With Sensex down over 3% since Sep 23, banking crisis may prevent bull run

Stock bulls betting on a second rally from India’s landmark corporate tax cut are having their faith tested by a shadow banking crisis.

The Sensex index has fallen more than 3 per cent since reaching a two-month high on Sept. 23. That has erased almost half of the surge sparked by the Sept. 20 announcement of a landmark corporate tax cut, as debt concerns emerge at lenders including Indiabulls Housing Finance Ltd. and a co-operative bank.

“What happened over the last week or so is renewed concerns around banking system with issues about stability,” said Gautam Chhaochharia, a strategist at UBS Group AG. However, the corporate tax cuts will still help spur economic growth in the long term, he said.

Chhaochharia expects the Nifty 50 stock index to climb about 10 per cent to 12,300 by June on the premise that reforms including tax cut will aid valuations, while the worries about the banking system and slowing economic growth will recede over the next few months.

His optimism is shared by other investors including those at AMP Capital Ltd. and Credit Suisse Group AG, which said fatter corporate bottom lines could eventually result in more investments and hence an economic recovery.

Suresh Tantia, an investment strategist at Credit Suisse in Singapore, points out that the central bank’s accommodative stance should help support confidence in the market. Last week, the Reserve Bank of India reassured investors the banking system is “safe” after depositors lined up to pull money from a small bank. That was followed by the governor’s comment on Friday that the RBI would not allow a co-operative bank to collapse.

“With limited inflationary pressure and still high real rates, there is more room for RBI to cut policy rate to support the economy,”’ Tantia said.

Banking Troubles

• Punjab & Maharashtra Co-operative Bank concealed large exposures from RBI since 2008, a former managing director said
• Central bank put restrictions on Lakshmi Vilas Bank Ltd., which Indiabulls Housing plans to acquire
• Yes Bank Ltd.’s shares plunged almost 34 per cent in two days on concerns a cleanup in corporate debt could drag on

The RBI’s assurances, however, did little to calm the market last week. Both the Sensex and Nifty 50 indexes lost more than 1 per cent on Friday even after the central bank cut the key rate by 25 basis points. The RBI said it may not be done with the fifth rate cut this year as the economy is mired in its slowest growth in six years. Foreigners have sold India equities for four straight days through Oct. 3, dumping stocks worth $458.1 million, after buying almost $1.9 billion in five sessions after India lowered companies’ tax burden..

While India’s tax cut has given the stock market “some life,” there’s a perception that rising risks in the financial sector will temper economic growth and keep optimism in check, Edelweiss Financial Services Ltd. analysts including Aditya Narain wrote in an Oct. 3 note.

“We continue to maintain our market target at 17x December 2020, in line with India’s long-term average multiple,” the analysts wrote, referring to the price-earnings ratio of the Nifty Index. The ratio is currently at 17.6, according to data compiled by Bloomberg.