Indian stocks rose to fresh closing highs on Friday with the Nifty briefly crossing 21,000 in early trade led by gains in large-cap bank and IT stocks. Reserve Bank, while keeping the dovish stance, made series of announcements to strengthen the financial system, each of them likely to have good impact.
Nifty and Sensex will make fresh attempts to cross their respective milestones of 21,000 and 70,000 next week as overseas fund flows support the bullish momentum. The sizzling global bond rally stalled on Thursday ahead of a key US jobs report, with a slump in Japanese debt adding to the nerves of Treasury traders already fretting those yields had dropped too far.
# 1 RBI
RBI policy was largely on expected line and there were no surprises. The omission of any mention of likelihood of OMO sales and allowing liquidity reversal over weekends and holidays was viewed as mildly positive by the market participants. This will help enable better liquidity management.
- Projected growth for FY 24 at 7% from previous estimate of 6.5%
- RBI says this rate is still conservative though higher than its earlier estimate of 6.5%.
- Surprising that growth rates have been increased without increasing the inflation projections, which is retained at 5.4%.
- Policy rates remain unchanged – Repo at 6.5%, and Bank Rate at 6.75%
- Rate remains unchanged consecutively fourth time compared to six increases last year.
- Other measures
2a. Introducing Unified regulatory framework for Connected Lending
- To strengthen the pricing and management of credit by regulated entities.
- Recent cooperative bank frauds would have accentuated RBI’s concern where directors have lent large sums of money to close relatives and friends.
- Extant guidelines are clear on connected lending guidelines in banks but not clear where connectedness extend to NBFCs/cooperative banks.
Connected lending has been clarified to be not “inter connectedness” but lending to persons who are in a position to control or influence the decision of a lender. The central bank has been reluctant to allow big business houses to set up banks after amending the Banking Regulation Act because of worries over governance, conflict of interest, misallocation of credit and concentration risks. Though corporate houses were allowed to seek bank licences in 2013 none were allowed as yet.
2b. Introducing New Regulatory Framework for Web-Aggregation of Loan Products
- Several concerns relating to web aggregation of loan products harming consumers interest noticed by RBI.
- A few days before RBI Dy, Governor pointed out on dark patterns – misleading consumers to borrowing with high risk. Bajaj Finance was stopped from pursuing two digital lending products due to absence of Key Fact Statements missing.
This framework is likely to enhance customer centricity and transparency in digital lending and will help borrowers to make informed decisions.
2c. Proposed to set up of fintech repository by RBI Innovation Hub
- While the data on banks/NBFCs are reasonably available, full data on operational and financial details of fintech’s are not available as they are unlisted but part of the financial system.
- There is increasing joint activities with fintech’s by Banks/NBFCs. and the likely risk arising out of such joint arrangements is incomprehensible without complete details on fintechs.
Repository may help to have a resilient fintech sector with relevant and timely information on fintech entities, including the nature of their activities.
2d Enhancement of limits under e-Mandates
- There is a need to popularise e-Mandates for making payments of recurring nature especially for MFs, Insurance subscriptions and credit card repayments where the average ticket size is more than Rs 15000.
- Currently additional factor of authentication (AFA) is required for recurring transactions exceeding ₹15,000.
- Enhanced limit of Rs 1 lakh per transactions without AFA will accelerate the usage of e-mandates.
Currently registered e mandates stand at 8.5 cr processing Rs. 2800 cr of monthly transactions and this enhanced limit is likely to increase adoption of e mandates. The other existing requirements such as pre- and post-transaction notifications, opt-out facility for user, etc. shall continue to apply to these transactions.
2e Proposed establishment of cloud facility for financial sector in India.
- Data is currently presently not uniform and there is a need to ensure security, integrity, and safety of the data as banks are utilising various private and public cloud facilities.
- There is also a need to provide a structured scalable data storage and data processing facility
- Smaller entities like cooperative banks are not able to make large investments in digital infrastructure.
The proposed facility would enhance the security, integrity and privacy of financial sector data with scalability proposition and would give access to all types of players.
2f. UPI Limit stands enhanced.
