Indian authorities have vowed to support financial markets rocked by growing concerns of defaults by shadow banks.
The government is to provide adequate liquidity to mutual funds and non-bank financial companies, Indian Minister of Finance Arun Jaitley said yesterday.
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 (IL&FS) missed debt payments and rattled investors on Friday last week.
Policymakers 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 (RBI) 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,” ICICI Securities Primary Dealership executive vice president Kuldeepsinh Jagtap said. “For example, if tighter rupee liquidity leads to disruption in money market rates, the RBI might provide adequate liquidity ensuring smooth functioning of markets.”
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 last week.
The company, which has been categorized as a “systemically important” non-banking financial firm by the RBI has total debt of US$12.6 billion.
Of that, 61 percent is 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 sell-off is being partially blamed for Friday last week’s crash on India’s stock market, which the capital market regulator is reviewing.
The Securities and Exchange Board of India is looking into whether brokers and investors colluded during the sharp sell-off and subsequent recovery in financial shares, people with knowledge of the matter said.
The slide even prompted the nation’s largest commercial bank, State Bank of India, to say that the default by IL&FS was not India’s Lehman Brothers moment.
The market yesterday extended losses, with the benchmark equity index down 1 percent as of 1pm in Mumbai.
“The RBI will wait to gauge the situation, but [the] most likely option in the current environment is to inject additional liquidity into the system,” Mumbai-based Mirae Asset Global Investment head of fixed income Mahendra Jajoo said. “They can also give additional line of credit to non-bank finance companies and to the mutual funds.”
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