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After opening on a negative note, the Indian stock markets moved steadily downwards. However, although they managed to come off the day's lows, they still closed the day significantly in the red zone. While the BSE-Sensex closed 264 points down (a 1.4% fall), the NSE-Nifty closed lower by 76 points (down 1.4%). The BSE Midcap and the BSE Small cap indices faced a similar fate, both down 1.4%. All sectoral indices were in the negative zone, with auto and capital good stocks seeing the bulk of the losses.

As regards major global stock markets, most Asian indices closed in the negative on the back of high crude prices. China, however, was one of the major gainers, up 2%. European indices, however, opened in the green. The rupee was trading at Rs 45.05 to the dollar at the time of writing.

High oil prices have been shocking the world post the political crisis in Libya. If, these prices stay at high levels, Asian majors like India and China will not be able to sustain growth. If oil stays around US$ 120 per barrel, according to RBS, China's growth rate could be cut from 10% to 8.8%. India would also have around 2% shaved off its annual growth rate, growing at 6% instead of 8.1%. In this negative scenario, RBS predicts that India could see its inflation in the year 2011 double to 14% from the 7.2% predicted currently. In this situation, India will not be able to maintain or increase subsidies. Therefore, inflation would be an even bigger problem. Diesel prices may also be deregulated at this rate. With a high deficit already, higher oil prices will majorly affect India's import bill, leading to major macroeconomic risks.

The government has enhanced credit to the agricultural sector by Rs 1 trillion to Rs 4,750 bn, as per the latest Union Budget. However, pressures to meet these targets have been hitting the bottom lines of various government banks. All PSU banks have been reporting an increase in their bad debts on farms loans ranging between 80% and 2000% in 9mFY11. State Bank of Bikaner and Jaipur has reported the highest increase, with NPAs in the farm loans category increasing from Rs 70 m to Rs 1.1 bn. SBI, the largest banking in the country reported an increase in NPAs of around 80% in the first 9 months. These amounted to around Rs 37.2 bn, the highest any bank has reported. Andhra Bank reported a 168% rise; Allahabad Bank reported a rise in excess of 157%. Corporation Bank and Bank of India reported a 205% and 100% increase in bad farm loans respectively.

This begets the question whether these banks are just blindly trying to meet government targets, or if they are doing proper credit appraisal. We hope that the budget's proposal to give an interest subvention of 3% on timely payback of loans will help the situation. When a similar problem happened a few years ago, the situation had to be remedied by the government by recapitalization and reimbursement through a farm loan waiver scheme. A Rs 700 bn farm loan waiver scheme was announced in FY09 to compensate banks. The government is already looking to recapitalize PSU banks, but a similar proposal to waiver farm loans will stretch the governments' tight budget balances.

Source: India Markets Monday Wrap-Up: Weak Outing for the Sensex