markets suffered a minor correction on Thursday and closed with small losses over Wednesday’s close. The trends of the major indices in the course of Thursday’s trading are given in the table below:

Following their global peers, the Indian equity markets fell during the mid-afternoon session on Thursday, a day after the US Federal Reserve hiked its benchmark rates. The rate-hike assumes significance as it is expected to lead FPIs (Foreign Portfolio Investors) away from emerging markets such as India, and is also expected to dent business margins as access to capital from the US will become expensive. Consequent to the late-night US rate hike, the Asian markets traded broadly in the red and eroded Indian investors' confidence in the highly expensive conditions in the domestic stock markets. Selling pressure was witnessed in banking, oil and gas and capital goods stocks. On the NSE, there were 837 advances, 805 declines and 311 unchanged.
 
The US Federal Reserve on Wednesday raised its benchmark interest rates for the third time since December and unveiled plans to start trimming its balance sheet, even as news of the Fed's relatively hawkish stance provoked caution in early trading in the Indian equity markets, which were trading flat on Thursday morning. "In view of realised and expected labour market conditions and inflation, the FOMC (Federal Open Market Committee) decided to raise the target range for the federal funds rate to 1% to 1.25%," the American central bank said in a statement after concluding its two-day monetary policy meeting. This rate is a 25 basis points increase over the current one of 0.91%.
 
Expressing confidence that the US economy is recovering, the Federal Reserve said America's labour market has "continued to strengthen" and economic activity has been "rising moderately" so far this year. Employment gains have been moderate but solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and fixed investment by business has continued to expand. The statement also said inflation "has declined recently" and in the next 12 months "is expected to remain somewhat below 2% in the near term".
 
As per data made available, the previous rate hike by the US central bank in May had a 0.77% upward impact on the BSE Sensex, while the decision to hold rates in March was impacted by 0.64%. However, the recent US rate hike has belied fears of capital outflows from India, with foreign funds continuing to pump in huge liquidity into the stock market. Riding on ample liquidity and confidence of the global fund managers, India's market capitalisation has crossed a massive $2 trillion. In fact, such volumes have also provoked calls for caution in handling inflows.
 
Two- and three-wheeler major Bajaj Auto on Wednesday said that it has reduced the prices of its bikes by up to Rs4,500 with immediate effect, in order to pass on the expected GST price advantage to its customers. "The savings will range up to Rs4,500 depending on the model and the state in which the motorcycle is purchased," the company said in a statement. According to the company, the post-GST benefits will vary for each state and differ across motorcycle models. "With GST implementation just around the corner, we felt that it would be appropriate to pass on this significant savings to customers," said Eric Vas, President, Motorcycle Business, Bajaj Auto. After the GST is implemented from July 1, motorcycles with more than 350 cc engines will attract a 28.84% tax, while mid-segment and high-end luxury cars will call for a tax incidence of 32.2%. The company’s shares closed at Rs2,810.00, down 0.54% on the BSE.
 
Taking higher haircuts is the way forward for resolving the bad loans of banks, UCO Bank MD and CEO RK Takkar said on Wednesday. "We may have to take some haircuts. The banks will be prepared for that and moving forward. I think that's the way things have to move. Most of these (non-performing assets) accounts will be having 40 per cent provisions, so the only issue that comes is for the banks to take higher haircuts," Takkar told BTVi in an interview. The Reserve Bank of India (RBI) has given banks a time frame of six months to resolve their bad loan cases, apart from the 12 identified by its Internal Advisory Committee, failing which the cases will have to be dealt with through the insolvency route. "Banks will be examining each NPA case during the six months. It is also to put pressure on the promoters," Takkar said. "It has to be done within six months. The only option left after that will be liquidation," he said. The RBI on Tuesday identified for insolvency proceedings 12 accounts totalling 25% of the non-performing assets (NPAs), or bad loans, of the banking system. The Bank Nifty closed at 23,391.75, down 0.46% on the NSE.
 
