Equity markets lost significant ground on Thursday as investors remained wary of the potential contagion impact of the ongoing liquidity issues in the non banking financial companies (NBFCs) segment, with rate- senstive sectors such as banking and real estate taking the biggest beating.
The benchmark Sensex lost 553.82 points or 1.38% to close at 39,529.72. This was the biggest single-day fall in absolute points for the benchmark in the current calendar year — higher than the 495 points fall registered on April 22.
The fall was primarily led by the financials sector with Indusind Bank, Yes Bank, State Bank of India, Bajaj Finance and ICICI Bank among the top losers along with auto majors Tata Motors and Mahindra & Mahindra.
The broader Nifty lost 177.90 points or 1.48% to close at 11,843.75.
Not surprisingly, sectoral indices Nifty Bank and Nifty PSU Bank were the worst hit, shedding 2.32% and 4.9%, respectively.
Incidentally, the fall came on a day when the Reserve Bank of India (RBI) cut repo rate by 25 basis points, a move in line with market expectations and already factored in.
The recent downgrade of Dewan Housing Finance Corporation Ltd (DHFL) has renewed concerns related to liquidity issues in the NBFC space, especially since it has come close on the heels of similar developments in entities belonging to the Essel Group, Anil Dhirubhai Ambani Group and the IL&FS.
“The downgrade of Dewan Housing Finance Corporation's commercial paper by rating agencies was the primary reason for the steep correction in markets today,” wrote IIFL Securities analyst Saurabh Rathi, in a note to his clients.
“Amid liquidity crisis, downgrade of DHFL's paper could accentuate contagion risk, which can spread to other financial institutions including banks... banks may also see MTM (mark- to-market) losses on DHFL's bond exposure, which may lower its earnings in coming quarters,” he added.
In a similar context, global financial major CLSA said that the default “could also accentuate contagion risk in the financial sector (in the backdrop of IL&FS default last year) leading to higher costs and the polarisation of funds to better-rated NBFCs.” Shares of DHFL lost nearly 16% to close at ₹93.90. The effect was visible on other lenders as well with stocks of HDFC, Indiabulls Housing Finance and PNB Housing among others also ending the day in the red.
“A possible reason of the fall could also be that there was no mention in the policy about addressing the liquidity stress in the NBFC space. With recent news around DHFL and the possible contagion effect, several financials corrected heavily today,” said Amar Ambani, president and research head, Yes Securities.