Uptick in Investments, Relief for Banks and Top Stocks in Action

Wed, 4 Apr Pre-Open

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On Tuesday, share markets in India opened on a flat note and remained volatile but ended the day on a strong note.

The BSE Sensex closed higher by 115 points to end the day well above the 33,000 mark at 33,371. While the broader NSE Nifty ended the day higher by 33 points to end at 10,245.

Among BSE sectoral indices, power stocks rose the most by 1.6%, followed by banking stocks at 1.1% after RBI relaxed norms for booking bond trading losses. ICICI Bank and Bank of Baroda were among the top gainers.

Top Stocks in Action Today

JSW Steel stock is likely to be in focus today after the Sajjan-Jindal led steel company has tied up with Numetal Mauritius to bid for the beleaguered Essar Steel. ArcelorMittal Netherlands NV-Nippon Steel and Sumitomo Metal Corp. (NSSMC) duo, and Vedanta Plc have also submitted their bids for the debt-ridden steel firm.

Motherson Sumi is another stock to watch today after the company agreed to acquire Reydel Automotive Group for US $ 201 million. France-based Reydel manufactures interior parts of vehicles for customers.

Modest Recovery in the Investment Climate

The Indian economy had some reason to cheer after companies reported a pick-up in new investments for the March 2018 quarter.

New project announcements have been falling in the past three quarters, reaching a 13-year low of Rs 1.2 trillion in the December 2017 quarter, as per Centre for Monitoring Indian Economy (CMIE). However, in the March 2018 quarter fresh investments announced by companies rose to Rs 1.95 trillion. The quantum, though less than half of the year-ago investments, still signals towards a modest revival.

More than half of the fresh projects announced in the March 2018 quarter were by manufacturing and power companies. Reliance Jio made the biggest project announcement of Rs 150 billion to set up an electronics manufacturing park near Tirupati in Andhra Pradesh. The company would be manufacturing mobile phones and set-top boxes in the park.

Another positive sign has been the decline in the rate of stalled projects that fell to 11.4% of total projects under implementation in the March 2018 quarter. However, the pace of stalled projects in the private sector continued to hover at record-high level of 24%. The power sector was the worst performer accounting for 35.8% of all stalled projects.

Despite a pick-up in investments and fall in the pace of stalled projects, sustainable recovery may still not be in the horizon as companies grapple with low capacity utilization. As per the Reserve Bank of India, India Inc's capacity utilization in the September 2017 quarter was muted at 71.8%. This is far below a capacity utilization of 80% reported five years ago.

Another stumbling block in the investment recovery cycle is the swell-up in the stressed assets that has put banks on a fire-fighting mode. Therefore, it may still be a while before these green shoots help in rejuvenating the economy.

Succor to Banks from Surging Bond Yields

Banks have been struggling with sluggish credit offtake and rising delinquencies eating into their earnings. But what has made matters worse is the surging bond yield that has necessitated higher marked-to-market (MTM) provision on treasury portfolio further pulling down their earnings.

Banks are required to maintain their bond portfolio under three categories - available for sale (AFS), held for trading (HFT) and held to maturity (HTM). The bond portfolio needs to be revalued at the end of every quarter.

As bond yields and bond prices move in the opposite direction, the recent surge in bond yields has pulled down bond prices and thereby the value of the treasury portfolio held by banks. Banks must provide for the MTM losses, for all bonds except the HTM bonds, at the end of every quarter.

In what has come as a temporary relief, RBI has permitted banks to spread out the MTM losses - arising in the December 2017 and March 2018 quarters - across four quarters.

Apart from this the government, earlier, lowered the size of its budgeted bond sales in the first half of FY19 to 48% of the total as compared to 60-65% in the previous years. This will help prevent the crowding out of investments from the market and thereby reduce the pressure on bond yields. Resultantly, the yield on the 10-year benchmark government bond that rose by 0.66% in the December 2017 quarter, increased by only 0.07% in the March 2018 quarter.

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