The markets initially fell on trade war fears but the bigger overhang appeared to be the IL&FS issue. With $12.5 billion of debt, the spill-over impact will be much bigger. Goldman Sachs downgrade of Indian equities saw most of the richly valued stocks giving up value. The top 7 out of the 10 companies lost close to Rs.90,000 crore in market value in a single week. The week was not just marked by the rupee and the rate uncertainty but also took a hit due to the fears that the IL&FS fiasco could get much bigger. The first such impact was seen in the price of housing finance companies.
There may be some good news for gold demand in India. World Gold Council expects 25% gold demand boost from higher MSP. According to the WGC, the farmer population in India has a huge affection for gold as an asset class and that could get a boost from the 150% of cost (MSP) announced by the government. Indians consume 800-900 tonnes of gold annually with close to 70% of the gold demand coming from the rural areas. This is the segment that will benefit from the higher MSP on Kharif crops. In short, rural demand is expected to drive up the gold demand in this year.
Midnight on Monday could see the second round of major tariffs on China. Trump’s $200 billion tariffs on China to be effective from Monday. This will be the single biggest trade tariff imposition in recent memory, taking the total impact to $250 billion of Chinese imports. China has also imposed counter tariffs on the US and has, in fact, even refused to sit down on the negotiating table with the US. China has already imposed tariffs on $110 billion of US imports. This could be an overhang for markets on Monday and could continue through the week with impact on metal prices too.
Finally, the government is pushing through with strategic sales, although the market demand for the new strategy is yet to be gauged. Government identified 9 PSU companies for strategic sale. Interestingly, even before the sale of these companies is done, the government will identify parcels of land owned by these companies and sell they as a separate company. The 9 PSUs include Pawan Hans, Scooters India, Air India, Bharat Pumps & Compressors, Projects & Development India, Hindustan Prefab, Hindustan Newsprint, Bridge & Roof and Hindustan Fluorocarbons.
It is now over to rate hikes and FII flows. According to a CII survey, 40% of the businesses are expecting another rate hike accompanied by a rise in business confidence that growth should be back in Q2. More than 80 out of the 200 companies interviewed by CII feel that higher inflation, a weaker rupee and Fed rate risks may force the RBI to hike the rates by another 25 basis points. This seems to be driven by FPIs pulling out $2.2 billion in September on rupee woes. September has been extremely negative for the Indian rupee and that is reflected in the way the FPIs have been selling aggressively in the first 3 weeks of the month. This is in sharp contrast to the inflows in the past 2 months. While the FPIs withdrew $1.2 billion from equities, the balance $1 billion represented outflows from the debt markets till date.
The first signs of the IL&FS contagion were visible on Friday. How the DSP bond sale spooked DHFL as well as equity markets is interesting. One of the stark reminders of volatility on Friday was the 50% intraday crash in Dewan Housing stock price. The stock was spooked by the fact that DSP Mutual Fund had sold DHFL bonds worth Rs.300 crore at an expensive yield of 11%. This was obviously to cover the risk of the IL&FS downgrade. But it is a signal that the credit default risk of most finance companies has gone up after IL&FS fiasco. Market cap loss to DHFL was over Rs.8000 crore.
