Assurances fail to assuage fears of tight liquidity; bond yields jump, equities and rupee collapse.
Assurances from the finance minister and the Reserve Bank of India (RBI) that liquidity would be supplied if needed left the markets unconvinced as stocks tanked on Monday led by a rout of shares of non-banking financial companies (NBFCs) and banks. Anxiety that liquidity would be scarce pervaded the bond market too and drove up the benchmark yield to 8.1220%. Meanwhile, the rupee lost a good 43 paise against the dollar, ending the session at 72.63 even as crude oil prices hit $80 per barrel.
Monday’s mayhem was caused by continuing fears liquidity would remain scarce. The tight conditions caused by outflows on account of advance tax payments of Rs 1.3 lakh crore could be exacerbated by further outflows to the tune of `1 lakh crore of CAMPA funds. “These could move to the government’s account from the banks,” Kotak Mutual Fund managing director Nilesh Shah explained, pointing out the already tight markets could see a further shrinking of liquidity.
Already, markets apprehend mutual funds (MFs) might find it hard to sell debt paper issued by NBFCs and housing finance companies (HFCs) or that these would need to be offloaded at a loss. Last week DSP MF was able to sell paper issued by DHFL but only at a much higher yield than was earlier expected. The transaction surprised the markets.
“The share of non-bank sources in NBFC lending has risen to 74% as of March 2018 and much of it has been short-dated with now a median 41% due for refinancing in 2018-19,” Credit Suisse wrote in a report. It pointed out that MFs have been a key provider of this liquidity with their exposure to NBFC commercial paper (CP) up threefold since March 2016. MFs now hold an estimated 60% of all NBFC issuances of CPs.
Even before that, the several defaults by infrastructure financier IL&FS, which owes lenders a whopping Rs 93,000 crore, had spooked the market which believes NBFCs and HFCs will find it very difficult refinance their loans. Later on Monday evening, the RBI announced open market operations to infuse Rs 10,000 crore of liquidity.
However, it simultaneously said the government would borrow an amount of `12,000 crore. Already money has become costlier; a typical AAA borrower is now accessing credit at 120 basis points higher than it was at the start of the year and about 180 basis points higher than about a year ago. MFs are looking to replace paper of a longer duration — which are losing value as interest rates rise — with shorter-term paper.
While the Sensex gave up 536.58 points on Monday to end at 36,305.02, the Bank Nifty plummeted 626.6 points. The Sensex has now lost 6% in September so far; the broader market has been in a trough for eight months now with the Nifty Small Cap Index having given up 26% in 2018.