A man counts Indian rupee banknotes in an arranged photograph in Varanasi, Uttar Pradesh, India. (Photographer: Dhiraj Singh/Bloomberg)

India Pledges Action as Markets Rocked by Default Worries

(Bloomberg) -- Indian authorities vowed to support financial markets rocked by growing concerns of defaults by shadow banks.

The government will provide adequate liquidity to mutual funds and non-bank financial companies, Finance Minister Arun Jaitley said on Monday. His tweet followed a rare joint weekend statement from the central bank and capital markets regulator assuring investors they were monitoring the situation and would take necessary steps.

Analysts are warning that India’s shadow banking sector could face a cash crunch after key lender Infrastructure Leasing & Financial Services Ltd. missed debt payments and rattled investors Friday. Policy makers are already battling with surging bad loans at banks, a plunging currency and volatile stocks as foreign investors pull money from emerging markets.

Some analysts expect the Reserve Bank of India to conduct more open market bond purchases to add liquidity to the market and calm investors, while others see a special refinance window for non-banking finance companies and mutual funds.

“It is more of calming nerves in the financial markets that things won’t go into a spiral,” said Kuldeepsinh Jagtap, executive vice president at ICICI Securities Primary Dealership. “For example, if tighter rupee liquidity leads to disruption in money market rates, the RBI might provide adequate liquidity ensuring smooth functioning of markets.”

Troubles

Turmoil in India’s non-bank finance companies has deepened in the past few weeks, with troubled lender IL&FS disclosing further missed debt payments on Friday.

The company, which has been categorized as a “systemically important” non-banking financial firm by the RBI has total debt of $12.6 billion. Of that, 61 percent are in the form of loans from financial institutions, indicating its woes could spread to other shadow banks in Asia’s third-largest economy.

Already a few mutual funds have been selling short term debt instruments issued by non-bank finance companies including those funding India’s housing sector.

That selloff is being partially blamed for Friday’s crash in India’s stock market which the capital market regulator is now reviewing. The Securities and Exchange Board of India is looking into whether brokers and investors colluded during the sharp selloff and subsequent recovery in financial shares, people with knowledge of the matter said.

The slide even prompted the country’s largest commercial bank, the State Bank of India, to say that the default by IL&FS was not India’s Lehman moment. The market extended losses on Monday, with the benchmark equity index closing 1.5 percent lower in Mumbai.

“The RBI will wait to gauge the situation but most likely option in the current environment is to inject additional liquidity into the system,” said Mahendra Jajoo, head of fixed income at Mirae Asset Global Investment in Mumbai. "They can also give additional line of credit to non-bank finance companies and to the mutual funds,” he said.

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