Week ending 2nd August 2025

# 1 Markets

FIIs have offloaded ₹27,000 crore of Indian equities over nine consecutive sessions, driven by poor Q1 earnings, a strong dollar, and Trump’s 25% tariff on Indian exports. Market sentiment remains fragile amid persistent foreign outflows and escalating US trade tensions. The Nifty 50 logged its fifth straight weekly decline—the longest since August 2023—highlighting sustained bearish pressure. On Friday, the Sensex closed lower at 80,600, while the Nifty fell to 24,565.

July marks the fourth straight month of debt outflows, with YTD outflows in FY26 reaching ₹23,435 crore. Rate-cut hopes dampened after RBI clarified that future decisions will be guided by structural inflation and growth outlook. 10Y bond yield closed higher at 6.37% on Friday.

US job growth slowed sharply in July with only 73,000 jobs added, far below expectations, and prior months’ payrolls revised down by 258,000, signalling weakening labour market momentum. The unemployment rate rose to 4.2% as workforce participation declined, while equity markets reacted sharply with all the three major indices falling by 2.2 – 2.9% last week.

President Trump’s aggressive tariff policies are contributing to economic uncertainty, with rising costs and dampened business confidence. The Federal Reserve has held interest rates steady for a fifth consecutive time though the probability of a September rate cut has increased which softened yields substantially. 10Y yield closed at 4.22% on Friday.

# 2 RBI

2.1 RBI has issued the RBI (Investment in AIF) Directions, 2025 on 29 July 2025, effective from 01 January 2026, to regulate the investment of Regulated Entities (REs) in Alternative Investment Funds (AIFs). These Directions are intended to mitigate systemic risks, address concerns such as evergreening of loans and indirect exposure to debtor companies and align with industry feedback and SEBI regulations. Key highlights:

• Limit by each RE capped at 10% of AIF Scheme corpus
• Aggregate RE exposure capped at 20% of AIF Scheme corpus.
• If a RE’s investment in an AIF exceeds 5% of the scheme’s corpus and the AIF has non-equity downstream investments in a debtor company of the RE, then the RE must: make a provision equal to the higher of: 100% of the proportionate indirect exposure through the AIF or Direct loan/investment exposure to the debtor company (Any entity to which the RE has (or had within the last 12 months) a non-equity loan or investment exposure).
• Investment in subordinate units must be deducted entirely from capital funds, split between Tier 1 and Tier 2 capital.
• Equity instrument’ shall refer to equity shares, compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCD).

Revision in ceiling limits and clarifying that CCPS and CCDs would be treated as Equity exposure and exempted from the provisioning requirements is a great relief to the AIF eco system. In addition, the extent of provisions is also limited to proportionate exposure through AIF and thus reasonable. Though the aggregate exposure capped at 20% would restrict exposure of banking system to this growing space, the changes proposed bring huge sigh of relief to the AIF space.

These Directions are therefore a welcome move since the revised exposure limits are more accommodative than the previous norms. These regulatory developments may also shape global Limited Partners’ (LPs) perception of risk and confidence in India-focused funds, particularly where domestic institutions play a pivotal role.

2.2 Impact of Key amendments to Banking Laws (Amendment) 2025 effective August 2025 (19 total amendments across five statutes: the RBI Act, 1934; Banking Regulation Act, 1949; SBI Act, 1955; Banking Companies (Acquisition and Transfer) Acts, 1970 & 1980).

• Threshold of “substantial interest” raised from ₹ 5 lakh (unchanged since 1968) to ₹ 2 crore or 10% of paid‑up capital, whichever is lower. This may be held by an individual, his spouse, or minor child, either individually or collectively.  Substantial interest would affect related party status for connected lending restrictions (Sec 20 and RBI Master Directions). It is applicable to see arm’s length lending, conflict of interest, and disclosures

• • While modernising for inflation and sector scale, ambiguity remains regarding high-influence holdings just below the threshold. Without supplementary measures (e.g., beneficial ownership, control metrics), governance may be weakened.
  • Many professionals previously excluded due to minor shareholdings (nominally above ₹5 lakh) will now qualify as independent directors.

• Tenure for directors (excluding chairperson and whole-time directors) is extended from 8 to 10 years, aligning with the 97th Constitutional Amendment mandate on cooperative autonomy

• • The increase promotes continuity but may reduce board refresh cycles. Without term limits per board tenure, risk of entrenchment exists.

• PSBs can now transfer unclaimed shares, bond redemptions and interest to the Investor Education & Protection Fund (IEPF), like Companies Act provisions
  • Enhances depositor/investor protection and reduces dormant liabilities. However, requires effective processes for beneficiaries to claim these assets and strong disclosure norms.

• Public sector banks gain autonomy to fix remuneration for statutory auditors, intended to attract higher-quality audit professionals

• • Greater professionalism may follow, but auditor independence must be safeguarded through stringent conflict-of-interest and rotation norms.

