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Caught in debt trap, Dalal Street bulls have mood swings

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Mumbai: India’s stock market encountered its most volatile day in more than four years on Friday after a debt market deal sparked fears that more non-banking financial service firms may be affected by problems that have beset infrastructure lending firm ILFS. Benchmark indices swung between gains and losses with the Sensex falling as much as 1,500 points from the day’s high in afternoon trade.

Financial stocks were the worst hit as the recent transaction in DHFL’s debt securities at higher interest rates was perceived to be a sign of a liquidity crisis in the housing finance company and the sector. The Sensex ended down 279.62 points, or 0.75%, at 36,841.60 and the Nifty ended down 91.25 points, or 0.81%, at11,143.10.

Both indices fell as much as 3% during the day.

The 1,500-point tumble in the Sensex from the day’s high on Friday makes it the most volatile trading session since May 16, 2014, the day when BJP scripted a victory in the general elections. The trouble was sparked in the afternoon after news emerged that DSP Mutual Fund sold securities of Dewan Housing Finance Corp at a higher yield of 11%.

This sparked fears that the housing finance firm could be in trouble and may be facing a liquidity crunch similar to the one experienced by ILFS. The troubled Mumbai-based infrastructure lender has defaulted on repayments and is seeking emergency capital infusion from existing shareholders.

Experts, investors and analysts fear that banks may tighten or even reduce lending to non-banking financial firms. India’s Volatility Index (VIX) soared 9.7% at 15.36, which suggests that traders are nervous about the near-term risks in the market. Cascading ImpactBut foreign portfolio investors net bought shares worth ₹760.7 crore and domestic institutional investors bought shares worth Rs 497 crore on Friday, provisional data showed. But the benchmark bonds were little changed on Friday.

The gauge was a tad up at 8.08% compared with 8.07%.

The rupee gained 0.25%, or 18 paise, to close at 72.20 in a sign that the equity market volatility could be due to panic based on incomplete or incorrect information. Dewan Housing Finance Corp fell by 60% and shares of other housing finance firms also fell steeply.

Kapil Wadhawan, chairman DHFL, clarified later that the firm has no exposure to ILFS and that liquidity is not an issue.

He said that the firm has Rs 10,000 crore cash in hand and its dependence on the commercial paper is less than 10% of its total borrowings. DSP Mutual Fund also said that it has sold ₹200-300 crore of DHFL paper to meet redemption pressure.

When a buyer demands higher yield from a seller for a company paper, it is usually perceived to be a risky paper.

Fund managers said, in the case of DSP, it would have been a case of a mutual fund selling securities at a discounted price to meet redemption pressure.

Yields and prices move in opposite directions.

Recently, DSP Mutual’s debt scheme took a hit after a ratings downgrade of ILFS papers. The Sensex and Nifty gained as much as 1% in morning trade on Friday supported by strong global cues and was on course for ending the week on a strong note.

Brokers said the fall was precipitated by liquidation of algorithmic trades as the initial drop in the market triggered stop losses and led to build-up of fresh short positions. “The last time a public institution came under pressure was in 2008.

We do not have a systemic risk similar to 2008 currently but if a company goes under pressure, then we will see a similar reaction,” said Nilesh Shah, managing director at Kotak Mahindra Asset Management Company. Besides the selloff in DHFL shares, Yes Bank’s shares plunged 34% after the Reserve Bank of India granted extension of less than five months to the company’s chief executive officer Rana Kapoor.

The Bank Nifty ended down 2.6% at 25,596.90, below the 200-day moving average — a key long-term indicator.

Yes Bank’s shares ended down 28.7% at ₹227 and Dewan Housing’s stock ended 42.4% lower at ₹351.55. Dewan Housing’s stock meltdown also had a cascading impact on other housing finance stocks, with LIC Housing Finance, GIC Housing Finance and Indiabulls Housing Finance ending down 2-8%. “Undoubtedly, investors should be cautious at his stage as volatility in the rupee, rates and credit market could have repercussions on the equity market.

However, investors must also realise that it is always the darkest before dawn,” said Shah. Punjab National Bank was the second-biggest casualty among Bank Nifty constituents with a 7.6% decline. Market participants said the local markets are likely to be under pressure for a while.




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