It was a weak day with only the tech stocks holding up the markets. Nifty closed 54 basis points lower at 11,520 on a day supported only by tech stocks like TCS, Wipro and HCL Tech. Most of the front liners in the banking sector and the FMCG sector saw deep corrections during the day. FMCG Index and the Bankex corrected sharply on Tuesday. The trigger for the market correction was the weak rupee and the rising bond yields. Of course, the recent SEBI circular has also raised fears of FPI outflows wherein SEBI has barred NRIs and PIOs from being ultimate beneficiaries of any investment fund.
LIC is to seek SEBI exemption on making open offer to IDBI shareholders over its gradual increase in stake to 51%. As per the Takeover Code, the open offer gets automatically triggered when a 25% stake in the target company is acquired. LIC has already expressed its intention to acquire a controlling 51% stake in IDBI Bank. LIC currently holds 7.98% stake in IDBI and will eventually take it to 51%. The problem with an open offer is that it entails an additional outlay for the acquirer since they are also required to give an exit route to existing shareholders. In case of IDBI, LIC may be just bailing out the bank.
Rupee closes at 71.57/$ and 10 year bond yields closed at 4 year high of 8.06%. The pressure on the rupee continued with the dollar demand from banks and importers picking up sharply. Bond yields closed decisively above the psychological mark of 8% as traders have started betting on another possible rate hike to stem the fall in the INR. Bond markets are anticipating that if the rupee does not come in control soon then the RBI may have no choice but to hike rates by another 25 basis points. The RBI has already increased repo rates by 50 basis points in the last 2 months.
Government rules out any excise cuts on petrol and diesel despite the rising prices of petrol and diesel in India. The government has ruled out any excise cuts on oil for now. During 2015-16, the government had hiked excise on 7 occasions but has since reduced only on 1 occasion. This has once again raised fears that the government may look to load subsidy burden on downstream oil companies. Fuel is a sensitive subject and it remains to be seen how the government handles this issue with critical state elections coming up this year and a larger general elections next year.
Weakening rupee raised the spectre of another rate hike in this year. With the rupee falling nearly 10% in a very short span of less than 5 months, it has raised the possibility that the RBI may be inclined to hike the rates once again by 25 basis points to 6.75%. This trend is also visible in the 10-year bond yields which have now decisively settled above the 8% mark. The RBI may actually be in a kind of dilemma as they do not have the arsenal to support the rupee for much longer by selling dollars. The forex reserves of the RBI have already fallen from $427 billion to a tad below $400 billion and are sufficient to cover less than 9 months of imports. A rate hike, on the other hand will be instrumental in making Indian bond investments more attractive and also expand the yield spreads between the US and India.
