Week ending 15th Feb 2025

Week ending 15^th Feb 2025

# 1 Markets

Indian equity markets have extended their losing streak for the fourth consecutive month from October 2024 to January 2025—marking the first such occurrence since 2001 and breaking a two-decade record. February shows little sign of respite, with subdued market sentiment. Concerns over Trump’s proposed tariffs, coupled with mixed third-quarter corporate earnings, continue to weigh on investor confidence. On Friday, the Sensex closed at 75,939, while the Nifty ended lower at 22,929. Looking ahead, Nifty’s trajectory is expected to be shaped by global developments and domestic economic indicators.

The latest AMFI data for January 2025 revealed two different tales of investor confidence and caution. While 56.19 lakh new SIPs were registered, 61.33 lakh SIPs were cancelled, resulting in a net decline of 5.14 lakh accounts. Inflows into small-cap funds surged by 22.6%, while large-cap fund inflows jumped by 52.3%, contributing to a total net inflow of ₹39,687 crore.

The week began with rising Indian government bond yields, driven by the RBI’s decision to refrain from announcing any liquidity measures. However, a lower-than-expected inflation print helped reverse this trend, with the 10-year yield closing at 6.70% on Friday.

Despite optimism fuelled by positive producer price data and Russia-Ukraine peace talks, U.S. equity markets ended mixed on Friday. The Dow Jones posted a marginal weekly gain. The S&P 500 showed signs of fatigue, closing about 1% higher, as it enters its third year of a bull market. The Nasdaq gained ~2%, bolstered by gains in tech giants Apple, Nvidia, and Tesla.

Meanwhile, Federal Reserve Chair Jerome Powell acknowledged that January’s CPI reading of 3.3% exceeded the forecast of 2.9%, dimming hopes of immediate rate cuts. However, traders still anticipate at least one rate cut this year, leading to a marginal decline in the US 10-year bond yield to 4.47% on Friday.

# 2 Income Tax Reform?

India’s outdated Income Tax Act of 1961, built for a different era, has become a misfit despite frequent amendments. Tax disputes have surged, with ₹15.4 lakh crore under litigation in FY24, and Indian authorities winning just 11.5% of cases in 2015, far below the OECD average. The newly approved IT Bill, with clearer language and simpler deduction rules, aims to reduce arbitrary demands and bring much-needed tax clarity. Key Changes in the Income Tax Bill 2025 effective from April 1, 2026, include:

1. Structural Simplification of the Income Tax Law

• Reduction from 47 chapters and 819 sections to 23 Chapters and 536 sections.
• Sections structured for easy reading removing 1,200 provisos and 900 explanations and grouping all provisions related to salaries, deductions and exemptions.
• Removes confusion around tax periods, making compliance easier. ‘Tax year’ to specify the year of earning income for which the tax liability is computed to replace confusing ‘previous year’ and ‘assessment year’ now in vogue.
• Over 300 redundant laws eliminated, including schemes that expired like 80CCA(NSS) 80 CCF (long term infra bond deductions)

• Section 80C Deductions Consolidated – 80D, 80CCD, 80E, 80TTA and 80G simplified without changing deduction amounts
• Exemptions for gratuity, leave encashment, pension commutation, voluntary retirement, and retrenchment compensation have been consolidated into a single table.
• Formulas introduced for tax calculation for better clarity.

2. Compliance Simplification with taxpayer friendly approach

• Trusts, universities, hospitals, and institutions categorized under a single term “Registered Non-Profit Organization” with a clearly defined compliance framework.
• Time limit for filing updated returns extended from 2 to 4 years.
• Faceless assessments streamlined and Appeal and review mechanisms improved.
• Presumptive Taxation Simplified for both residents and non-residents.

• Taxpayer’s Charter Introduced Outlining rights and obligations of taxpayers.

3. Governance simplification through Administrative Reforms

• Stronger Anti-Avoidance Measures (GAAR) Introduced.