These amendments represent a significant legal modernisation—updating decades‑old thresholds, strengthening governance in cooperative banking, improving depositor protection, and enhancing audit standards. However, to realise its full potential, the reforms must be accompanied by robust guidelines on defining economic influence, performance standards for auditors and vigilant monitoring.

2.3 RBI last Monday released Digital Payments Index [DPI] for March 2025. RBI has been publishing a composite Reserve Bank of India – Digital Payments Index (RBI-DPI) since January 1, 2021, with March 2018 as base to capture the extent of digitisation of payments across the country

• The index for March 2025 stands at 22 as against 465.33 for September 2024, which was announced on January 29, 2025.

The increase in RBI-DPI index was driven by significant growth in parameters viz. Payment Infrastructure – Supply-side factors and Payment Performance across the country over the period.

2.4 As per sectoral deployment of credit data for June 2025 (covering ~95% of non-food credit)

 

• Overall non-food credit growth slowed to 10.2% YoY, down from 13.8% in June 2024.

Sector-wise Credit Trends

• Agriculture & Allied Activities: Growth decelerated to 6.8% (vs. 17.4% YoY).
• Industry: Slowed to 5.5% (vs. 7.7% YoY), though MSMEs, engineering, construction, and textiles sub-segments saw robust demand.
• Services: Moderated to 9.6% (vs. 15.1% YoY), mainly due to a slowdown in credit to NBFCs.
• Personal Loans: Grew 14.7% YoY (vs. 16.6% YoY) due to slow down on vehicle loans and credit card spends.

2.5 Highlights from ICRA report on Affordable Housing Finance Companies [AHFC] –

• AHFC AUM to grow from ₹1.4 lakh Cr to ₹2.5 lakh Cr by FY28; non-bank mortgage AUM to reach ₹20 lakh Cr (from ₹13 lakh Cr).

• • Growth driven by strong demand and constraints in unsecured lending.
• Credit quality remains sound: NPAs stable at 1.1–1.3%, credit cost at 0.3%, avg. LTV ~55%.
• Returns strong: RoA at 3.5–3.6%, though opex is high vs. prime HFCs.

• Rising competition from larger players will pressure margins; operational efficiency and prudence in credit policy are critical.

2.6 As per CRIF High mark report released last week

• Credit card delinquencies (91–360 DPD) surged 44.3% YoY, reaching ₹33,886.5 Cr in Mar 2025 (vs ₹23,475.6 Cr in Mar 2024).
  • Nearly ₹34,000 Cr now qualifies as NPA-equivalent under banking norms.
  • In 91–180 DPD bucket delinquencies jumped to ₹29,983.6 Cr, vs ₹20,872.6 Cr in Mar 2024 and nearly double 2023 levels.
  • PAR 91–180 DPD rose to 8.2% (vs 6.9% in 2024, 6.6% in 2023) — indicating rising mid-term stress
  • PAR 181–360 DPD increased to 1.1%, up from 0.9% (2024) and 0.7% (2023) — sign of sustained long-term defaulting.

• Total credit card outstanding rose to ₹2.90 lakh Cr as of May 2025, up 8.6% YoY from ₹2.67 lakh Cr.

Rising delinquencies and sustained deterioration in PAR metrics point to heightened borrower stress in unsecured credit, raising asset quality concerns amid continued growth in card-based consumption.

2.7 Key takeaways from Microfinance Sector Outlook by CRISIL published last week

• MFIs unlikely to turn profitable before FY26; normalisation expected only by Q4 FY25.
• New ordinances in Tamil Nadu and Karnataka are impeding recovery. Both states form ~25% of the MFI portfolio.
  • Bihar (15% portfolio share) flagged as a watchlist state ahead of upcoming elections; past elections have disrupted collections.
• Asset Quality Concerns:
• Legacy stress persists despite April 1 guardrails.
• Collections stabilised at 98–99%, but Karnataka still lags at 80–85%.
• 14% of AUM still exposed to >3 lenders/borrower; down from 23% in Dec’24 but remains risky.
• Credit Costs expected to reduce from 7.7% in FY25 to 6% in FY26, as incremental stress reduces.

Despite operational guardrails and stabilising collections, state-level regulatory and political disruptions, combined with legacy stress, will delay full recovery of MFI profitability until end-FY25. The sector remains structurally viable but near-term remains challenging.Bottom of Form

# 3 SEBI

3.1 SEBI on Friday made some changes in REITs and INViTs guidelines

• proposed allowing foreign investors (except individuals, body corporates and family offices) and qualified institutional buyers to participate as strategic investors
• Strategic investors receive allocation before an issue opens and are required to invest at least 5% and up to 25% of the total offer size in REITs and InvITs

The current definition of strategic investors is narrow and does not include investors including public financial institutions, insurance funds, provident funds, and pension funds, which also invest in units of REITs and InvITs. This results in REITs and InvITs being unable to attract capital from them as strategic investors. This proposed move is thus aimed at boosting capital inflows into these sectors.

