Sensex Trades in Red; Metal Stocks Top Losers

Sensex Trades in Red; Metal Stocks Top Losers
November 16
00:52 2017

After opening the day flat, Share markets in India witnessed choppy trades and are presently trading below the dotted line. Sectoral indices are trading on a mixed note, with stocks in the auto sector and stocks in the realty sector witnessing maximum buying interest, while stocks in the metals sector are leading the losses.

The BSE Sensex is down up by 80 points (down 0.2%) and the NSE Nifty is trading down by 30 points (down 0.3%). Meanwhile, the BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading down by 0.1%. The rupee is trading at 65.37 to the US$ .

In news from the banking sector. According to a leading financial daily, the government has sought a special dividend from the Reserve Bank of India (RBI) to fund a part of its Rs 2.1 trillion plan to recapitalize public sector banks (PSBs).

As per the article, the government asked the RBI if it can pay a special dividend apart from the yearly surplus that it already pays to the government.

Provided talks on the matter are fruitful, the dividend payout will be made during the current RBI financial year ending June 30, 2018. This dividend, if agreed to by the central bank, will be used only for bank recapitalization.

The RBI had for its financial year 2016-17 transferred Rs 306.6 billion of its surplus to the government, less than half of the Rs 658.8 billion it had handed over a year earlier, citing expenses of demonetisation and the subsequent printing of notes. The government had in the Budget for 2017-18 accounted for a dividend of Rs 74,901 crore from the RBI and nationalised banks.

According to various reports, the RBI may participate in the Rs 1.35-trillion bond programme that is a component of the bank recapitalization plan. The government plans issue the first tranche of the bank recapitalization bonds in December.

Recapitalisation of PSBs Over the Years

The Government unveiled the Rs 2.11 trillion public sector bank (PSB) capitalization plan on 24 October. This will be carried out over the next two years with maximum allocation in the current year. And implemented through the budgetary provisions of Rs 181.4 billion, recapitalization bonds to the tune of Rs 1.35 trillion. The balance will be through raising capital by issuing new shares to the tune of Rs 580 billion.

India had used this tool in the 90s. When the Government recapitalised PSBs with the total amount up to Rs 20,000 crore by recapitalization bonds.

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PSBs are burdened by bad loans that have doubled in the past five years. This has led to a slowdown in the loan growth segment. Due to this, PSBs lost their market share from 70.9% in FY16 to 64% in FY17.

PSBs are in a big mess. They already have a huge amount of bad loans piled up. There is a sense of urgency towards the recapitalisation move. This is because banks have to be recapitalised by 2019 to be compliant with the Basel-III frameworks.

However, using recapitalisation bonds can only act as a short-term measure to the crisis afflicting Indian public sector banks today. Such a measure will not address the structural issue in the banking system, i.e. the poor standard of lending and poor governance system.

Our big picture editor, Vivek Kaul, talks about moral hazard risk arising out of recapitalization. He writes:

  • “If the government bails them around this time around, the banks know that they can count on the government bailing them out the next time around as well. And this means that they can follow fairly loose standards of lending, in order to lend money quickly.”

Moving on to news from the oil and gas sector. ONGC share price is among the top losers on the bourses today while oil retailers like HPCL and BPCL gained after a steep correction in oil prices.

Global crude oil prices continued to fall today after the International Energy Agency cast doubts over the past months’ narrative of tightening fuel markets.

Brent crude futures were at US$ 61.4 per barrel, down 1.2% from their last close while US West Texas Intermediate (WTI) crude was at US$ 55.1 per barrel, down over 1.1%. Oil prices fell as the prospect of further rises in U.S. output undermined ongoing OPEC-led production cuts aimed at tightening the market. The falls came after both crude benchmarks early last week hit highs last seen in 2015, but traders said the market had lost some momentum since then.

Oil prices has increased nearly 130% since January 2016. This is a typical capital cycle. And it gets interesting every time.

The expectation in the market is that prices could remain elevated owing to several reasons, such as drawdown in inventories, especially in the US, better compliance with the voluntary production cut by the Organization of the Petroleum Exporting Countries (OPEC), slower pickup in US shale oil and continued geopolitical risk in West Asia.

The OPEC is expected to extend a cut of around 1.8 million barrels per day into the whole of 2018. Since June 2017 onwards, prices of Brent have been on the rise, on the back of a drop in US crude inventories, geopolitical tension between OPEC countries, and disruption in production caused by the hurricane activity in the US.

Crude prices are now down by around 5% since hitting 2015 highs last week. Crude oil is the most critical factor for economy like India as it imports around 80% of oil requirement.

From India’s perspective, rising oil prices warrant close attention. This could lead to rising risks of fiscal slippage, greater inflationary pressures, and lower likelihood of a rate cut by the Reserve Bank of India (RBI) in December prompt investors to review their positions.

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