Nifty cracked by nearly 235 points

On October 11th, the Nifty effectively erased all the gains since the beginning of 2018. Nifty cracked by nearly 235 points as US treasury yields, Italian bond crisis and a China slowdown combined to spook the markets. The Sensex has lost 5000 points since the peak in late August representing a correction of 13% in rupee terms. If you add the dollar losses, the effective losses adjusted for currency will be closer to 20%. INR gained marginally to 74.215/$ while 10-year bond yields tapered to 7.99%. There was some degree of calm returning to the currency and the bond markets post government intervention.

Digital revenues continued to drive the performance of TCS in the second quarter ended Sep 2018. TCS surprised on the upside with highest OPM in seven quarters. The first signs of the positive spill-off effect of a weak rupee were visible in case of TCS. Net profits for the quarter were up by 7.5% at Rs.7901 crore. Operating profits increased by nearly 14% at Rs.9771 crore. But the big takeaway was the 150 bps expansion in the OPMs to 26.5% on the back of higher share of digital revenues and a stronger dollar. The revenue growth was robust at 5.2% and digital revenues account for 28% of total revenues of TCS.

The Italian effect came back to haunt European stocks as most markets corrected by more than 2%. European stocks slumped to a 21-month. The recent defiance shown by Italy against adhering to the EU austerity program has been instrumental in the Italian bonds yields going up sharply. This led to a virtual sell-off in European equities. Italy has threatened that it is willing to secede from the EU if austerity measures are thrust on them. An Italian secession will mean definite default by Italian bonds, which are over $1 trillion and could have a contagion effect across global financial markets.

RBI began shifting its intervention strategy to the derivative markets back during Raghuram Rajan’s tenure. The current dispensation has continued that strategy. With the rupee weakening sharply in the last couple of month, the RBI has been relying more on forward markets to protect the rupee. Spot market intervention requires selling the dollar but that absorbs rupees and creates a liquidity crunch in the banking system. The total dollar selling by the RBI in the forward market was twice the amount it sold in spot dollars and that has protected the rupee without impacting liquidity.

Since the peak of January, the correction in Emerging Markets across Asia has been really rapid. The recent Emerging Market correction has seen nearly $1 trillion wiped off in a span less than 9 months. The MSCI Emerging Market Index has given away more than 25% since the peak of 2018 and this has been an outcome of rising US treasury yields, US trade war with China, rising oil prices and slowing growth in EMs. However, the world’s largest fund manager, Blackrock, has said that this fall has been led by a narrow group of stocks even as the EM structure still remains robust. Across the board we have seen emerging market currencies losing value against the US dollar. The problem has been very acute in economies like Turkey, Indonesia and Latin American. INR has lost 16% versus the dollar.

There could be more relief coming for NBFCs as more banks may join SBI to buy stressed assets of NBFCs. Normally, banks do rely on buying out the NBFC portfolio either by taking over their loan portfolio or by investing in a pool of securitized receivables of NBFCs. Even as SBI pledged to increase its lending to NBFCS from Rs.15,000 crore to Rs.45,000 crore, more banks increasing their lending exposure to NBFCs should only help address the liquidity crunch. In the current market, banks see a good opportunity to buy NBFC portfolios at attractive costs. This should largely alleviate the problem that NBFCs would have faced in rolling over their loans and should come as a relief to bond markets.

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