Indian share markets are presently trading on a negative note. Sectoral indices are trading in the red with stocks in the banking sector and metal sector witnessing maximum selling pressure.
The BSE Sensex is trading down 154 points (down 0.5%) and the NSE Nifty is trading down 52 points (down 0.5%). The BSE Mid Cap index is trading down by 0.2%, while the BSE Small Cap index is trading down by 0.1%. The rupee is trading at 65.06 to the US dollar.
In the news from the banking sector, as per a leading financial daily, the government has ordered all state-run banks to examine non-performing loans of more than Rs 500 million for any wrongdoing similar to the Punjab National Bank (PNB) fraud.
The banks have been given 15 days to also prepare a pre-emptive action plan to address such risks.
The above development would mean investigations in high-profile bankruptcy cases that are undergoing resolution, and putting their promoters under the scanner if any scams are uncovered.
The share of large corporates, in total advances of the banking sector, has almost remained unchanged over past three years (at an average of 55%).
However, their contribution to incremental slippages has been huge. At one point, the big corporate borrowers accounted for nearly 90% of total NPAs of the sector, as can be seen from the chart below:
Big Borrowers Turning into Big Offenders
Banks, in principle, must be careful about not extending loans to borrowers with poor creditworthiness or payment track record. That too, irrespective of the size of the borrower.
While the bad loans struggle at PSBs has been going on for a decade, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of these state-run banks.
That's the reason we've been wary of PSU banks since 2014. This was well before the market had caught a whiff of the NPA problem. We've recommended just two large PSU banks in StockSelect since then...and already successfully closed both of them.
In the news from the global financial markets, Federal Reserve Chairman Jerome Powell yesterday appeared before the House Financial Services Committee. This was his first testimony since he took charge earlier this month.
He said that his expectations for domestic economic growth have increased since the beginning of the year, citing the passage of the US$1.5 trillion tax cut and stronger global growth.
On interest rates, Mr. Powell said that the Fed planned to continue increasing its benchmark interest rate only gradually, as it did under his predecessor, Janet Yellen.
Investors, however, responded to his optimism as an indication the Fed may be compelled to move more quickly on interest rates. As Powell testified, stocks fell, the dollar strengthened and bond yields rose.
Many expect that a tightening labor market and increased government spending in the US would further boost inflation and will force the Fed to be more aggressive in raising interest rates this year.
The Fed has forecast three rate hikes this year. The first increase expected at its next policy meeting in March.
In its latest meeting, the Fed said it expects "further gradual" rate increases. The target range for the federal funds rate currently is 1.25% to 1.50%.
Note that with the US economy chugging along for many months, the Fed is now gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.
How does a US interest rate hike affect Indian investors?
The instant effect is foreign money moving out of India's vaults. This means a slight correction in the share market in India, albeit temporarily.
While this might provide a good buying opportunity in long-term stocks, the main thing to look forward would be capex and earnings trends.
In the end, Indian investors are better off staying informed about the corporate earnings revival than Fed rate hikes.
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