A man stands in front of an electronic ticker board showing stock information figures outside the Bombay Stock Exchange (BSE) in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

RBI, SEBI, SBI Step In To Assure Nervous Credit Markets

India’s banking and financial market regulators, along with the country’s largest bank, on Sunday stepped in to reassure nervous credit markets, saying that they stand ready to step in to ensure smooth functioning of the financial markets.

“The Reserve Bank of India and the Securities and Exchange Board of India are closely monitoring recent developments in financial markets and are ready to take appropriate actions, if necessary,” said statements released by both RBI and SEBI simultaneously.

The statement came after signs of nervousness in the credit markets. On Friday, equity markets plunged after a secondary market sale of debt securities of Dewan Housing Finance Ltd spooked markets. The sale took place at a yield higher than what the paper was trading at, leading to questions about liquidity and demand conditions in the market.

Prior to that incident, the credit markets had turned nervous because of a series of defaults by Infrastructure Leasing & Financial Services Ltd (IL&FS). The group has defaulted on inter-corporate deposits, commercial paper and also a Letter of Credit facility of IDBI Bank. This, despite the fact, the IL&FS was a AAA rated entity until August. Since then, it has been downgraded to ‘default’. This, in turn, has impacted mutual funds, insurance and pension funds holding IL&FS debt securities.

Earlier on Sunday, BloombergQuint reported that the Reserve Bank of India has called shareholders of IL&FS for a meeting. The shareholders, including LIC and SBI, are yet to finalise short term debt and equity funding for the strained infrastructure conglomerate.

With the defaults by IL&FS, concerns have been raised about whether funding to NBFCs would dry up. Trying to allay those concerns, earlier on Sunday, SBI chairman issued a statement saying that SBI will continue funding NBFCs.

Some comments are being attributed to SBI about the Bank being wary of lending to NBFCs. The rumours are baseless. SBI lends support to NBFCs in private and public sector within the regulatory policy framework and will continue to do so.
Rajnish Kumar, Chairman, SBI

On Monday morning, the Finance Minister Arun Jaitley tweeted that the government will take all necessary measures to ensure that adequate liquidity is maintained in the system.

State Of The Credit Markets

The joint statement from the RBI and SEBI is being seen as a preemptive step to ensure that nervousness in the markets does not turn to panic. There was a build-up of nervousness, which threatened to spill over, said Ananth Narayan of SP Jain Institute while adding that issuing a statement is a good move.

The nervousness stemmed from both the IL&FS defaults as well as tightening liquidity conditions. Together, these conditions could mean that funding for NBFCs may become sparse and expensive, markets feared.

There are two separate issues, explained Ajay Manglunia, vice president & head — fixed income, Edelweiss Financial Services. The liquidity deficit has widened to nearly Rs 1 lakh crore in recent days due to a combination of factors including advance tax payments and the RBI’s intervention in the forex markets, which drains rupee liquidity, he explained.

While liquidity conditions have been tight, the overnight call money market rates have remained close to the repo rate, suggesting that the inter-bank funding market remains calm. On Friday, the weighted average call money market rate was at 6.58 percent, just marginally above the repo rate of 6.50 percent.

However, there was nervousness specifically in the NBFC segment where mutual funds have been seen reducing exposure to fixed income securities of non-bank firms, perhaps as a fallout of the IL&FS downgrades and defaults. This, in turn, could have had a spillover impact and led to a liquidity squeeze for the non-bank financiers. The statement from the RBI and SEBI, should have a calming impact, said Manglunia.

“A potential risk aversion among investors in debt funds (retail/corporate) can result in investors preferring quality over yields for their debt funds. This along with rising risk aversion by asset managers may lead to market shifting only towards best rated paper,” said CLSA in a note issued on Sunday before the RBI and SEBI released the joint statement.

CLSA pointed out that a widening of spreads was already visible in lower-rated corporate paper. The yield on 1-year A-rated corporate bonds has moved up from 8.7 percent to 10.7 percent between September 2017 and September 2018. The yield on BBB-rated corporate paper has risen from 9.9 percent to 11.9 percent over this twelve month period. Meanwhile, the yield on AAA-rated corporate paper has risen from 6.9 percent to 8.6 percent.

Mere speculation could create market failure, thus it was essential to communicate appropriately, said Soumyajit Niyogi of India Ratings. “The statement will help alleviate concerns stemming out of rumours, events and speculation,” he said.