NBFC wounds need salve

Markets began the week on a strong note and registered new lifetime highs on June 3. They surrendered some of the gains on the same day and all of it and a little more by the end of the week to register minor losses. The four-day trading week saw BSE Sensex close at 39615.90 points - a loss of 98.30 points or 0.25 per cent, while NIFTY closed at 11,870.65 points – a loss of 52.15 points or 0.44 per cent.

The closing levels do not give the sense of trading volatility that happened during the week. The high made during the week was 40,312.07 points and the low 39,279.47 points. The swing was 1,033 points and the close reflected a mere change of 98 points. Similarly, on the NIFTY, the high was 12,103.05 points and low 11,769.50 points, a range of 334 points and the net change 52 points.

The broader indices saw the BSE100, BSE200 and BSE500 lose 0.52 per cent, 0.59 per cent and 0.68 per cent respectively. BSEMIDCAP lost 1.26 per cent and BSE SMALLCAP lost 1.41 per cent. Dow Jones had a stellar week with it gaining a massive 1,168.90 points or 4.71 per cent to close at 25,983.94 points. The US FED has indicated that they would be cutting interest rates and they could go down all the way to zero in time to come.

RBI cut interest rates on expected lines by the customary 25 basis points. Repo rate is now 5.75 per cent and it is at its lowest level since 2010. What is important to note is that the stance has been changed from neutral to accommodative and this indicates that more cuts could follow.

It is on the NBFC front that not much has happened and while the contentious circular struck down by Supreme Court maintains its spirit, the same looks mildly different in reading. The crux of the problem being faced by NBFC's is that they have been lending to riskier propositions and charging higher rates of interest and trying to maximise profits. In this process, they have been taking risks far greater than what even banks would take when lending to lower-rated borrowers. When issues emerge in the market place, it first affects the lower-rated clients and this is what has happened.

Another issue that has cropped up with the housing finance NBFC's is their exposure to bulk loans and developers. With a slowdown in the realty space, they are stuck with no rotation of their loans and the developer not able to pay up as he is not having sales of property. It truly is a 'catch 22' situation.

A piece of good news for the market is that monsoon has hit Kerala coast on Saturday. It would take maybe 7 to 10 days to hit the financial capital of the country, but the event is now on course. The progress of the monsoon would now be a talking point and one would see the electronic media using this as a discussion point on a daily basis. They then talk of sectors the monsoon would impact and so on.

Most fund managers are advocating that the next leg of the rally would see midcap and Smallcap stocks outperforming the large-cap stocks. While this may seem logical, the current scenario is such that action continues in the large-cap stocks only. It is yet to percolate to the small and midcap sectors. With results season over, Cabinet formation completed, focus would now be on the budget to be presented in less than a month. While the government has made overtures to the opposition on conducting business and the smooth passage of bills in the house, it needs to be soon how they reciprocate.

Coming to the week ahead, one would see markets remaining choppy and volatile. There would be sharp bouts of rise and fall as a significant segment of people believe everything is priced in and there is no reason for markets to rise. When there is buying, this leads to short covering and bulls have their say. Similarly, when nothing happens and markets become listless, they tend to fall. This is when bears take the upper hand. This would continue with markets remaining in a broad range. Buy on dips and sell on rallies. There will be plenty of such opportunities.

(Arun Kejriwal is the founder of Kejriwal Research and Investment Services. The views expressed are strictly personal)