Indian stock markets are trading on a weak note this Monday afternoon as most cues from the local as well as global front continue to pound on investors' sentiments. After drifting on the back of worse than expected April month inflation data which came in at 8.66% against 9.04% seen in the previous month, the benchmarks have managed to pare some of the losses and are hovering well above the psychological 5,500 and 18,400 levels. Investors have gone on to pummel all the rate sensitive counters viz. Automobile, Realty and Banking on further rate hike fears while the metals counter too has furthered its downtrend, a day after showing some recovery. Leads from across the globe too remained disappointing as all Asian peers traded with large cuts while the European counterparts too began on an extremely weak note. However, the gains in index heavyweight Reliance Industries and L&T limited the frontline indices from loosing further ground. Buying interests was also witnessed in BSE's Healthcare index after Glenmark Pharma surged by around 12% as its arm inked a pact with Sanofi to grant license for the development and commercialization of GBR 500. While the Capital goods and Consumer Durables pockets too were trading with marginal gains.
Meanwhile, the broader markets too are trading on a negative note but are outperforming their larger peers by a small margin. The midcap index eased 0.37% and the smallcap index fell 0.26% points. The market breadth on the BSE was in favor of declines in the ratio of 1025:1449 while 114 scrips remained unchanged.
The BSE Sensex declined 86.23 points or 0.47% at 18,445.05. The index touched a high and a low of 18,492.68 and 18,357.11 respectively.
The BSE Mid-cap index eased 0.37% and Small-cap index shed 0.26%.
On the BSE sectoral front, HC up 0.95%, CD up 0.27% and CG up 0.22% were the only gainers.
While, Auto down 0.80%, Realty down 0.79%, Metal down 0.69%, Bankex down 0.63% and FMCG down 0.54% were the major laggards in the BSE sectoral space.
The top gainers on the Sensex were Hero Honda up 1.81%, Bhartio Aitrel up 1.44%, BHEL up 1.24%, TCS up 0.88% and HUL up 0.44%.
On the flip side M&M down 2.59%, ONGC down 2.28%, Bajaj Auto down 2.11%, R Infra down 1.94% and JP Associates down 1.60% were the major losers on the index.
Meanwhile, the RBI Reserve Bank of India has recommended banks, post October, to hold the investment in liquid funds at lower levels. This recommendation is especially for banks who own Mutual Funds. If this rule of capping lenders' investment in Mutual Fund products becomes effective, it may hamper money flow from banks to liquid schemes.
This restricting rule will force banks to focus more on raising funds through individual Fixed Deposits (FDs) and Mutual Funds (MFs) to turn to retail clients to build assets under management. Banks have been blamed of sharing a warm relationship with MFs to meet their money requirement. Capital Market watchdog SEBI has frequently pressed MFs to build a business based on retail portfolios rather than institutional money
The RBI, however, did not recognize the level to which banks need to bring down their investments in liquid schemes; the experts have the view, it will be ideal for banks to maintain their holding within the 10% mark or level. But on the other hand, banks executives are interpreting this informal 'limit' as 5-6% of lenders' net-worth.
An RBI official is said to have expressed the central bank's opinion to top bank executives soon after it announced this investment restriction in its monetary policy review on May 3. The RBI has also informed bank executives to cut exposure to liquid schemes in phased manner over the next 5 months rather than exchanging the entire amount just before the new limit comes to effect. The revised investment limit will be based on the banking industry's total net-worth as on March 31, 2011.
The Mutual Fund Industry estimates banks' total net-worth by this date between Rs. 3 lakh crore to Rs 4 Lakh crore. At 10% of the net-worth banks' money flow into liquid schemes will be capped at Rs 30,000 - Rs 40,000 after October. At present, banks' investments in liquid schemes are about Rs 90,000 crore. If the banks make a decision to limit the investment in liquid schemes at 5-6% of their net-worth, the Mutual Fund industry may end up getting only about Rs. 15,000 to Rs. 20,000 Crore.
Banks invest their excess money in liquid schemes, which is invest in debt securities for a period less than a year, including Certificates of Deposits issued by banks, Commercial Papers from companies, Treasury Bills and the Collateralized Lending and Borrowing Obligation (CBLO) market, for quick return. These funds in turn, lend to banks in the overnight CBLO market. Mutual Funds are also among the major investors in the Certificate of Deposits.
'Such circular flow of funds between banks and DoMFs (Debt-Oriented Mutual Funds) could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk,' RBI said in the circular on May 3. It is very clear, RBI wants banks to keep exposure to liquid schemes to the minimum and wants to break the comfortable dependence that banks and mutual funds enjoyed,' said a top mutual fund industry official, aware of the development.
Among top banks in the country, State Bank of India, ICICI Bank, Axis Bank, Canara and Punjab National Bank have mutual fund subsidiaries.
The S&P CNX Nifty fell 17.25 points or 0.31% at 5,527.50. The index touched high and low of 5,541.80 and 5,498.95, respectively.
The top gainers on the Nifty were Ranbaxy up 3.47%, Sun Pharma up 3.25%, Ambuja Cement up 2.61%, ACC up 1.64% and Hero Honda up 1.61%.
On the other hand, M&M down 2.43%, ONGC down 2.18%, R Infra down 2.04%, Bajaj Auto 1.99% and Kotak Bank down 1.83% were the major losers on the index.
On the Asian front Shanghai Composite fell 0.60%, Hang Seng shed 1.28%, Jakarta Composite dropped 1.11%, KLSE Composite slid 0.25%, Nikkei 225 down 0.94%, Straits Times slipped 0.77%, Seoul Composite down 0.75% and Taiwan Weighted plunged 1.05%.
The European markets have opened a negative note as the France's CAC 40 shed 0.83%, Germany's DAX fell 0.55% and London's FTSE 100 dropped 0.11%.
Unit-8, 3rd Floor, First Mall, The Mall, Ludhiana-141001, Punjab (INDIA).
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