It was literally a Black Monday on Dalal Street

It was literally a Black Monday on Dalal Street. The Sensex crashes 536 points on Black Monday; loses 2000 points in 2 weeks. The pressure came from the rate sensitives as the markets started looking at most of the NBFCs and HFCs as vulnerable to any credit default by IL&FS. The sharply higher prices of crude oil also played havoc. A/D ratio was steeply negative at 1:4. INR weakened 60 bps to 72.634/$ while 10-year bond yields scale up to 8.12%. The demand for dollars was strong as dollar borrowers and importers rushed for cover. Higher yields are betting on a rate hike in October MPC.

Now government may fall back upon profit making power firms to assist in its divestment program. Government to raise $2.8 billion by merging power firms. The government of India will sell its stake in SJVN and Power Finance Corporation to NTPC and REC respectively. Not only does this help the government augment its disinvestment revenues without too much trouble, but it also commences the process of consolidation in the power sector. The government has not even reached 15% of its targeted divestment revenues for the fiscal. This move will help build scale in the power sector.

After 4 years, the first REIT finally gets launched. Blackstone and Embassy Group file for Rs.5000 crore REIT. This will be the first real estate investment trust launched in India after they were first permitted in India in 2014. REIT is a special purpose vehicle (SPV) which holds rent-yielding real estate assets and passes through the benefits to the subscribers. Embassy has put 33 million SFT of office and hospitality space under its proposed REIT spread across 4 key cities of India. REIT is expected to provide that much needed diversification to the portfolio by helping monetize realty assets.

Brent Crude at $81/bbl is almost close to its 2014 highs. Despite pressure from the US, the OPEC refrained from hiking output at this point of time. OPEC output is likely to fall effective November this year when the US sanctions on Iran take effect. In fact, oil bulls are already calling oil back to the $100 levels if supply is not increased. It may be recollected that Brent fell from a high of $115/bbl in 2014 to a low of $30/bbl in 2016. Oil demand is also expected to be higher due to rising growth levels although the trade war, if it truly happens, will subdue oil demand.

IL&FS Financial Services defaults on commercial paper. It has almost become routine now as IL&FS totters on the verge of total default. IL&FS defaults continued with the financial arm of the group now defaulting on commercial paper that had an interest due on September 24th. The group is heavily crunched for liquidity and needs an urgent infusion of funds to prevent a contagion effect. The group has a classic asset-liability mismatch where illiquid road assets have been financed by short term debt. This has been one of the key problems with infrastructure financing in India as a lot of short term money has gone into long term illiquid assets. Things were fine as long as these loans could be rolled over but with a sharp downgrade to junk status, that has almost become impossible now.

RBI finally plans to infuse liquidity into the system through an Rs.10,000 crore OMO as call rates rose by 50 bps on liquidity deficit worries. The short end of the money market has been recently rocked by the IL&FS default, pressure on MF redemptions and half-year end pressure. Rate on 3-month CPs shot up by 50 bps as liquidity became extremely tight in the call markets. RBI is planning open market operations (OMO) of Rs.10,000 crore to soothe the liquidity, although the OMO size is much smaller than market expectations, which were closer to Rs.100,000 crore of OMOs.

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