NSEL Turmoil & Thereby Finantech Breakdown Dragged the Stock Markets

At macro level also there was downgrade pressure as RBI kept the policy rates unchanged. This definitely exerted liquidity pressure on the banks. With margins getting affected banks are left with only choice of increasing the interest rates to keep the balance sheets inline. We witnessed this decision taken by Yes Bank but markets punished that stock with heavy sell off and gains being wiped out entirely.

All the money market transaction especially speculative ones ceased away as a result of RBI policy to Rupee being stabilized. This is near term negative for the financial sector. Depreciation of Rupee is mainly caused because $ is getting stronger with improving US economy. This is not in control of RBI or any other controller. Markets will remain volatile and may showcase kneejerk reactions to the policy changes. There imminent inflationary risk as Brent crude prices are firming upwards.

NSEL Turmoil: This was a big event as the exchange had given an undertaking to the Government and simultaneously, with a view to ensure orderly performance of the markets, introduced T+10 contracts with Trade for Trade settlements.

As a consequence to ensure the mandate by the regulator NSEL also postponed settlement of one-day forward contracts. The exchange has decided to merge the delivery and settlement of all pending contracts and to defer it for a period of 15 days. Consequently, the positions outstanding in the contracts will be settled by way of delivery and payment after expiry of 15 days.

Non delivery and non-payment of short term contracts has put NSEL and its parent Financial Technology in a fix. Panic came in as reaction to default risk. The stock tumbles down 80% and MCX was also punished to 20% lower circuit for two days in a row.
At macro level we dont expect any dramatic change in Rupee/$ relationship or any improvement in sovereign data.

The bearish attitude persisted for one more week in the stock markets. The investors could neither experience a bounce nor the support from the markets. Both the major supports at 5830-5850 and 5775 levels were smashed for the nifty to close lower by 3.5%. Initial two trading sessions traded with a negative bias where Realty sector directed the move. Amongst the frontliners majorly Jindal Steel & Power could exceptionally beat nifty. Third day experienced short covering in the latter half of the session. Fourth day experienced highest volatility in the week due to July month expiry with a tug-of-war between Realty sector at the negative front and Banking sector specifically Axis, HDFC and Kotak to pull the markets upwards. Last day smashed the double bottom formed during the previous two trading sessions but closed near to these levels. Overall market sentiments were driven by Realty sector.

Nifty seems to have taken a support at 5680-5650 levels thrice which is its 78.2% retracement level. The major trendline support is at 5620-5600 levels. Moreover, nifty is already at a major support on weekly charts. This indicates a bounce back up to 5800-5820 levels in the first place if it crosses 5750 levels on closing basis which would be a gap-filling for the nifty. Monthly chart has formed a triangular pattern where nifty is trading at the lower end of the triangle. If nifty trails at these levels or takes a reversal from there, the major target would be 6200 or if it breaks the support we can also see 5566 again.