Mumbai: Liquidity returned to Indian financial system on Thursday even if it didn’t entirely help the Indian stock market.
The inter-bank call money rate dropped from a peak of 22% last week to 7% on Thursday and banks’ daily borrowing from the Reserve Bank of India’s (RBI) repurchase, or repo, window dramatically dropped to Rs4,130 crore, from a daily average of Rs80,000 crore so far in October.
In fact, 11 cash-surplus banks parked their excess money, worth Rs6,270 crore, at 6% interest with the Indian central bank today. Net of this, RBI infused Rs4,130 crore into the system. RBI infuses money at 9% and mops up excess liquidity at 6%, daily.
The abrupt flush feeling is the result of the 250 basis points cut in the central bank’s cash reserve ratio (CRR), or the funds that banks need to keep with RBI, and the release of Rs1 trillion. One basis point is one-hundredth of a percentage point.
The drop in call money rate forced banks move toward mutual funds, after many days. Domestic mutual funds, which have been selling assets to raise cash to meet redemption and prepare for future redemption, finally witnessed net inflowsafter 10 days, as companies and banks restarted their investments.
Still, the flow of money into the system, did not lend support to the Bombay Stock Exchange’s bellwether stock index, the Sensex, which went perilously close to below the 10,000 level during morning trades, down about 800 points.
Unclear outlook: Investors react while watching the stock prices at a BSE screen on Thursday. The Sensex finally closed at around 10,581, down about 2.11%, thus recovering some 550 points. Shashank Parade / PTI
The Sensex took 481 days to climb from 10,000 to 20,000 levels. However, its fall from 20,000 to 10,000 points intraday Thursday took a mere 191 days, with much of it concentrated in the past few weeks.
On Thursday, the Sensex finally closed at around 10,581 points, down about 2.11%, thus recovering some 550 points. The National Stock Exchange’s broader 50-stock index, the Nifty, also gained around 2% from its intra-day low to close 3269.30, down 69.1 points.
Still, it is unclear if the recovery will last into Friday. In morning trading on the New York Stock Exchange, the Dow Jones Industrial Average (DJIA) was falling, down 4.2% by 8.45pm India time before recovering a bit.
Earlier Thursday, the Sensex slumped in line with other Asian and European markets, taking cues from DJIA’s Wednesday plunge driven by recession fears that were reinforced by the economic data and declining consumer spending.
Unlike the Sensex, Asian equities ended deep in the red on Thursday, with Tokyo’s benchmark Nikkei dropping 11.4%, in the region’s largest market. South Korea’s Kospi dropped about 10% while Hong Kong, Shanghai and Singapore lost 4-5% each.
Back in India, the sharp fall in benchmark indices during the day was mainly because of a steep double-digit fall in the stock price of Reliance Industries Ltd, which has close to a 14% weightage in the 30-stock Sensex.
According to equity analysts, after the intense sell-off, institutional investors around the world are now caught in a bind —the fear of recession is pulling them away from the market but, at the same time, they do not want to miss a potential equity rally from these low levels. A section of fund managers and analysts is also expecting another round of rate cuts by the world’s central banks after a series of generous, liquidity-pumping announcements in past two weeks.
According to Merrill Lynch’s survey of fund managers for October, investors are waiting for the right conditions to return to equity markets amid the most pessimistic outlook yet recorded.
“Fund managers are waiting for the triggers that will give them the confidence to buy,” said Gary Baker, head of EMEA equity strategy at Merrill.
However, Rajan Mehta, executive director at Benchmark Asset Management Co. Pvt. Ltd, said adding to cash at this juncture may not be a good idea, as stocks are highly oversold.
Talking about rising liquidity in India, Ajay Bagga, chief executive of Lotus India Asset Management Co. Pvt. Ltd, noted that “Paper (debt) became saleable today, we could actually sell some (paper) at profit.”
He noted that both companies and banks “starting investing”.
Added Sujoy Das, head of fixed income at Bharti AXA Investment Managers Pvt. Ltd: “The banking system is flush following the CRR cut.” Das said that his firm’s net fund flows turned positive on Wednesday, after some 10 days.
An estimated Rs30,000 crore, or about 30% of the corpus of the so-called liquid and liquid-plus schemes, has been withdrawn in the past fortnight, as banks pulled out money to invest in the overnight inter-bank market where rates soared to 20%.
“Equities will move positively to the increased liquidity in the market,” insisted Nikhil Johri, managing director, ABN AMRO Asset Management (India) Pvt. Ltd. But the real relief for equity investors, he cautioned, will only come when “banks start lending more to corporates”.
According to an estimate of ICICI Securities Primary Dealership Ltd, a firm that buys and sells government bonds, the system will have at least Rs10,000 crore extra cash even after a Rs10,000 crore bond auction next Monday.
However, if RBI continues to sell dollars in the foreignexchange market, the liquidity crunch will resurface as forevery dollar RBI sells, an equivalent amount of rupees is drained from the system.
The local unit dropped 0.7% to 48.82 a dollar on Thursday, according to Bloomberg data, its lowest since June 2002.
It has lost 19.3% this year, the biggest among Asia’s 11 most-active currencies after the South Korean won.