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Stock markets: A possible trigger...

Sep 22, 2000

Even as the markets languish under selling pressure, there is a possibility that buying interest may emerge. The RBI has announced the draft guidelines for bank investment in shares. The draft guidelines deal with two aspects of the securities market. The first of these is aimed at making it easier to avail of financing for IPOs. The other, and this is of greater interest to us, deals with investment of banks in shares (including units of mutual funds and convertible debentures). Presently, banks are permitted to invest only 5% of their incremental deposits in shares. The draft guidelines propose that the limit should be related to the outstanding advances. The RBI has clarified that the ceiling is 'not mandatory'.

To put this issue in perspective, let's look at the amount of funds that are involved. So far during the current year, banks have mobilized incremental deposits worth Rs 476 bn i.e. they can invest in shares to the tune of Rs 24 bn. Now consider this. The outstanding advances (say total bank credit) of the banking sector are put at Rs 4,618 bn i.e. an investment limit of Rs 231 bn!

The markets have lacked triggers in the past few days. But these guidelines could possibly be one of the biggest triggers to buying interest in recent years. Ofcourse, there is an issue whether the banks will actually invest the amount they are eligible or not. Or for that matter whether the guidelines will be implemented or not. But the point is that as and when the money were to flow in, the banking sector would emerge as a key player in the domestic markets.

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