Indian markets and country-specific ETFs retreated Friday after Yes Bank Ltd. and Dwan Housing Financing Corp. shares plummeted and dragged down the whole financial sector.
On Friday, the iShares MSCI India ETF (BATS: INDA) declined 2.7%, PowerShares India Portfolio (NYSEArca: PIN) decreased 2.8%, WisdomTree India Earnings ETF (NYSE: EPI) fell 2.6% and Franklin FTSE India ETF (NYSEArca: FLIN) dropped 2.6%.
Yes Bank shares retreated to their lowest level since 2016 on Friday after India’s banking regulator refused to extend the chief executive officer’s tenure while Dewan shares plunged 43% for its steepest loss on record, Bloomberg reports.
The sudden pullback revealed investors’ anxiety over Indian financial shares after Infrastructure Leasing & Financial Services Ltd. defaulted on its debt and shook confidence in the sector.
“IL&FS’ problem and Yes Bank’s issues are impacting every financial stock in the market,” A K Prabhakar, head of research at IDBI Capital Market Services Ltd., told Bloomberg. “Leveraged positions are being reduced.”
The markets may have overreacted after some mutual funds dumped exposure to bolster cash positions before an expected tightening of market liquidity in September.
“Two things simultaneously led to this panic selling,” according to Deven Choksi of KRChoksey. “Some of the mutual funds schemes ended up offloading part of their portfolios to offset the losses from IL&FS holding. Along with this, heavy selloffs could have happened from arbitrage funds in the cash market. Need to validate this from the end-of-day market data.”
Reserve Bank of India could tighten rules
Some market participants also speculate the Reserve Bank of India could tighten rules on housing finance firms to clamp down on the history questionable lending that has contributed to a surge in bad debts. This follows after the central bank said Yes Bank’s chief executive officer will have to step down at the end of January.
“Investors are speculating that more bad loans may come to light as RBI may take stricter action,” Soumen Chatterjee, head of research at Guiness Securities, told Bloomberg.
The IL&FS downgrade and default may have pushed investors to eschew the broader financial market to avoid any further potential collateral damage.
“Downgrades are a serious possibility” for non-bank financial companies, Aneesh Srivastava of IDBI Federal Life Insurance Co. told Bloomberg
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