The unexpected up move met with stiff resistance

However, in the absence of further triggers, the market fell off its high due to the sharp sell-out during mid-session. The Sensex still closed 416 points higher after initially climbing 750 points. Nifty gained 1.40% but closed below 9,300 points for the day. Britannia (up 7.02%), IndusInd Bank (up 6.56%) and Bajaj Finserv (up 6.19%) were the major gainers while NTPC (down 1.12%), HDFC Bank (down 0.86%) and M&M (down 0.82%) were the major losers of the day.

The current euphoria in the market is definitely surprising at a time when the manufacturing sector is going through an all-time low. Vehicle sales could hit zero in April with dealerships being shut during the lockdown. The Supply chain remains broken and many of large states are staring at an extended lockdown.

RBI extends its support:

While the promised fiscal package is going to be a key catalyst event, the RBI has emerged as the key player in the resistance against the current economic turmoil. The central bank today announced a Rs 50,000 crore special liquidity facility for mutual funds (SLF-MF) after redemptions rose due to Franklin Templeton closing six debt mutual funds in the last week.

Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements. MFs can avail this facility against the collateral of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs).

Key takeaways:

The new SLF-MF will ensure enough liquidity to high-quality mutual fund schemes against the redemption pressure. It will also boost investor's confidence that there is enough liquidity to meet the redemption requirement.

Learning from the past: Banks unwilling to lend:

The Indian banking system is likely to see a spike in asset quality deterioration as a result of ongoing economic disruption.

RBI's recent Targeted Long Term Repo Operation (TLTRO) 2.0 of Rs 25,000 crore also met with a tepid response as bankers remained unwilling to infuse fresh liquidity despite the cut in repo rates as well as relaxation in provisioning norms.

A historical study reveals that regulatory interventions have always been followed by higher gross non-performing loans (GNPLs). After the farm loan waiver in 2008-09, agriculture GNPLs rose from 10.5% in March 2010 to 18% in March 2012. Portfolios at risk for 90 days also increased sharply for microfinance companies (MFIs) after regulatory interventions in 2010 and 2016.

Key takeaways:

Surplus liquidity with the banking system is set to surge to 8-9 trillion rupees by July. However, banks are not showing any willingness to start lending given the shaky business environment.

Learning from past incidents, banks are unwilling to take a risk of a rise in bad assets. As a result, commercial vehicle (CV) loans, unsecured retail loans, MFIs and SME loans are most likely to come under further pressure.

Teji Picks of the day

JK Cement Ltd. (NSE: JKCEMENT)

Granules India (NSE: GRANULES)

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