Indian Indices Remain Flat

Thu, 21 Jul 11:30 am

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After opening the day on a flat note, the Indian stock markets witnessed some choppy trades and are presently trading near the dotted line. Sectoral indices are trading on a mixed note with stocks from the oil & gas and realty sectors leading the gains. Power and capital goods stocks are trading in the red.

The BSE Sensex is trading down by 28 points (down 0.1%), while the NSE Nifty is trading flat. The BSE Mid Cap index and the BSE Small Cap index are trading in the green, both up by 0.6%. The rupee is trading at 67.21 to the US$.

Stocks in the mining space are trading on a positive note with Ashapura Minechem and Coal India leading the gains. Hindustan Zinc reported its results for the first quarter of the financial year 2016-17 (1QFY17). Net profits during the quarter fell 47% to Rs 10.4 billion on a YoY basis. The drop was seen mainly on account of higher costs of production, taxes and depreciation.

Total income of the company also took a hit. Total income fell by 30% to Rs 25 billion during the quarter on a YoY basis. The company said that the decline in revenues was on the back of lower volumes, primarily zinc. Also, the lower LME (London Metals Exchange) that was partly offset by higher rupee depreciation and higher silver price weighed on the topline of the company during the quarter.

On a sequential basis, revenue decreased by 19% due to lower volumes, partly offset by higher zinc & silver prices.

Reportedly, ore production from Sindesar Khurd declined and reached the originally conceived capacity of 3.75 million tonnes per annum (MTPA). Moreover, production from Rampura Agucha underground mine crossed one MTPA production rate during the quarter. Mined metal production during the quarter was 127 kilo tonne (KT). This was reported as 45% lower on a YoY basis and 33% lower than the previous quarter.

Presently the stock of the company is trading up by 0.5%.

Moving on to the news from the banking sector... Axis Bank has cut its base rate by 10 bps. Post this reduction, the base rate of the bank stands at 9.35% from 9.45% earlier. The new rates are said to come into effect from July 27.

Notably, the bank's base rate, with this cut, is the joint second lowest among Indian banks along with that of ICICI Bank. One must note that the base rates of State Bank of India (SBI), and the largest bank by market capitalisation - HDFC Bank, are currently the lowest at 9.3%.

In order to facilitate monetary transmission and ensure that changes in lending rates are sensitive to movements in the policy rates, the Reserve Bank of India (RBI) has introduced the marginal cost of funds based lending rate (MCLR) as the benchmark for lending from April 1. With this, the RBI has suggested banks review their lending rates frequently, and reflect changes in their cost of borrowing.

MCLR is computed based on banks' marginal cost of borrowing, or incremental cost of funds. This is as against the computation based on the average cost of funds that banks have used so far.

What this means is that if a bank's cost of borrowing is 8% but the incremental cost of funds becomes 7.5%, the marginal cost of borrowing for the computation purpose will be 7.5%, rather than the average of the two. With this regime in place, a fall in deposit rates will be quickly reflected in the lending rates.

The Reserve Bank of India (RBI) has cut interest rates by 1.5% so far. However, the transmission of rates by banks has been much lower. Hopefully, with the marginal cost of funds based lending rate that came into effect from April 2016, banks are now in a better position to pass on the rate-cuts. However, more than this, the revival in the broad economy will play a key role in bringing about a more sustainable recovery in credit demand.

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