Basel-III, IIP cheers Indian markets

Mon, 13 Sep Closing

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Led by stocks from the banking sector, Indian markets carried on with their strong performance and closed with good gains today. Banking stocks were closely followed by those from the oil & gas and realty sectors. FMCG and auto stocks however closed with just small gains. Interestingly, on the broader BSE, more than one stock lost for every one that closed in the positive.

The BSE Sensex and NSE Nifty closed with gains of around 410 points (2.2%) and 120 points (2.1%) respectively. Midcap and smallcap stocks followed suit, as the BSE Midcap and BSE Smallcap indices closed up by around 0.8% and 0.2% respectively. The rupee was trading at 46.39 to the US dollar at the time of writing this.

India was in fact the best performer in Asia today. Among other key Asian markets, Hong Kong and China closed with gains of 1.9% and 0.9% respectively. European markets have also opened the week on a positive note.

Carrying on from where they had left last week, banking & finance stocks emerged the best performers today as well. The BSE-Bankex closed with gains of around 3.5%. Leading the pack were heavyweights like SBI, HDFC, and ICICI Bank. Today’s gains in these stocks were largely driven by the announcement of ‘less stringent than feared’ new capital adequacy norms as agreed by global banking regulators. The Basel Committee on Banking Supervision, representing regulators from 27 nations, has more than trebled its capital requirements for banks. But what has cheered investors is that the committee has given banks a long eight years (January 2019) to comply in full to these (Basel-III) norms.

These measures are part of the committee’s efforts to prevent future financial crises. What this extension of compliance timing will do is let the banks do away with the need to raise fresh capital. And it would also be valid for Indian banks. But what no remains to be seen is whether global banks take some cues from this extension and try and repair their balance sheets rather than creating another financing bubble.

India reported its latest industrial growth number (IIP) late last week. The number was for the month of July 2010, and it stood at a strong 13.8% YoY. This was much better than what most economists had earlier projected. And it just raises expectations that the RBI might go in for a rate hike sooner than later. The central bank has another demon to tame - inflation - that is running at almost double-digits. The RBI has already raised interest rates four times this year, and it would thus be interesting to see what it does next. Anyways, investors in capital goods companies are cheering this higher IIP growth number. The BSE-Capital Goods index closed today with gains of around 1.2%. This was led by stocks like Crompton Greaves and Siemens.

The negative fallout of a strong IIP growth is that it attracts foreign capital that creates an oversupply of the same in the domestic financial market. And when that happens, the local currency appreciates. This is what is happening with the Indian rupee as of now, which has risen to its one-month high post the release of the IIP growth numbers. We see this as adding to the headache of Indian IT companies who see their profitability go down due to rupee’s appreciation. This is given that every unit of US dollar they convert will give them lesser amount of rupees. IT stocks are probably taking cues from this. So while Wipro closed with losses, TCS and HCL Tech managed just marginal gains in an otherwise strong market. It may be noted that FIIs have already pumped US$ 13.5 bn so far this year into Indian stocks, which is 56% higher than the amount that came in during the same period last year.