Indian Indices Continue Sell-Off; Sensex Down Over 320 Points

Thu, 25 Oct 12:30 pm

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After opening the day in the red, share markets in India have continued their downtrend tracking the sell-off in the US stock markets. US stocks continued their downtrend, confirming a correction for the Nasdaq and erasing the Dow and the S&P 500's gains for the year, as disappointing forecasts from chipmakers and weak home sales data fueled jitters about economic and profit growth. The Nasdaq closed around 12% lower from its August 29 record closing high. It fell 4.4% yesterday - its biggest one-day percentage decline since August 18, 2011.

Sectoral indices are trading on a negative note with stocks in the metal sector and realty sector witnessing maximum selling pressure.

The BSE Sensex is trading down by 328 points (down 1%), while the NSE Nifty is trading down by 107 points (down1%). The BSE Mid Cap index is trading down by 1.2%, while the BSE Small Cap index is trading down by 1.5%.

The rupee is trading at 73.31 to the US$.

Market participants are tracking Bharti Airtel share price, YES Bank share price, Maruti Suzuki share price, BHEL share price, JSW Steel share price, and L&T Technology Services share price as these are among the companies are announcing their quarterly results today.

In the news from the banking sector, as per a leading financial daily, the Reserve Bank of India (RBI) may consider relaxing its prompt corrective action (PCA) framework for loss-making banks.

If done so, this would mark a significant shift in the central bank's stance.

Banks under PCA face several restrictions, including on lending, till they are nursed back to health. The government has said that credit disbursement has suffered as a number of banks are under PCA.

Note that earlier this year, in May, Finance minister Piyush Goyal had promised all possible support to the 11 state-run banks that are under the Reserve Bank of India's (RBI) Prompt Corrective Action (PCA) framework. He had also expressed confidence that public sector banks will overcome legacy issues very soon.

After meeting chief executives of these 11 PSBs, he said that it will be ensured that the central government gives every possible support to further strengthen the resolve of these banks to come out of PCA framework as quickly as possible.

The 11 banks under PCA are Dena Bank, United Bank of India, Allahabad Bank, Corporation Bank, UCO Bank, Bank of India, IDBI Bank, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra.

PCA is the process to ensure that banks do not go bust. Under the process, the RBI has put in place some trigger points to take corrective actions on banks which are weak and troubled.

Note that PSB's are in the spotlight for their growing bad loan problems and the painful issue of willful defaulters.

Banks, in principle, must be careful about not extending loans to borrowers with poor creditworthiness or payment track record. That too, irrespective of the size of the borrower.

However, the data from State Bank of India shows that when it comes to big corporate borrowers, our banks literally look the other way. The share of large corporates, in total advances of the banking sector, has almost remained unchanged over past three years (at an average of 55%).

However, their contribution to incremental slippages has been huge. At one point, the big corporate borrowers accounted for nearly 90% of total NPAs of the sector.

Therefore, according to us, banks with large corporate books deserve a lower valuation if they can't keep NPAs in check.

Moving on to the news from commodity markets, crude oil is witnessing selling pressure today. Oil prices extended their fall seen this week and fell by around 1% today on the back of a sharp selloff in global stock markets.

Earlier this week, crude oil slumped as much as 5%, after Saudi Arabia said it would make up for supply disruptions from US sanctions that are targeting Iran's petroleum exports from next month.

Saudi Energy Minister Khalid al-Falih yesterday said that despite expected supply disruptions from the US sanctions against Iran that kick in from November 4, Saudi Arabia would step up to meet any demand that materializes to ensure customers are satisfied.

Losses were also seen after the American Petroleum Institute (API) reported a huge build of 9.88 million barrels of United States crude oil inventories for the week ending October 19. This compared to the analyst expectations of 3.69 million barrels.

Note that buyers are seeking alternatives ahead of the start of the US sanctions on November 4 and creating a challenge to other OPEC oil producers as they seek to cover the shortfall.

Market participants are worried that Iranian sanctions could severely undersupply the oil market in 2018 and that will mean further rise in crude oil prices.

Speaking of crude oil, oil prices have climbed steadily this year, helped by rising demand. However, rising crude oil prices doesn't bode well for the Indian economy, as it not only affects fuel prices, but also has many other repercussions on the macroeconomic level.

They can be a big worry for the Modi government as well as it has been a big beneficiary of lower crude oil prices.

Apart from that, what does rising crude oil prices mean for stock markets?

Richa Agarwal, editor of Hidden Treasure, tracks the oil and gas sector very closely. She believes the rise in crude oil prices is a bearish sign for stock markets globally. At the same time, any market correction, will throw up interesting buying opportunities in small-cap stocks.

This is what she wrote...

• After hitting a low of US$ 30 per barrel in January 2016, prices have more than doubled this year.
  
  While the Hidden Treasure team looks for long-term wealth creators, such macro situations can help to recommend such stocks at a bargain. The ones who keeps calm, when everyone else is losing their heads, will gain the most when the tide turns.

Also, it's interesting to note that whenever oil prices have surpassed US$ 100/barrel, they didn't stay there for very long. In technical term, it is sort of 'resistance level'.

Resistance Kicks in Once Crude Touches US$ 100/barrel

This is what we wrote about this in one of the editions of The 5 Minute WrapUp...

• Oil prices have collapsed thrice because of demand destruction: in 1979, 2008, and 2014.
  
  In 1979, the trigger for oil price increase was the Iranian Revolution and the Iran-Iraq war. Due to this, oil prices rose from US$ 50/barrel to above US$ 100/barrel between January 1979 and April 1981.
  
  Then, new production from the North Sea, Mexico, Alaska, and Siberia flooded the market. By March 1986, prices had fallen to US$ 27/barrel.
  
  In 2008, when oil touched US$ 150/barrel, it was quickly followed by the financial crisis and recession.
  
  Then, between 2011 and 2014, when oil was above of US$ 100/barrel, several years of triple-digit oil prices led to a near doubling of shale production in the US, a volume that helped trigger the crash in 2014.

In fact, as per the media reports, even Saudi officials think US$ 60 is a reasonable price for oil in the long term.

It would be interesting to see how Iranian sanctions will influence crude oil prices. Meanwhile, we will keep you posted on all the updates from this space.

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