• All TDS provisions consolidated under one section with tables for clarity.
• Penalty and Compliance Framework simplified with well-defined structure for penalties and dispute resolution.

4. Clarity on Virtual Digital Assets (Cryptocurrency & Digital Transactions)

• Concept of “electronic mode” introduced to cover new financial instruments.

The primary objective of the new tax bill appears to be reorganizing and rephrasing numerous sections of the old act. This is expected to lead to greater transparency and a faster, more efficient tax processing system.

Overall, the bill does not introduce drastic changes but aims to simplify, codify, and modernize tax regulations. Is this a revolutionary step? Of course not. But it was necessary, and we hope that this is a step in the right direction.

# 3 Banking

3.1 RBI last week extended pre-approved UPI credit facility by banks to Small Finance Banks [SFBs]

• The scope of UPI transactions using pre-sanctioned credit lines, previously limited to banks, has now been extended to Small Finance Banks.

• Currently savings accounts, overdraft accounts, prepaid wallets and credit cards can be linked to UPI and scope of UPI is now expanded by inclusion of credit lines as a funding account.

These credit lines, if competitively priced, could serve as a cost-effective alternative to traditional credit cards or personal loans, particularly in the micro-loan segment dominated by SFBs. This is another initiative aimed at promoting greater financial inclusion.

3.2 RBI’s bimonthly forward-looking surveys released last week capture public sentiment on the economy.

• The Consumer Confidence Survey (CCS) shows declining confidence, weaker employment sentiment, and softer spending, which could impact private consumption.
• Manufacturing surveys indicate steady but slow growth, rising input costs, and stagnating capacity utilization.
• The Bank Lending Survey reveals growing business credit demand but declining personal loan uptake.
• As per Inflation Expectations survey, Indian households expect inflation to rise further, with the one-year-ahead expectation increasing to 10.2% in January 2025 from 10.1% in November 2024. Despite actual inflation hovering around 6%, rising inflation expectations influence consumer spending, wage-setting.

Overall, cautious sentiment and slowed growth highlight the need for continued policy intervention to sustain economic momentum. Higher inflation expectations is thus noteworthy and contrary to RBI’s lower projected inflation for next FY.

3.3 Key Takeaways from EY Private Credit Report (H2 2024) released last week

3.3.1 Private Credit Market Growth

• Private credit investments in India totalled $3.3 billion in H2 2024, compared to $5.9 billion in H1 2024 and $3.7 billion in H2 2023.
• CY 2024 recorded $9.2 billion across 163 transactions, reflecting a 7% YoY growth, but slightly below the expected $10 billion mark due to delays in large transactions.
• Domestic private credit players outperformed global funds, completing 63% of total deal value and 61% of deal count.
• Real estate dominated investments, securing 43% of total funding, followed by consumer durables and financial services.
• Deals exceeding $100 million accounted for 50% of total investments, showing a preference for large-scale funding.

3.3.2 Private Credit Growth via AIFs

• AIFs are emerging as the preferred vehicle for private credit growth in India.
• Category II AIFs accounted for ~80% of total commitments in FY24.
• Private credit AUM grew from US$3.7B in CY 2014 (6% of total AIFs) to US$19.5B in CY 2022 (14%) and is projected to reach US$58.3B by CY 2028 (25%).

3.3.3 Competitive Landscape and Market Dynamics

• The market is witnessing increased competition from new AIF registrations, re-activated NBFCs, and global banks tapping into Indian corporates’ capital needs.
• A buoyant equity market, exaggerated valuations, and alternative capital sources (e.g., ESOP sales, family offices, promoter exits) are impacting private credit deployment.
• Yields are under pressure, leading to lighter covenants and potential risk misjudgements by newer fund managers, potentially resulting in higher future credit costs.

3.4 Additional cause of worry for MFIs?

Karnataka Govt. has recently passed an ordinance- Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance 2025 – to control MFI operations.

