- Indian stocks have been under significant selling pressure recently, with the downturn attributed to high valuations, significant FII selling, a hawkish US Fed, and election uncertainty.
- The sell-off has particularly affected public sector banks due to the Reserve Bank of India’s draft guidelines on project finance, which propose that lenders allocate more funds for loans to under-construction infrastructure projects.
- The Nifty PSU Bank index saw a significant decline of 6.30% in a week, with stocks like Punjab National Bank and Canara Bank experiencing the most substantial fall.
Indian stocks face significant selling pressure due to high valuations, FII selling, a hawkish US Fed, and election uncertainty. Public sector banks hit hard due to new draft guidelines on project finance.
Impact on Public Sector Banks
The recent sell-off has significantly impacted public sector banks, with the Nifty PSU Bank index declining by 6.30% in a week. Stocks like Punjab National Bank and Canara Bank have seen the most substantial fall, losing 12% and 11.4% of their value, respectively. Other banks, including the Central Bank of India, Bank of India, Indian Overseas Bank, and UCO Bank, have also seen declines of over 9%.
Proposed Norms and Their Implications
Analysts have pointed out that if these proposed norms are enforced, they could significantly impact lenders’ margins. “We believe the draft norms are punitive toward incremental and existing project lending,” and state-owned lenders will be most exposed if the norms get implemented, Nomura analysts said in a note. Macquarie analysts added that the new provisioning requirements apply retrospectively and not to incremental loans, which could lead to increased provisioning requirements for lenders, affecting their profitability, and these companies may ration credit to project finance, further postponing the capex recovery.
Nifty 50, Sensex down over 2.6% in a week
Adding to the challenges, the hawkish comments from the Federal Reserve also exerted pressure on the markets. Federal Reserve Bank of Boston President Susan Collins indicated that interest rates may need to be maintained at a two-decade high for a longer period than initially anticipated, aiming to moderate demand and alleviate price pressures. The upcoming release of inflation figures will provide new perspectives on the US economy, especially following last Friday’s employment data, which indicated a slowdown in the labor market.
Conclusion
Indian stocks are currently under significant selling pressure, with public sector banks bearing the brunt due to new draft guidelines on project finance. The situation is further exacerbated by hawkish comments from the US Federal Reserve. Investors are advised to exercise caution and closely monitor market developments.
