Reasons behind the fall in markets today

The downgrade of Dewan Housing Finance Corporation’s (DHFL) Commercial Paper (CP) by Ratings agencies, was the primary reason for the steep correction in markets today. Notably, Nifty fell 1.48% while the Bank Nifty declined 2.32% on June 06, 2019, as the 25bps rate cut failed to cheer the market. Domestic rating agencies ICRA and Crisil downgraded rating on CP of DHFL from ‘A4’ to ‘Default’ followed by it missing interest payment of `960cr on due date i.e. June 04, 2019 and DHFL’s worsening liquidity position.

The mess at #DHFL just got real https://t.co/FdcvhtnHua pic.twitter.com/erxMZUTHQB

— EconomicTimes (@EconomicTimes) June 6, 2019

Amid liquidity crisis, downgrade of DHFL’s paper could accentuate contagion risk, which can spread to other financial institutions including banks. DHFL’s default can expose `1 lakh cr in borrowing to default risk. Banks, insurers and mutual funds have funded half of ~`1 lakh cr to DHFL, with PSU banks having major contribution, beside some private banks like IndusInd Bank and Yes Bank also have meaningful exposure to DHFL. Secondly, the banks may also see MTM losses on DHFL’s bond exposure, which may lower its earnings in coming quarters.

#TopStories At This Hour | DHFL likely to get payment of Rs 2500 cr from #Blackstone for its arm Aadhar Housing Fin & pay Rs 1150 cr due on #NCDs by Monday. Srcs also suggest Wadhawans likely to close stake sale deal in a month, post which there will be a mgmt change #exclusive pic.twitter.com/QFu4FUvV2Q

— CNBC-TV18 (@CNBCTV18Live) June 5, 2019

Moreover, market was expecting 50bps repo rate cut, as against the actual cut of 25bps, which added to the negative sentiment. Further, the stocks of PSU banks and wholesale lending NBFCs have been affected the most.

Key takeaways from RBI’s meeting today

 Repo rate lowered to 5.75% from 6%, which was on expected lines

 RBI is closely monitoring developments in NBFCs and HFCs. It further said that it will take appropriate action on liquidity as and when required

 Revised Feb 12 circular expected soon. New bad loan circular is expected in 3-4 days

 It expects the government to remain fiscally prudent

 The RBI revised its inflation forecast for April-September to 3-3.31%, up from 2.9-3% seen in April 2019, due to pick up in food prices. This is still lower

 Growth forecast for FY20E cut to 7% from April 7.2%

 The apex body said, sharp slowdown in investment activity and continuing moderation in economic activity is a cause of concern

 RBI has changed its stance from Neutral to Accommodative, meaning rate hike is off the table. The change in stance and lower growth forecast indicates that further rate cuts are possible in coming quarters.

 RBI proposed to issue the Draft Guidelines for ‘on tap’ licensing of Small Finance Banks (SFB) by the end of August 2019. SFBs have achieved their priority sector targets and attained their mandate for furthering financial inclusion. Hence, RBI believes there is a case for more players to be included.

 RBI has decided to do away with the charges levied for transactions processed in the RTGS and NEFT systems. Banks will be required, in turn, to pass these benefits to their customers.

 A committee is expected to setup to examine the entire gamut of ATM charges and fees. This is in the backdrop of significantly growing use of ATMs by the public and demand to change the ATM charges and fees. The committee will be setup within a week and will submit its recommendations within 2-months of its first meeting.

 RBI has decided to increase the leverage ratio to 4.0% for Domestic Systemically Important Banks (D-SIBs) and 3.5% for other banks versus 3% for all banks earlier.  The Basel disclosures for large banks show that their existing Leverage ratios are way higher than the regulatory prescription. Hence, no impact on capital position or RoE.