• The ordinance says loans advanced to ‘vulnerable sections of the society’ before commencement of the law is deemed to be discharged along with interest if the MFI concerned is unregistered and unlicensed.
• The law bars civil courts from entertaining any suit against the borrower for recovery of loans advanced in such cases.
• The ordinance however excludes RBI-regulated banks and microfinance institutions (MFIs) from its provisions, focusing instead on penalizing unregulated lenders for coercive recovery practices.
• The ordinance imposes strict penalties, including a 10-year jail term and a ₹5 lakh fine, for violations.

While this provides relief to regulated MFIs, possibility of potential misinterpretation by local authorities, which may inadvertently impact loan collections and borrower discipline over the next two quarters is not ruled out. Concerns also arise regarding potential interference in legitimate MFI operations and additional compliance burdens for field agents and business correspondents. However, removing the term “MFIs” from the text and replacing it with “micro-loans” would have provided greater clarity.

# 4 SEBI

4.1 SEBI has released the Industry Standards Recognition Manual to provide guidance on the formation and functioning of Industry Standards Fora (ISFs), which aid in implementing regulatory directives.

• SEBI had launched a pilot programme for ISFs in July 2023, initially for listed companies and stockbrokers, later expanding it to other stakeholders such as portfolio managers, custodians, designated depository participants, and AIFs.
• ISFs are beneficial in promoting good governance, ensuring high-quality regulatory compliance, and simplifying compliance processes. However, since ISFs currently operate as pilot programmes without standardized norms, their constitution and functioning vary.

The new manual aims to streamline the processes as differences continue to exist in areas such as the regulations addressed, stage of SEBI consultation and methods for gathering industry input.

4.2 SEBI on Thursday has proposed additional provisions to strengthen the framework for Environmental, social and Governance [ESG] rating providers (ERP).

• Under the credit ratings agencies regulations, an ERP cannot withdraw ratings except when the rated issuer is wound up or merged with another company or except in cases specified by SEBI
• SEBI has now proposed other circumstances under which the rating can be withdrawn by ERPs following a subscriber-pays business model and an issuer-pays model.
  • Under subscriber- pays business model, ERP can withdraw a rating provided there are no subscribers for rating as on the date of withdrawal.
  • Under the issuer-pays business model, ERP can withdraw the rating, provided it has rated security continuously for 3 years or 50% of tenure of the security, whichever is higher, and having received NOC from 75% of the bond holders by value.

This will ensure corporates don’t get away with fancy rating for the purpose of securing impact credit at concessional rates without fully implementing the ESG standards.

4.3 SEBI last week has introduced MITRA (Mutual Fund Investment Tracing and Retrieval Assistant)

• MITRA is a digital platform to help investors track and reclaim inactive or unclaimed mutual fund folios.
• Developed by RTAs, it provides a searchable database of unclaimed investments, encourages KYC compliance, and aims to prevent fraudulent redemptions.

A folio is classified as inactive if there are no transactions for 10 years, despite a unit balance. This follows SEBI’s revised framework for dealing with unclaimed funds and securities lying with stockbrokers.  The client securities which could not be credited to client’s accounts initially to be put under ‘enquiry status’ and if it continues in the same status for a period of more than 30 days to be termed as ‘unclaimed securities.

MITRA is similar to the UDGAM portal developed by the RBI, which helps investors trace unclaimed deposits, making it a valuable tool for investors.

4.4 Ministry of Corporate Affairs [MCA] in its notification released last Wednesday

• extended the deadline for large unlisted private companies, including unicorns, to dematerialise their shares by 9 months till June 30, 2025.
• As per its earlier notification issued in Oct 2023, it was mandatory to issue securities in demat form latest by Sept 2024.
• SEBI followed suit vide its circular dated 13^th Feb 2025 and relaxed timelines for holding AIFs’ investments in dematerialised form till June 30,2025.