Indians working overseas sent home $62.74 billion last year, an increase of 68.6% in the last decade, according to a UN agency. India received the most overseas remittances last year, a report by the International Fund for Agricultural Development (IFAD) issued here on Tuesday said. The money sent by Indians overseas amounted to 3.3% of India's gross domestic product, the report said. Gulf countries were the primary destination for Indian workers going abroad, with the US as a "popular destination". The data is likely to indicate stability of the Indian rupee against the US dollar and British pound sterling and ensure that there is hardly any volatility in the Indian stock markets on account of foreign institutional investors.
 
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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Demonetisation could cause capital erosion for MFIs, NBFCs and SFBs in FY2018
Following demonetisation and political interference, microfinance institutions (MFIs), including non-banking finance companies (NBFCs) and small finance banks (SFBs) with exposure to states like Uttar Pradesh, Uttarakhand, Maharashtra and Madhya Pradesh, faced with asset quality overhang, are staring at significant credit costs and capital erosion in FY2018, says a research report.
 
In a note, India Ratings and Research (Ind-Ra) says, "The current upheaval has validated our earlier opinion of borrower overleverage and idiosyncratic and systemic risks (due to political ecosystem) prevalent in the industry. Furthermore, borrower discipline, a key ingredient for the smooth functioning of microfinance, has severely deteriorated in certain districts of affected states and may take years to be restored. In addition, MFIs need to structurally look beyond joint liability group (JLG) loans for loan growth and product diversification by building capabilities."
 
 
Ind-Ra says as per its interactions with borrowers, unintentionally defaulting borrowers are unlikely to clear four or more equated monthly instalments (EMIs). "...borrower interactions over the last six months indicate that earning members have lost one-three-month wages or income due to demonetisation in FY2017. However, business almost recovered in 1QFY2018. The analysis suggests that incremental incomes of such borrowers in FY18 would be enough to repay three missed EMIs at best. However, MFIs may need to take haircuts on borrowers that have missed more than three EMIs or are intentional defaulters. The extension of loans by three months may work if default is unintentional."
 
 
An analysis by the Fitch Group Company, indicates that aggregate collection efficiency of majority of MFIs with significant exposure to affected states on portfolio outstanding (as of December 2016) was 75%-80% higher in May 2017 compared with a low of 50%-60% in December 2016. "In case collections on portfolio as on 31 December 2016 do not increase from the current level, MFIs with significant exposure to affected states and with aggregate loans under management of Rs1,000 crore and above could incur credit costs and capital erosion and, thus, higher leverage," the ratings agency says.
 
 
 
According to Ind-Ra, collection pick-up is slower than expectation. Maharashtra was one of the worst affected states, with monthly collections in some districts being in single digits, it says, adding, during the revival period after December 2016, the intensity of political interference in affected states was such that demand for loan waivers did not die down in some districts even after local elections.
 
Ind-Ra's analysis indicates that in case collections (on portfolio as on 31 December 2016) do not increase from the current level, MFIs with significant exposure to affected states and with aggregate loans under management of Rs1,000 crore and above could incur credit costs and capital erosion and, thus, higher leverage. "At 80%, these MFIs could require equity of Rs100 -Rs300 crore, depending on loans under management, to ensure their capital levels remain over the regulatory minimum. The aggregate recovery level on the December 2016 portfolio should exceed at least 85% by 2QFY2018-3QFY2018 to prevent capital erosion beyond the regulatory minimum, without additional infusion for some MFIs. At 95% collections on portfolio at end-December 2016, MFIs are likely to witness marginal capital erosion," it added.
 
 
According to the ratings agency, lower-than-worse-case credit costs and equity erosions are supported by the fact that 15%-20% of assets under management of MFIs are off-balance-sheet, where credit enhancements, over-collateralisation and first loss default guarantees could range between 5% and 15% on an aggregate basis.
 
Ind-Ra feels that MFI should now look beyond JLG. "We acknowledge that JLG loans address an important credit need and have an important role in financial inclusion. However, borrower selection and operating processes need to be reassessed. Moreover, MFIs need to develop expertise in other secured and unsecured credit products and roll them out gradually (early experience not pleasant for most MFIs). Instead of pursuing growth, they need to adopt best practices of NBFCs, minimise employee churn, and innovate lending and risk sharing mechanisms," it concluded.
 

