India's fiscal deficit, asset strain big worry for markets: Edelweiss

Even though third quarter earnings will be better-than-expected, the Street is worried about India's widening fiscal deficit and the asset quality of banks, according to leading brokerage house Edelweiss.

Of the eight trading sessions in the New Year, the market just managed to close in the green only for two days. However, many foreign brokerages like Deutsche Securities have pegged the year-end target for the Sensex at 24,000 and for the Nifty at the 7,150 point on the back of a possible decisive electoral outcome.

"The mounting pressure on fiscal deficit is the biggest worry of the market, as the concerns from the CAD and rupee volatility having been successfully addressed. The deteriorating asset quality of the banks is also a major concern even though overall earnings will be better than expected in the current results season," Edelweiss group chairman and chief executive Rashesh Shah told PTI.

"We are still on the edge, the economy has just recovered, and not made a comeback. Probably post-elections we can see some sustained growth as the frenetic actions by the government in the past four months and the RBI under Raghuram Rajan will take some time to show tangible effects," he added.

On the impact of the new party AAP on the markets and the forthcoming hustings, Shah said they could clean up the system to a considerable extent but hinted that the fledgling party may also rob the leading parties of a clear mandate, which may disappoint the street.

Fiscal deficit till November reached a worrying 94 per cent of the annual target, while revenue mop-up was faltering at around 12.5 per cent till December. The government's divestment effort has also come a cropper with it managing to garner only Rs 3,000 crore out of Rs 44,000 crore planned for the fiscal year.

The current account deficit, which stood at 4.8 per cent in FY13, was the biggest worry both for the market and the government, coupled with the rupee fall which had touched a 68.85 in August.

Asset quality of banks has been worsening, prompting the Reserve Bank of India (RBI) bank to warn that gross non-performing assets (NPAs) could touch 4.6 per cent by September this year.

In its financial stability report released on December 30, the RBI had flagged the NPA issue saying the health of banks worsened in the past six months.

"The strain on asset quality continues to be a major concern," the report had said, and warned that gross NPAs could touch 4.6 per cent by September 2014 from 4.2 per cent in September, 2013, and if present economic conditions deteriorate, this will be 7 per cent by March, 2015.

The report had also noted that amount of recast loans touched an all-time high of Rs 4 trillion or 10.2 per cent of the overall advances by September 2013, with the state-run banks being the worst-hit and that if recast assets added, total stressed loans ratio rose to 10.2 per cent in September, 2013 from 9.2 per cent in March, 2013.

Finance Minister P Chidambaram had often asserted that a 4.8 per cent deficit is a red-line that could be crossed.

On his retail broking business, Mr Shah said it has just broken-even and that his group doesn't believe in faster growth which is one of the reasons why he has not been aggressively adding more retail clients.

He, however, added that there is no question of the retail broking arm shutting down, as he is very optimistic about the market in the years to come. Shah has about 5 lakh retail accounts with around 30 per cent of them being active, but which is the industry average.

Due to continuing losses a few months back, IIFL had announced that it would be exiting the retail broking business. In fact, almost all the brokerages are losing money on the retail front.