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Sensex Opens Flat; Consumer Durables & Metal Stocks Drag
Fri, 14 Dec 09:30 am

Asian stock markets are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 1.7% while the Hang Seng is down 1.4%. The Shanghai Composite is trading down by 0.6%. Meanwhile, the S&P 500 finished little changed after a volatile session on Thursday, as investors continued to be spooked by uncertainty on both domestic and international issues.

Back home, India share markets opened on a flat note with a negative bias. The BSE Sensex is trading down by 53 points while the NSE Nifty is trading down by 10 points. The BSE Mid Cap index opened the day up by 0.2% while BSE Small Cap index opened flat.

Sectoral indices have opened the day on a mixed note with energy stocks and realty stocks witnessing maximum buying interest. While, metal stocks and consumer durables stocks have opened the day in red.

The rupee is currently trading at Rs 71.81 against the US$.

In the news from the economy. The government is considering additional capital infusion of up to Rs 300 billion in public sector banks (PSBs) as they have been unable to raise required funds from the markets.

As part of the capital infusion plan announced by the Finance Ministry in October 2017, the government envisaged that PSBs would raise Rs 580 billion from the stock markets by March 2019 to meet Basel III norms.

However, due to subdued market conditions, banks have been unable to raise enough funds from the markets so far.

In addition, non-performing assets of many banks have seen a spurt in the first two quarters of this fiscal, putting stress on their bottomlines.

However, the banks have got a breather in respect of Capital Conservation Buffer (CCB), a part of Basel III norms. The RBI, at its last board meeting, deferred the requirement to meet the CCB target by one year, leaving about Rs 370 billion in the hands of banks.

Despite this relaxation, PSBs need more funds to meet global capital norms called Basel III as the RBI has retained the capital to risk weighted assets ratio (CRAR) at 9%, and the shortfall could be around Rs 300 billion, the reports noted.

The government had decided to take a massive step to capitalise PSBs in a front-loaded manner, with a view to support credit growth. This entailed mobilisation of capital to the tune of about Rs 2,110 billion over the next two years, through budgetary provisions of Rs 181.4 billion, recapitalisation bonds of Rs 1,350 billion, and the balance through raising of capital by banks from the market while diluting government equity estimated at Rs 580 billion.

As per this plan, the remaining capital infusion is about Rs 420 billion.

Earlier this year, the government pumped in Rs 113.4 billion into five PSBs, including PNB, Allahabad Bank, Indian Overseas Bank, Andhra Bank and Corporation Bank to improve their financial health.

However, using recapitalisation bonds can only act as a short-term measure to the crisis afflicting Indian public sector banks today. Such a measure will not address the structural issue in the banking system, i.e. the poor standard of lending and poor governance system.

Recapitalisation of PSBs Over the Years

Our big picture editor, Vivek Kaul, talks about moral hazard risk arising out of recapitalization. He writes:

  • "If the government bails them around this time around, the banks know that they can count on the government bailing them out the next time around as well. And this means that they can follow fairly loose standards of lending, in order to lend money quickly."

My colleague, Ankit Shah, editor of Equitymaster Insider presents an interesting analysis of recapitalisation plan.

Here's a snippet of what he wrote:

  • "The Indian stock markets are at an all-time high. The BSE Sensex has crossed the 33,000 mark.

    Stock prices of public sector banks are up anywhere between 10% and 40%.

    I did some quick math and found that the 21 listed public sector banks have gained approximately Rs 1.1 trillion of market capitalisation in just one day.

    In other words, 50% of the recapitalisation amount of Rs 2.11 trillion has been captured by the stock market in a single trading session".

Ankit is deeply intrigued by the interplay of politics and economics, and how it impacts the stock markets. His aim is to connect the dots and offer deeper insights into the workings of the market.

I would recommend you read his entire article here. (subscription required)

Moving on to the news from pharma sector. In the latest development, Lupin announced that it has received tentative approval for its Dimethyl Fumarate Delayed Release Capsules, 120 mg and 240 mg from the United States Food and Drug Administration (FDA).

Reportedly, Lupin's Capsules, 120 mg and 240 mg is the generic version of Biogen, Inc's Tecfidera Capsules, 120 mg and 240 mg.

It is indicated for the treatment of patients with re lapsing forms of multiple sclerosis.

Tecfidera Capsules, 120 mg and 240 mg had annual sales of approximately US$3,545.4 million in the US (IQVIA MAT September 2018).

To know more about the company, you can access to Lupin's Q2FY19 result analysis and Lupin's 2017-18 Annual Report Analysis on our website.

Lupin share price opened the day down by 0.1%.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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