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COMMENTS

narasimha prasad

2 days ago

Sir my mom has deposited 2 12,000 rd on 28 Jan. 2017 but we have not received any of the amt.May I know when we will be getting back

Mahesh S Bhatt

2 days ago

Kejriwal is fighting defamation case against Jaitley who has sued him for few crores Ram Jetmalani defending Judge asking Kejriwal to explain word "CROOKED" FOR JAITLEY. Now Demon happened 8/11/16. On 3 years completion televised interview JAITLEY HAS AUDACITY TO tell audiences that RBI is still counting & accounting. Another news was Delhi deposited 55000 cr / Mumbai 22000 cr so it reflects where crooked more people stay Lastly with automatic note counting machine 1 lac denonimation of Rs 1000/would take 1 min, So God knows how is collected back last count was 14.6 lacs crores /Shivsena complaining that Coop Banks 2200 crores to be exchanged. So with this state of Democracy God also cannot support God Bless Mahesh Bhatt

Suresh Kadam

1 week ago

Demonetization was a useless attempt to curb the black money. It has sure slowed down the economy and the signs are visible everywhere from agriculturists protests to non creation of jobs.

Satyadev Verma

1 week ago

Agree that some negative implications r there with demonitisation.
Never the less,I appreciate the bold & couragious step of demonitisation.
No decision can b 100% correct on country level,there will b benefits & pains.
Demonitisation did not bring out desired results for corrupt bank officials & politicians.
It was with good intentions for the country.

SuchindranathAiyerS

1 week ago

As nothing was done about corruption, either in the form of legislation or in the farm of action, the continuing negative fall outs of demonetization will echo past the term of the Modi Sarkar

Do positive real interest rates impact financial savings?
Empirical evidence in economic literature in India is mixed regarding the impact of real interest on financial savings. Some economists have found savings to be insignificantly related to real interest rates, while others have found a very small but positive interest rate elasticity of savings. If indeed the empirical evidence is any indication, it seems that real interest rate may have to stay positive at much higher levels than 1.5% to have any meaningful impact on financial savings, says a research note.
 
In a report, State Bank of India (SBI), says, "The Reserve Bank of India (RBI) has also changed the goalposts often in so far as estimation of real interest rates are concerned. Even the RBI had admitted that the estimation of such rate of interest is highly sensitive to underlying assumptions and hence is a challenge for the conduct of monetary policy. The RBI had estimated this rate at 0.6-3.1% in Q4FY2015 that in itself is different from the 1.5% as laid in monetary policy."
 
 
Inflation adjusted deposit rate or real interest rate for FY2017 was at a 15-year high at 3.2% due to low inflation, and will remain high as the inflation scenario for FY18 is quite benign. Now the question arises whether these high real rates will impact financial savings, which was average 10.4% of GNI for the last five years, in some way or other, SBI wonders.
 
In 1973, economists Ronald McKinnon and Edward Shaw postulated a relationship between high interest rates and private savings. In theory, SBI says, high real interest rates have two opposing effects on private savings. The first is the substitution effect, in which saving increases as consumption is postponed to the future, and the second is the wealth effect in which savers increase current consumption at the expense of saving. "The impact of real interest rates on private saving is, therefore, ambiguous and can only be established empirically. Further, McKinnon and Shaw said that under conditions of financial repression, the substitution effect dominates the wealth effect, thus enhancing financial intermediation," it says.
 
More crucially, SBI says, in the Indian context, studies have shown the substitution effect of real interest rate is more than the wealth effect leading to overall negative impact of higher interest rates on savings rates. 
 
"However, the actual coefficients are significantly small and insignificant in most of the cases. The coefficient ranges from 0.1 to 0.3, suggesting a large change of as much as 3% to 10% in real deposit rates will be needed to change savings rate by 1% and small changes will hardly make any difference, if any. Additionally, causality analysis in India between income per capita and savings rates shows that such causality run mostly from income to savings. This implies that high gross domestic product (GDP) growth and increase in per capita income would significantly improve the savings rates in India," the report added.

 

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COMMENTS

Ramesh Poapt

1 week ago

is inflation really low? 'consumption ' is the only theme the govt
wants at 'any cost'! 'good guaranteed return' is hated by govt.
common man has to go to mkt/mf where risk awaits..catch 22
for savers!

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