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Sensex Opens Flat; IT & Energy Stocks Drag
Fri, 21 Dec 09:30 am

Asian stock markets are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 1.8% while the Hang Seng is down 0.5%. The Shanghai Composite is trading down by 1.2%. US stocks fell for a second day after the Federal Reserve raised benchmark interest rates and said that it would continue to let its massive balance sheet shrink at the current pace.

Back home, India share markets opened on a flattish note with a negative bias. The BSE Sensex is trading down by 15 points while the NSE Nifty is trading down by 4 points. The BSE Mid Cap index and BSE Small Cap index, both opened up by 0.4%.

Sectoral indices have opened the day on a positive note with telecom stocks and realty stocks leading the pack of gainers. While, IT stocks and energy stocks have opened the day in red.

The rupee is currently trading at Rs 69.98 against the US$.

Bank stocks are trading on a mixed note with Punjab & Sind Bank & Central Bank leading the gainers. According to the latest RBI data, Bank credit rose at a healthy 15.1% to Rs 92 trillion in the fortnight to 7 December, while deposits grew 9.7% to Rs 118.8 trillion.

In the year-ago fortnight, advances were at 80 trillion and deposits at Rs 108.4 trillion.

In the previous fortnight ended 23 November, credit has risen by 15.1% to Rs 91.3 trillion, while deposits surged 9.4% to Rs 118.1 trillion.

In October this year, non-food credit rose 13.4% compared to an increase of 6.6% in the same month last year. Credit to the services sector expanded 27.4% in the month compared to 9.4% a year ago.

Loans to agriculture and allied activities increased 8% in October compared to an increase of 5.5% in October last year.

Credit to the industry rose by 3.7% in October 2018 as against a contraction of 0.2% in October 2017.

Personal loans rose 16.8% in October as against 16% in October 2017.

Note that, an important indicator of business health is credit off-take. Declining credit growth implies a slowdown in business. While, a rise in credit growth implies an increased business activity.

Moving on to the news from the economy. In the latest development, the government will infuse additional Rs 410 billion in to public sector banks (PSBs), making the total amount for bank recapitalisation at Rs 1.1 trillion in financial year 2018-19.

While the government has already infused Rs 230 billion into PSBs this year, the remaining Rs 830 billion will be provided in the remaining three months of FY19.

Reportedly, department of financial services sought Parliament's approval via second supplementary demand for grants for additional funds for banks' recapitalization, over and above the budgeted estimate of Rs 650 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)

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

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