India’s benchmark equity index fell after some session volatility, as investors weighed the government’s proposal to merge three state-run lenders in an effort to strengthen the debt-laden banking system. The benchmark Sensex Index fell 0.78% or 294.84 points to 37,290.67. Since January, it has gained 9.5%.
The index lost ground in the last hour of trade after a report said Saudi Arabia is comfortable with Brent oil prices rising above $80 a barrel, as global markets adjust to the loss of Iranian supply resulting from US sanctions. India, the world’s third-biggest oil consumer, meets more than 80% of its crude demand through imports and is Iran’s second-biggest customer.
A measure of banking stocks tumbled 1.7% after a panel headed by the Finance Minister Arun Jaitley recommended combining Vijaya Bank and Dena Bank with Bank of Baroda. This led Credit Suisse and Deutsche Bank to cut ratings on Bank of Baroda, which dropped to its lowest level since March 2014. “In the near-term, this could be negative for Bank of Baroda given Dena Bank’s weak financials, which could weigh on the stock,” Siddharth Teli and Dhiren Shah, analysts with CIMB Securities India, wrote in a note. “The most important factor is that this merger comes at a time when a large clean-up exercise for banks has been done, so as a result, the residual stress on the book could be limited.” Dena Bank climbed nearly 20% while Vijaya Bank fell 5.8%.
The proposed entity would create the country’s third largest bank by loans.
At a briefing in New Delhi late Monday, Banking Secretary Rajiv Kumar said the government will ensure there are no job losses.
India is attempting to clean up more than $210bn of stressed loans, most of them with state-run lenders, to strengthen the financial system. Mounting debt has eroded the capital of many smaller national banks and constrained lending. State Bank of India and Tata Motors were the worst performers on the Sensex. All but one of the 19 sector sub-indexes compiled by BSE fell, led by an index of real estate companies.
Meanwhile the rupee yesterday hit a fresh record low against the US dollar and closed near the 73-mark, tracking losses in the local equity markets after US said it will impose fresh tariffs on China.
The rupee ended at an all-time low of 72.97 a dollar, down 0.63% from its Monday’s close of 72.51. The home currency opened at 72.60 per dollar and touched a low of 72.97.
So far this year, the rupee has weakened 12.5%, while foreign investors have sold $784.50mn and $6.38bn in equity and debt markets, respectively.
The 10-year bond yield closed at 8.14%, from its previous close of 8.098%. Bond yields and prices move in opposite directions.
“A stronger USD and limited policy action could disappoint the market. There remain many negative risks to INR—especially those that are global-led, but it is also clear that the government could step up actions if there is another round of significant INR depreciation/underperformance,” Nomura Research said.
US will impose a 10% tariff on about $200bn of Chinese goods from September 24 and will immediately pursue further tariffs on about $267bn of imports from the Asian nation if Beijing retaliates, President Trump said in a statement on Monday in Washington.
 “(Market corrected due to) spike in oil prices led by factors like implication of US sanction on Iran and supply constraints. Domestic triggers failed to add momentum despite ease in inflation, govt. policies to contain CAD and consolidation in PSUBs.
This situation will ease once the global bond & currency market stabilize which is currently under pressure given chaos over Oil and FED rate hike,” said Vinod Nair, head of research, Geojit Financial Services.