Indian Indices Trade in the Green

Thu, 12 May 11:30 am

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After opening the day on a positive note, the Indian stock markets have continued to trade in the green. Sectoral indices are trading on a positive note with stocks from the banking, realty and power sectors leading the gains.

The BSE Sensex is trading up 136 points (up 0.5%) and the NSE Nifty is trading up 43 points (up 0.5%). The BSE Mid Cap index is trading up by 0.5% while the BSE Small Cap index is trading up 0.8%. The rupee is trading at 66.60 to the US$.

As per an article in Economic Times, the Reserve Bank of India (RBI) has cautioned banks from lending more to power distribution companies. The regulator has advised select state-owned banks to exercise caution in giving new loans to these utilities and has reminded them that any additional exposure to discoms would result in ever-greening and invite supervisory measures.

Moreover, the RBI has also directed banks to categorise existing loans to discoms as non-performing assets, or bad loans, which attract provisioning.

The banks' total credit outstanding to discoms stands at Rs 4,370 billion. Also, the outstanding dues of state utilities payable to central generating power stations have increased 16% in the last one year. With this, the amount of dues has touched around Rs 222 billion.

All of this is despite about 18 states agreeing to join Ujwal Discom Assurance Yojana (UDAY) and eight states issuing bonds of about Rs 1,000 billion recently.

One shall note that the UDAY scheme was brought up by the government to bring a turnaround in the State Electricity Boards (SEBs) that have been caught up in a vicious cycle of high debt and operational losses. The scheme allows power distribution companies (discoms) in select states to convert their debt into state bonds. Further, the part of debt not taken over the DISCOMs shall be converted by banks into bonds with a cap on the interest rates. According to the scheme, 75% of the loan would be converted into bonds by end of March 2017.

The data above suggests that it has failed to provide the much needed relief so far. It may take long before the impact of this initiative gets reflected in the financials of power utilities. Having said that, one shall watch out further steps that government takes to make the scheme successful.

One shall note that the issue of rising bad loans has made Prime Minister Narendra Modi repairing bank balance sheets his administration's top-most priority. Earlier, in April, the Supreme Court had asked the government to overhaul the banking system to prevent bad loans and hasten recovery from defaulting borrowers.

Tanushree Banerjee, co-head of research at Equitymaster, has stated how the PSUs have accumulated assets worth billions of rupees in one of the editions of The Equitymaster Research Digest (subscription required).

In a separate news from commodities space, crude oil witnessed buying interest yesterday and soared to its six months' peak. This was seen after the US Energy Information Administration (EIA) said that inventories witnessed an unexpected draw. EIA said in its Weekly Petroleum Status Report that US commercial crude oil inventories decreased by 3.4 million barrels for the week ending on May 6 from the previous week. This was recorded as the first decrease in US crude inventories in six weeks.

The above buying interest is preceded by fears two weeks ago that a sustained price rally would be damaged by the failure of the major oil producers to agree to limit oil production. Oil prices witnessed volatility after the summit in Doha among the world's largest oil producing countries turned out to be a complete wash.

All eyes are now on June's meeting of OPEC countries that will decide the fate of crude oil production levels ahead.

To keep a regular tab on the movements in crude oil prices, you can read weekly market commentary from the Daily Profit Hunter team. Their weekly commentary tracks the developments in the global economy as well as equity, currency and commodity markets.

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