- Need to encourage use of UPI for medical and educational services where transaction limit is capped at Rs. 1 lakh, to Rs. 5 lakh, while for MFs, Credit cards etc it is Rs. 2 lakhs.
- For IPO Retail Direct Scheme, it is already enhanced to Rs. 5 lakh last year.
- Whither Peer to Peer lending?
As per reports released last week, RBI is planning to halt certain activities of Peer-to-Peer lending, which connects individual lenders with borrowers, after inspections of at least 10 lenders between June and September found rule violations and misleading sales practices.
- Some platforms market the product with savings or fixed deposits.
- Variety of questionable practices including relending of repaid funds
It may not be surprising, if RBI soon brings out with directions like Consumer lending, as Peer-to-peer lending is growing in India with appx $120 bn, Global size is estimated at $407 billion as of last year, according to a report by Future Market Insight.
# 4 SEBI – AIFs
As per statement made by WTD last week, SEBI is exploring framework where fund managers give a specific commitment that the funds would not be mis-used to sidestep other regulations. Such a general obligation would be converted into specific standards so that fund managers know what needs to be done.
Why SEBI wish to tighten AIFs?
As per statement by Wholetime Director –
- Dozens of cases where AIFs acted as tools to evergreen sticky loans, circumvent FX laws and bankruptcy code.
- An NRI who is unable to invest in a company to restrictions on foreign holdings, routes money through AIFs or a disgraced promoter trying to get into a company by using AIFs to make the investment.
- Some funds were also used to buy into listed entities without attracting takeover code or other SEBI regulations.
- NBFCs have used AIFs to move loans out of their books just before they turn bad. NBFCs cuts a deal with a large foreign investor to float an AIF which invests in debentures issued by borrowers of NBFC. The latter uses the money received from AIF to pay off he loans to NBFC.
# 5Tax – AIFs
The Indian tax department is closely examining certain investment funds that have used agreements with Mauritius and Singapore to get tax benefits. They want to know detailed information about these funds, like where they work, who works for them, and where important decisions are made. Sometimes, they even check if the people in charge really live in Mauritius or Singapore.
- The tax authorities think that some of these funds are using these arrangements to avoid paying taxes in India. The focus now is on how these funds actually operate, not just on what documents they have.
- This scrutiny mostly applies to funds that invested before 2016/17 and later sold their investments. The idea of ‘grandfathering’ was meant to give these funds stability even when tax rules changed. But now, these funds need to provide strong arguments to prove they deserve these benefits. When these funds want to sell their investments, buyers might ask for extra guarantees to cover.
- IFSCA has already provided guidelines with regard to presence of key management personnel and appropriate space to run the office in Gift City.
# 6 CRISIL – Bond market
As per report released last week by CRISIL,
- India’s corporate bond market is expected to more than double in size over the next 5-6 years – and will reach Rs. 120 lakh cr from Rs 43 lakh cr.
- Factors contributing to this growth include infrastructure and corporate sector investments, attractiveness to bond investors, strong retail credit growth, and regulatory support.
- Government and regulatory efforts, such as a ₹33,000 crore backstop fund and AMC Repo Clearing, have also boosted the market.
- The RBI and SEBI have mandated large borrowers to use the corporate bond market for incremental borrowings.
- Further growth potential exists if regulators address issues like relaxing investment restrictions on lower-rated corporate bonds for insurance and pension funds and strengthening the credit default swaps market.
# 7 BCG – Deep Tech Report
Summary of observations of the report last week
- Deep tech represents 20% of venture capital funding, up from 10% a decade ago, and it addresses global challenges and offer potential for market growth.
- Despite a drop in venture capital funding from $160 billion in 2021 to $40 billion in H1 2023, deep tech maintains a 20% share.
- Average deep tech investments have grown significantly, often exceeding $100 million.
- Returns on deep tech investments are similar to traditional venture funds, with exits primarily through corporate acquisitions (51%) and IPOs (31%).
- Investing in deep tech involves multi-stage funding and scientific risks.
- Deep tech investments take longer to mature (25-40% longer) and have higher failure risks.
- Investment categories include digital AI, autonomous systems, advanced physics, chemistry, and more, with a focus on mobility, health, energy, and cross-industry platforms.