The trigger was the JLR shutdown

The trigger was the JLR shutdown but auto and consumer stocks were weak across the board. The 47 point correction in the Nifty can be attributed to auto and consumer stocks. Tata Motors ended 13% down after Jaguar Land Rover (JLR) announced that it would shut its European plant for 2 weeks in the light of weakening demand for cars from China. INR weakened to 74.388/$ while 10-year bond yields hardened to 8.08%. The rupee continued to weaken after the persistent FPI selling of more than Rs.12,000 crore in the first five days of October. Bond yields are back above 8%.

Finally, the bond and forex markets may be getting the much needed liquidity from the RBI. The RBI is planning to inject Rs.12,000 crore through bond purchases on October 11th as part of its regular OMO program. This may still be inadequate considering the current liquidity shortfall in the system. RBI is also planning to go ahead with the NRI Special Deposit scheme to shore up its dollar reserves. In 2013, RBI had raised $38 billion through this route, and it may be bigger in 2018. An NRI special deposit is normally an expensive proposition since the RBI guarantees the deposit against currency risk.

It was always coming and finally there is confirmation that LIC may be facing a short to medium liquidity crunch. LIC has been playing “Shining Angel” for a little too long now. From early signals it does look like LIC may not be as comfortable on the liquidity front and that could impact its ability to declare profits. LIC has had to shell out Rs.12,600 crore for its stake in IDBI Bank, heavy funding of railway infrastructure projects and also due to the assured returns on the Pradhan Mantri Vaya Vandana Yojana. It is also feared that LIC may have to intervene and bail out IL&FS from  the current mess.

Not all is bad news on the mutual funds as a total of 65 lakh folios got added in the first half of fiscal 2018-19. There may be bad news for liquid funds with over Rs.3 trillion worth of redemptions in the month of September. But the number of folios have shot up sharply in the first half of the fiscal to an all time high of 7.78 crore folios. Equity and ELSS funds account for nearly 6 crore out of these folios and there is hardly any retail panic in equity funds, unlike in the case of liquid funds and income funds. In the last 10 years since the 2008 recession, the equity folios have shot up 10-fold in India.

It now looks like SBI could emerge as a saviour of the embattled NBFCs in India. Most NBFCs are facing a tremendous liquidity crunch as the debt market appetite for NBFC paper has tightened after the IL&FS mess and the sell-off in DHFL bonds. SBI is likely to triple its target for loans it purchases from non banking finance companies (NBFCs). Against its original target of purchasing loans to the tune of Rs.15,000 crore, it may now purchase up to Rs.45,000 crore to bail out NBFCs that are in a deep crunch. Most NBFCs have been struggling to raise funds in the bond markets after the IL&FS fiasco and SBI may buy priority and non-priority loans from NBFCs. Buying or priority loans from NBFCs to meet the RBI targets is standard practice among public sector banks in India.

Oil prices hardened on the back of Hurricane Michael off the US coast. Both the Brent Crude and the WTI crude saw hardening of rates. Most US refiners curtailed offshore production after Hurricane Michael strengthened closer to the coast. This has resulted in nearly 1/5th of the output in the Gulf of Mexico being shut. A lot will depend on whether Iran is able to continue supplying oil after November and there are hopes as Russia, Turkey, India and China have decided to ignore the US call for sanctions on Iran. High oil prices normally have negative repercussions for the Indian economy.

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