Benchmarks end in red ahead of Union Budget; Sensex slips below 36K mark

Indian equity benchmarks ended the Wednesday’s trade with marginal losses, as traders opted to stay away from buying risky assets ahead of upcoming budget to be released on February 01, 2018. Markets started the session on pessimistic note and extended losses to breach their crucial 11,000 (Nifty) and 35,900 (Sensex) levels, as traders remained cautious with Chief Economic Adviser Arvind Subramanian’s statement that elevated stock prices are a matter of concern and could correct sharply if they are not backed by growth, requiring ‘heightened vigilance’. Subramanian added that the situation was similar to the US in 2006 and he cannot prevent the run-up but can control the cleanup. So, if something happens, he can lower interest rates and inject money into the economy. Subramanian said the macro environment had turned adverse with oil prices having risen above $60 a barrel and staying there, the interest rate cycle changing globally and elevated asset prices in India and across the world.

However, markets took some support near day’s lows and pared most of their early loses with traders taking solace with report that India has been ranked sixth in the list of wealthiest countries with total wealth of $8,230 billion, while the United States topped the chart. Traders also get some comfort with ratings agency Moody’s statement that recently introduced goods and services tax (GST) mechanism is still a work in progress that will ultimately result in formalisation of economy. It added that it was a necessary step to help banks and such reforms should continue. Traders also took some comfort with rating agency ICRA enlightening that with banks credit outpacing deposits in the last few months, pushing up the credit-deposit ratio, lenders are likely raise deposit rates in the near-term. Besides, ahead of the February 1 Budget, a debate has been brewing about the exemption of long-term capital gains tax on stocks.

On the global front, European markets were trading in green in early deals, as investors surveyed a mixed back of results from some of the region's biggest industrial names. Consumer price inflation (CPI) in the euro zone eased slightly in January, diminishing pressure on the European Central Bank to move forward with further removal of monetary accommodation. Asian markets exhibited mixed trend on Wednesday with Chinese manufacturing sector slowing more than expected in January to an 8-month low in the face of a cooling property market and tighter pollution rules that have curtailed factory output.

Back home, investors took note that the country’s largest bank, State Bank of India has raised interest rates offered on bulk deposits by 50 to 140 basis points, signaling a turn in the interest rates cycle. The bank has sharply raised rates for 46 days to 210 days by 140 basis points from 4.85% from 6.25%. The hike in deposit rates comes a couple of days before the finance minister is set to announce the union budget for 2018-19 and a week before the Reserve Bank of India is set to announce its monetary policy. In scrip specific development, Dr Reddy’s Laboratories edged lower for the fourth straight day after the company reported 29% year on year (Y-o-Y) decline in its consolidated net profit at Rs 3,344 million in December 2017 quarter (Q3FY18).

Finally, the BSE Sensex declined 68.71 points or 0.19% to 35,965.02, while the CNX Nifty was down by 21.95 points or 0.20% to 11027.70.

The BSE Sensex touched a high and a low of 36,050.69 and 35,818.41, respectively and there were 12 stocks on gaining side as against 19 stocks on losing side on the index.

The broader indices ended in red; the BSE Mid cap index declined 1.29%, while Small cap index was down by 0.83%.

The few gaining sectoral indices on the BSE were Energy up by 0.60%, Oil & Gas up by 0.48%, Bankex up by 0.40% and Telecom was up by 0.09%, while Healthcare down by 1.62%, FMCG down by 1.25%, Metal down by 1.25%, Capital Goods down by 1.12% and IT was down by 1.10% were the top losing indices on BSE.

The top gainers on the Sensex were Kotak Mahindra Bank up by 1.88%, Reliance Industries up by 1.25%, HDFC up by 1.15%, Indusind Bank up by 1.05% and Tata Motors up by 0.77%. On the flip side, Tata Steel down by 4.58%, Dr. Reddy’s Lab down by 3.75%, Coal India down by 2.32%, Hindustan Unilever down by 2.13% and Sun Pharma down by 2.02% were the top losers.

Meanwhile, domestic credit rating agency, ICRA in its latest report has said that banks are likely to increase deposit rates in the near term as incremental credit has outpaced deposits in the last quarter, which has pushed up the credit/deposit ratio (the proportion of deposits used for lending) of the banking system. Besides, it noted that the government's Rs 88,139 crore capital infusion in struggling public sector banks (PSBs), will improve their ability to pursue credit growth in the coming months.

According to the report, while banks have an option of reducing their excess statutory liquidity ratio (SLR) holdings and deploying funds for incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Therefore, it anticipates an imminent increase in competition for deposit mobilisation and an upward movement in deposit rates. Further, it highlighted that between September 29, 2017 to January 5, 2018, the incremental credit of Rs 1.85 lakh crore, was significantly higher than the accretion of deposits of Rs 0.30 lakh crore. Besides credit, it pointed out that there has also been a slow increase in currency with public (CWP), which rose by Rs 1.36 lakh crore from September 29, 2017 to January 5, 2018, reaching almost 96 percent of pre-demonetisation levels.

The rating agency further said that while the bulk deposit rates have recently seen an upward trend, the retail deposit rates continued to witness some cuts, although at a lower pace, with the median one-year deposit rate declining by only three basis points during January 2018, despite the 20 bps cut in various small saving schemes of the government effective from January 1. It expects the incremental bank credit offtake to surge in Q4FY18. In order to support the same, it pointed out that the banks will need to mobilise additional deposits as the credit deposit ratio has increased to 74.6 percent as on January 5, 2018, from the lows of 68.5 per cent in December 2016 and 73 percent each at end of FY17 and the second quarter of FY18.

The CNX Nifty traded in a range of 11,058.50 and 10,979.30. There were 21 stocks in green as against 28 stocks in red, while one stock remained unchanged on the index.

The top gainers on Nifty were Bharti Infratel up by 2.19%, Kotak Mahindra Bank up by 1.93%, Tech Mahindra up by 1.34%, Reliance Industries up by 1.22% and Tata Motors up by 1.05%. On the flip side, Dr. Reddy’s Lab down by 3.56%, Tata Steel down by 3.36%, UPL down by 2.51%, Hindustan Unilever down by 2.50% and Cipla down by 2.34% were the top losers.

European markets were trading in green; UK’s FTSE 100 rose 2.54 points or 0.03% to 7,590.52, France’s CAC increased 7.99 points or 0.15% to 5,481.77 and Germany’s DAX was up by 21.75 points or 0.16% to 13,219.46.

Asian equity markets ended mixed on Wednesday, as investors digested a slew of regional data and looked ahead to cues from the US Federal Reserve meeting for any indications on interest rates. Underlying sentiment remained cautious somewhat in the wake of falling oil prices, rising bond yields and US President Donald Trump’s tough rhetoric on immigration and North Korea during his first State of the Union address. Chinese shares ended lower after a government report showed activity in China’s vast manufacturing sector expanded at a slower pace in January. The official PMI slipped to 51.3 from December’s 51.6. Growth in the services sector picked up pace, with the corresponding PMI rising to 55.3 from 55 in December. Further, Japanese shares fell for the sixth straight session, as the yen rose against the dollar on concerns over political wrangling on US immigration policy. Investors largely ignored positive readings on the country's industrial production and consumer confidence. Meanwhile, the Malaysian market was closed for Thaipusam.