RBI bets against

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On 24th July 2020,  RBI governor Shaktikanta Das in its 21st issue of the Financial Stability Report (FSR)
warned against the cheerful stock market rally.

Firstly, let's discuss what happened.
In March 2020 panic selling in the stock market globally due to worldwide lockdown implement under the scenario of  Nobel Coronavirus originated from Bejing, China has dragged down the investor's wealth in a few days to over 50-60%.
After that market started its V-Shape recovery leaving behind the fundamentals due to stimulus package provided across countries and surge in people investing eventually created immense liquidity stretched the market way behind.


Nifty daily chart 


But the financial sector remains under pressure and couldn't cope up with overall rally, the major contribution
to pick up Nifty was from Reliance and IT sector. Reliance alone contributed approximately 2000 points in
driving nifty so its not actually bull market rally.



Nifty Bank Indices


Now the question arises why RBI warned despite being a slow performance of the financial sector.
So let's see highlights of the report:-

  • The overleveraged non-financial sector, simmering global geopolitical tensions and economic losses on account of the pandemic are major downside risks to global economic prospects. 
  • The capital to risk-weighted assets ratio (CRAR) of Scheduled Commercial Banks (SCBs) edged down to 14.8 percent in March 2020 from 15.0 percent in September 2019 while their gross non-performing asset (GNPA) ratio declined to 8.5 percent from 9.3 percent and the provision coverage ratio (PCR) improved to 65.4 percent from 61.6 percent over this period.
  • Macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase from 8.5 percent in March 2020 to 12.5 percent by March 2021 under the baseline scenario; the ratio may escalate to 14.7 percent under a very severely stressed scenario.

Times of India - Any worsening of banks’ loan books would hurt their capital buffers and make it more difficult to extend credit just when companies need it most.

So, as stock market work on future growth/shrink perspective according to RBI market is heading in the wrong direction
developing a major threat especially to the retail investors.
It is believed that the bank may collapse if Gross NAP roses over 15%, for better understanding,
in 2008 financial crises USA prominent banks collapsed even having a market capitalization of 10 times that of Indian 
major Banks.



Disclaimer:- All figures used are based on approximation and should be verified before further use. 














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