Bank stocks power Sensex to new record on $32 bn recapitalisation plan
Photo Credit: Reuters

Indian banking shares soared on Wednesday, sending indexes to record highs after the cabinet approved a $32 billion plan to recapitalise its state banks over the next two years, although uncertainty remains about how the injections will be structured.

The gains come after India’s cabinet announced its plan to inject 2.11 trillion rupees ($32.4 billion) into state-run lenders over the next two years, in a bid by Prime Minister Narendra Modi to tackle a major drag on the economy that has frustrated his attempts to boost growth.

The plan was announced after Indian markets closed on Tuesday.

Investors welcomed the news, sending State Bank of India, the biggest lender, up as much as 25 percent to its highest since January 2015. The benchmark NSE Nifty surged as much as 1.3 percent to a record high.

But details of how New Delhi will fund the injections remain unclear. Also, questions remain about whether it would add to the country’s fiscal deficit at a time markets are already doubtful India can meet its 3.2 percent target of gross domestic product for the year ending in March 2018.

The amount injected also still falls short of credit rating estimates. Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking rules.

For now, analysts said the actions were a positive - and long-awaited - move.

“At the end of the day, a good dose of the medicine that is required is being provided. How the medicine is being sourced could have its own implications on the macro picture, but as far as the banking sector is concerned, it is helpful,” said Jobin Jacob, associate director of financial institutions at Fitch Ratings.

Of the planned 2.11 trillion rupees sum, so-called recapitalisation bonds will account for 1.35 trillion rupees, while about 580 billion rupees is estimated to come from share sales by banks, the ministry said on Tuesday.

The government will also use 180 billion rupees left from its previously budgeted recapitalisation fund.

Concerns about how the recapitalisation bonds will be structured sent the benchmark 10-year bond yield up 3 basis points to 6.81 percent from its previous close.

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