Another whammy for stock markets in the offing - Views on News from Equitymaster

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Another whammy for stock markets in the offing

Mar 27, 2000

The stock markets have received a drubbing in post budget trading, losing over 800 points. The pessimism was compounded by Sebiís decision to increase the cash component of margins deposited by brokers with the stock exchange. The Sebi had rolled back its guidelines pertaining to the cash component in order to stem the slide on the bourses. Now, however, a committee set up by the Reserve Bank of India and the Sebi has recommend that the margins charged for providing bank guarantees be hiked from the present average level of 10 - 15%. The move if implemented is sure to have an adverse fallout on market sentiment. But the move is nonetheless desirable.

Although the higher margins will mean that the effective costs of funds will be higher, it will also imply a higher degree of safety from the bank point of view (as the collateral value is higher). The borrowers on the other hand may be tempted to use their own funds in view of the higher costs.

In case of stock markets, the move is all the more significant because the borrowers will have to either repay debt or provide additional security. This would lead to a drain of resources from the market (implying selling pressure). The move will be equivalent to the Sebiís decision (which was withdrawn) to increase the cash component of margin money deposited with the stock exchange.

The move is likely to attract howls of protest from stock market participants. But the move is desirable and necessary, especially with the view of improving the financial health of the banks.

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