The 2023 rule change was brought in to help establish genuine beneficial ownership of high-growth stocks and crack down on shell companies often used to funnel black money. The rule however led to a pile-up of a large number of applications for dematerialisation with depositories NSDL and CDSL, raising their workload, necessitating extension of deadline. 

4.5 SEBI plans to expand the scope of Category II AIFs that invest ‘primarily’ (more than 50 per cent of investments) in unlisted securities to listed debt securities as well.

• Category II AIFs assume both liquidity risk and credit risk by the virtue of being closed ended funds and with the mandate of primarily investing in unlisted securities.
• SEBI intends to nudge Category II AIFs to invest in listed debt securities having credit rating ‘A’ or below, in line with higher risk appetite of AIFs. There are 192 schemes of Category II AIFs, which have invested more than 50% of their investment in unlisted debt.
• In order to cater to the possible shrinkage in investment opportunities in unlisted debt securities universe, the proposed requirement to invest more than 50% of their invisible corpus in unlisted securities may also include investment in listed debt securities having credit rating ‘A’ or below

The proposals are the result of the recent changes in listing regulations. For instance, one such change mandates that listed entities with outstanding listed debt securities can only issue additional listed debt securities from January 1, 2024, onwards.

4.6 SEBI has proposed reforms to enhance corporate governance in listed firms, including revising the Annual Secretarial Compliance Report (ASCR) for better transparency.

• Includes setting eligibility criteria for statutory auditors and introducing monetary thresholds for Related Party Transactions (RPTs).
• The ASCR would become a mandatory part of annual reports, while auditor appointments would require disclosure of key details.

# 5 Economy

5.1 As per data released last Wednesday,

• India’s retail inflation dropped to a five-month low of 4.3% in January, from 5.2% in Dec 2024, driven down by a sharply lower food inflation.
• Rural inflation fell sharply to 4.6% in January from 5.8% in December 2024, while urban inflation declined to 3.9% from 4.6% over the same period.
• India’s wholesale inflation eased slightly to 2.31% in January from 2.37% in December, as slower food inflation was offset by rising manufacturing costs.
• The central bank has projected an average 4.1% inflation for the January-March quarter of 2024-25.

The lower inflation print supports the Reserve Bank of India’s recent decision to reduce the policy rate by 25 basis points to 6.25%—the first cut in nearly five years. If this persists, we can fairly expect another rate cut in April.

5.2 As per data released last Wednesday

• India’s Industrial production [IIP] growth slowed to 3.2% y-o-y in Dec. 2024 from a six-month high of 5.2%
  • Manufacturing sector growth fell to 3% in December 2024 from 5.5% in November.
  • Among the 23 manufacturing sectors, 16 saw growth like basic metals, electrical equipment etc. in December 2024.
• On average, the Index of Industrial Production (IIP) growth was 3.9% in the third quarter of 2024-25.

The drop in IIP is consistent with a slowdown in core sector output, which grew by 4% in December from 4.4% in the month before.  While lower exports in leather and pharmaceuticals contributed to negative growth, domestic demand conditions were reflected in the vehicle segment.

# 6 PE/VC

6.1 Key Takeaways from the Centrum Report on Wealth Management

• India’s wealth management industry is witnessing rapid expansion, with financial assets under management projected to grow from $1.2 trillion in 2023 to $2.2 trillion by 2028, reflecting a 13-14% annual growth rate.
• Ultra-High Net Worth Individuals (UHNIs) control nearly 80% of financial assets, presenting a significant opportunity for wealth managers..
• Professional wealth management penetration in India remains low at 15%, compared to 75% in developed markets, highlighting substantial growth potential.”
• Between FY19-FY24 Indians earning over ₹50 million grew by 49% to 58,200 while Indians earning over ₹100 million rose 63% to 31,800. Total income of those earning >₹100 million surged 121% to ₹38 trillion.
• Alternative Investment Funds (AIFs) have witnessed an average annual investment of ₹600 billion over the past five years, with total commitments of ₹11.3 trillion and ₹4 trillion deployed by FY24.