A big default by Dewan Housing was always coming and it finally manifested on Monday when DHFL defaulted on Rs.1571 crore bond repayments. According to an ET report, Dewan Housing has defaulted on bonds and commercial paper. Nearly 70% of this amount represents default on principal with the balance 30% representing default on interest payments. DHFL presents a systemic problem for the RBI and the government because it has debt to the tune of Rs.92,000 crore on its books and it has already expressed inability to service the debt and its continuance as a going concern.
US technology companies led by NVIDIA rallied sharply on Trump’s reprieve to Huawei of China. In what could be seen as a temporary reprieve for Huawei, the US has given Huawei another 90 days to purchase equipment from American suppliers. Trump had put strict curbs on US firms dealing with Huawei after the Chinese telecom giant was accused by Trump of endangering American national security. Stocks gained in the US, largely led by technology stocks and the positive sentiments rubbed off on other stocks as well as on oil prices were hopes of an end to the trade war got built.
Sensex lost over 313 points from its intraday peak on the back of disappointment on lack of actionable clarity on the proposed stimulus package. The much awaited stimulus package still appears to be elusive and markets expressed their disappointment on Monday by giving up most of their gains to close almost flat on the Nifty. Markets were expecting clarity on FPI tax and the LTCG tax as well as a booster dose from the government to address beleaguered sectors like automobiles, ancillaries, FMCG and NBFCs. However, the FM has only given assurances to the business community without any concrete action.
Oil had a brief rally on Monday, which actually sharpened in the second half. Brent Crude prices rallied 165 bps to $59.60 on dual boost to oil. It was first the geopolitical risk that took oil prices higher after the Houthi rebels in Yemen launched drone attacks in parts of neighbouring Saudi Arabia. Iran is accused by Saudi Arabia of being the financer of the Houthi rebels. The real boost to the crude rally came after the US decided to go soft on Huawei. This raised hopes of a trade truce and oil rallied sharply in the second half on growth revival hopes. That is normally positive for oil prices.
According to a recent survey conducted by Bloomberg, the cost to the world economy as a result of the trade war could be $585 billion. This trade war is expected to shave off 0.6% from world GDP annually by 2021. The bigger impact on growth would be for China but Bloomberg believes that China could weaken the Yuan and force other EMs to share the burden. Meanwhile, the Indian rupee closed at 6-month low of Rs.71.43/ against the US Dollar, the lowest level since the beginning of February. The weakness in the rupee was largely driven by dollar strength, rise in crude prices and sustained selling by FPIs. The INR has now lost nearly 3.5% since the beginning of August and has turned out to be the worst performer among the emerging market currencies across Asia; worse than Peso and Won.
RBI governor, Shaktikanta Das, underlined the need to link at least some of the loans to the benchmark rates so that any rate cut is transmitted immediately to the end borrower. RBI has in the last few months expressed its disappointment at the pace of transmission. Banks, however, argue that such a linking may not be practical as it is the average cost of funds that actually matter. In the past, the attempts to force such a transmission have hardly worked and the only time the banks were forced to cut rates was at the peak of demonetization in 2016 when there was surplus liquidity with banks.
