Indian Indices Continue Momentum; Sensex Up Over 170 Points

Tue, 28 Aug 12:30 pm

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After opening the day at record high, stock markets in India have continued their momentum. Sectoral indices are trading on a positive note with stocks in the metal sector and energy sector witnessing maximum buying interest.

The BSE Sensex is trading up 173 points (up 0.5%) and the NSE Nifty is trading up 50 points (up 0.4%). The BSE Mid Cap index is trading flat, while the BSE Small Cap index is trading up by 0.6%.

The rupee is trading at 70.14 to the US$.

In the news from currency markets, the rupee went on to hit a record closing low of 70.16 against the US dollar yesterday.

The rupee has been witnessing selling pressure lately on the back of many factor such as rising current account deficit, rising global crude oil prices, and tepid export growth.

It has been falling against the US dollar since the start of this calendar year.

What does the fall in rupee mean for the Indian economy?

A depreciation in rupee means importers buying goods and services at a higher rate that earlier. This doesn't bode well for a developing economy that relies heavily on imports.

Also, India imports most of its oil requirements. So, a fall in rupee leads to a consequent rise in the import bill. The depreciation of the rupee will also add to crude oil's rising cost.

On the corporate side, companies who have taken foreign loans from abroad will be impacted. The repayment obligations in terms of principal and interest will rise, leading to a dent in the cash flows and financials.

Further, companies who import most of their raw material requirements will get impacted provided they have not hedged their foreign currency exposure.

Looking at the brighter side, rupee depreciation brings a cheer on the exports front.

A depreciating rupee will provide a much-needed cushion to falling exports. However, a falling rupee will not be the only factor to boost exports. There are certain structural issues too which the government needs to address.

Apart from the above issues, the falling rupee is also posing a big risk to the unhedged foreign currency borrowings. Meaning liability on these loans could up exorbitantly because of unfavourable forex movements.

Here's what we wrote about this topic in one of the editions of The 5 Minute WrapUp...

• Even as the PSU banks struggle to recognise and provide for their bad loans, the companies they lent to, have yet another problem. The rupee's sharp depreciation is posing a big risk to the unhedged foreign currency borrowings.
  
  Lured by low interest rates overseas, Indian companies' foreign currency borrowing was at a 5-year high in FY18. Almost two thirds of it was unhedged. And the rupee's fall has turned their loan liabilities into a huge problem.
  
  So, if the high exchange rate is here to stay, the possibility of PSU banks recovering some of their bad loans from the troubled companies is negligible.

In other news, as per a leading financial daily, Life Insurance Corporation of India (LIC), which is in the process of buying up to 51% stake in IDBI Bank, is unwilling to offer any premium for the stake deal.

As per the news, LIC is expected to arrive at the final share price soon.

The above development comes as earlier this month, the Union Cabinet and the Insurance Regulatory and Development Authority of India (IRDAI) permitted LIC's proposed plan to acquire up to 51% stake in state-owned IDBI Bank.

As per the deal, LIC is set to pick up to 51% stake in the bank and the deal is expected to be closed in the next two months. The total outgo for the deal is estimated at around Rs 120 billion.

Speaking of the above deal, this attempt by LIC to bail out the troubled IDBI Bank is a classic case of the state insurer buying toxic assets.

In fact, LIC has been acting like the government's ATM for years. It has bailed out public issues of scores of PSUs. This is evident from the chart below:

LIC - The Default Bad Bank?

As Tanushree Banerjee wrote in one of the editions of The 5 Minute WrapUp...

• Given the high stakes that LIC owns in the most troubled banks, the government needn't even consider the proposal of setting up a 'Bad Bank'. It could just turn LIC into one. At least then the investors owning investments in LIC policies, would know the real risk they carry.

How the above deal pans out remains to be seen. Meanwhile, we will keep you updated on all the developments from this space.

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