MUMBAI - Indian markets steadied after an early wobble on Tuesday despite a rupee currency dangerously close to record lows, and abiding fears that problems at two large non-banking financial companies could signal a wider credit crunch.
Alarm over potential for a credit crunch had heightened on Friday when bonds issued by Dewan Housing Finance Corp were sold by a large fund manager at hefty discount. Shares in the NBFC fell 23.2 percent on Tuesday, undoing the previous day's recovery from Friday's catastrophic fall, when the stock nearly halved in value.
Investors had already been set on edge by Infrastructure Leasing & Financial Services (IL&FS) defaulted on a series of its coupon payments.
"There's a lack of confidence in the markets now, especially in the banking sector," said Siddharth Sedani, head of equity advisory at brokerage firm Anand Rathi.
The central bank late on Monday said it would buy 100 billion rupees ($1.38 billion) worth of government bonds, but Sedani said the market would need more long term reassurance than open market operations can provide.
The main share indexes fell by up to 0.8 percent in nervous early trading, before recovering. By early afternoon the broader NSE Nifty was 0.28 percent up, while the benchmark BSE Sensex had gained 0.45 percent.
There was no let up in the suffering for investors in NBFCs, however, and others followed the fall in Dewan Housing Finance.
Indiabulls Housing Finance Ltd fell as much as 8.7 percent on Tuesday, with the stock shedding 15.3 percent over the past two sessions.
Finance Minister Arun Jaitley told investors on Monday that the government stood ready to take steps to ensure adequate liquidity to NBFCs, echoing assurances already given by the central bank and the market regulator. But investors said the markets needed more than verbal assurances.
Having posted record highs last month, equity markets were still in better shape than the rupee and the bond market.
India's lurch into a balance of payments deficit in the April-June, as price of oil imports continuing to climb spelt trouble for a rupee already bruised by rising U.S. interest rates and the fall out from U.S. tariff wars.
The partially convertible rupee is Asia's worst performing currency so far this year, and on Tuesday it briefly weakened to 72.9650 per dollar, just a whisker away for the all time low of 72.99 struck last week. By early afternoon the currency steadied to 72.82, still a shade weaker than Monday's close at 72.63.
Currency traders were expecting authorities to take some pressure off the rupee by granting direct dollar credit lines to oil companies or to put curbs on non-essential imports.
Meantime, yields on Indian bonds have hit their highest since November 2014, as investors retreated from rupee assets.
The benchmark 10-year bond yield was flat at 8.12 percent after earlier rising 2 basis points.
The one year commercial paper rate has risen by 35 basis points to 8.85 percent since the start of September as liquidity conditions have tightened.
In the money market, tight liquidity conditions moved the one-year OIS rate up to 7.51 percent from Monday's 7.46 percent, while the overnight call money rate rose to 6.60 percent from Monday's close of 6.35 percent.