INSUBCONTINENT EXCLUSIVE:
Mumbai: The government sought to calm markets on Monday but investors paid little heed as fears that the non-banking financial sector is
facing a credit crunch hit domestic bonds, stocks and the rupee, adding to Friday's selloff.Finance Minister Arun Jaitley tweeted that
"the Government will take all measures to ensure that adequate liquidity is maintained/provided to the NBFCs", referring to the non-banking
financial companies.His intervention came on the heels of assurances on Sunday from both the central bank, the Reserve Bank of India, and
market regulator, the Securities and Exchange Board of India, that they were closely monitoring developments in financial markets and ready
to act if needed.However, the benchmark Nifty index closed 1.58 per cent lower on Monday, while the benchmark 10-year bond yield was up 2
basis points at 8.10 per cent as bond prices dipped
On Friday, the stock index at one stage plunged more than 3 per cent in a 30-minute period.The partially convertible rupee was weaker at
72.54 per dollar versus its previous close at 72.1950 and not far off its record low of 72.99 hit early last week.Investors have been
unnerved by credit concerns surrounding two companies in particular
One of the biggest NBFC names in the country - Infrastructure Leasing Financial Services (ILFS) - this month defaulted on a series of its
coupon payments.Then on Friday, a large fund manager sold short-term bonds issued by home loan provider Dewan Housing Finance at a sharp
discount, raising fears of wider liquidity problems in the sector."The recent tightness of liquidity in the corporate bond markets indicate
a contagion effect may be playing out following the default by ILFS," said brokerage firm CLSA in a research note on Monday.A big correction
in equity markets could hurt Prime Minister Narendra Modi and the ruling BJP as they prepare for a series of key state elections later this
year and a national election by May 2019.PM Modi and his BJP swept to power in 2014 on the slogan "achhe din aane waale hain (good days are
coming)", but a lack of jobs, falling crop prices and surging fuel costs have triggered discontent and opposition attacks in recent months.A
selloff in equity markets, which have been one of the few bright spots in the economy, could further dent PM Modi's popularity among the
small business and trading community, a core base of BJP supporters, who were already stung by two of his largest reform moves -
demonetisation and a nationwide Goods and Services Tax (GST).The domestic equity markets have hit record highs in 2018 despite selloffs in
domestic bonds and weakness in the rupee, which has been the worst-performing Asian currency this year.Despite the correction this month,
the Nifty Index is up more than 4 per cent so far this year
But for foreign investors, the drop in the rupee will have wiped out any gains.The country's largest bank, State Bank of India, also
sought to calm investors, issuing a statement on Sunday saying fears that banks were wary of lending to NBFCs were baseless."SBI lends
support to NBFCs in the private and public sector within the regulatory policy framework and will continue to do so," SBI Chairman Rajnish
Kumar said in a statement
"There is no concern on liquidity of NBFCs in view of their liquid cash position and availability of committed lines."Mr Jaitley is due to
chair an annual review meeting with the chiefs of state-run banks on Tuesday, where he is expected to seek updates on their plans to tackle
bad loans."Bear phase"With defaults from ILFS and its group companies on the rise, markets are unlikely to calm down in a hurry.Late on
Monday, the infrastructure developer and lender said it was unable to service certain debt obligations that fell due that day and also
missed interest payments on some short-term bonds that were due over the weekend.Separately, its unit ILFS Financial Services also said it
could not service some debt obligation due Monday.The head of a mutual fund, who declined to be named due to company policies, said a number
of factors from the rupee to oil are not supportive for India."The underlying sentiment is so weak the market is not taking any assurances
It's not even taking the government at face value any more," said the mutual fund head."The market has entered the bear phase, and when
the bears take over panic multiplies."The RBI's attempts to stem declines in the rupee have driven much of the liquidity tightening in the
market, as the bank has been selling dollars and sucking up rupees, leading to higher borrowing rates for big borrowers such as the
non-banking financial companies.In a note to clients, Morgan Stanley warned that the funding costs for NBFCs are likely to stay elevated for
some time."We expect markets to be more conservative in lending to NBFCs, which is likely to push up pricing," Morgan Stanley analyst Anil