3.2 SEBI in draft proposal published last Wednesday, proposed that for IPOs exceeding ₹5,000 crore,

• the retail investor allocation may be reduced to 25% from the current 35%,
• the allocation for institutional buyers may be increased from 50% to 60% in a graded manner.
• increasing the number of permissible anchor investor allottees for allocations above ₹250 crore, aiming to ease participation for large foreign portfolio investors managing multiple funds.
• raising the reservation for life insurers, pension funds, and domestic mutual funds from 30% to 40% of the anchor investor portion—of which one-third would remain reserved for domestic mutual funds, while 7% would be set aside for insurance companies and pension funds.

Rationale:

• For a ₹5,000 crore IPO, the minimum retail application size requires about 700,000–800,000 bidders. For bigger IPOs such as, say, a ₹10,000 crore offering, the number rises to at least 1.75 million applications.
• Despite robust inflows into mutual funds—where retail investment via systematic investment plans (SIPs) hit a monthly record of ₹26,688 crore in May—direct participation by retail investors in IPOs has plateaued.
• For example in  Hyundai Motor’s₹27,859 crore IPO, where retail portion was subscribed at just 0.4x; Hexaware Technologies’ ₹8,750 crore IPO (retail subscription 0.1x); and Afcons Infra’s ₹5,430 crore IPO that saw retail subscription at 0.9x. In contrast, mutual fund participation via SIPs and as QIBs has been surging.
• The proposed move is thus a welcome move aimed at improving success of IPOs.

The proposals, which could reshape the allocation structure for domestic equities, aim to align IPO structures with market realities—such as surging mutual fund flows and growing average issue sizes—while safeguarding long-term investor confidence.

# 4 Economy

4.1 US President Donald Trump imposed a 25% tariff + penalty on Indian imports, citing high trade barriers and energy-defence ties with Russia. Key impact analysis:

• Tariffs raise average effective US import duty on Indian goods to 20.6% (vs pre-tariff 2.7%): India’s tariffs on US goods remain lower at 11.6%.
• Impacts ~10% of Indian exports (Jul–Sep), worth ~$13B.
• India’s trade with US = $129.2B in 2024; trade surplus = 1.2% of GDP.

Gems & Jewellery

• US accounts for $10B+ in exports; Tariff to disrupt value chain, increase costs, delay shipments, and pressure jobs.

Pharmaceuticals

• India is top supplier of generics to US; $9B exports.; Faces stiff competition from Vietnam due to lower tariffs.

Electronics

• Electronics exports (~$30B, led by mobiles) — among the fastest-growing categories — may see a slowdown after years of ~40% CAGR.

Oil Refining

• Russian oil (37% of imports) faces US penalty. Hits Indian refiners via higher input costs and lower refining margins.

Auto Components

• While direct damage may be limited, longer-term effects on export momentum and sectoral innovation are worth tracking.

IT Services

• Indian IT exports continue uninterrupted — though more clarity is needed on the “penalties” component.

Macro Impact

• India’s exports to the US stand at ~$85B — just over 2% of its ~$4T GDP. Even a meaningful decline would shave off only ~20–50 bps from overall growth.

• Export-led MSMEs at risk; may delay capex.

Strategic Implications

• India no longer holds a tariff edge versus Vietnam, Indonesia, or Japan — all of which now enjoy lower rates post-trade deals. The relative positioning on the China+1 axis is narrowing.
• Negotiations are reportedly ongoing, and with several details — including the nature of penalties — yet to be finalized, a reset remains possible. For now, it’s a moment to stay cautious, but not alarmedBottom of Form

4.2 As per S&P report released last week, Manufacturing activity surged to a 16-month high, with the HSBC India Manufacturing PMI rising to 59.1, up from 58.4 in June.

• Growth was led by sharp expansion in new orders and output, with sales rising at the fastest pace in nearly 5 years.
  • Hiring slowed, with job creation at its weakest since November 2024.
  • Input and output prices remained elevated, though cost pressures were moderate by historical standards.

Geopolitical tensions in West Asia (notably Iran–Israel) added to external uncertainties resulting in lower confidence for future months.

4.3 Key takeaways from World Trade Organisation Q12025 report released on Thursday.

• Services trade growth halved to 5% YoY in Q1 2025 (vs ~10% in 2023–24), driven by economic uncertainty and stronger US dollar.
  • Asia led growth: China (+13%), India (+12%), Japan (+11%) supported double-digit export expansion.
  • Europe & North America lagged: Export growth slowed to 3% YoY (vs 8–11% in 2024).
  • Computer services remained robust despite macro slowdown.
  • India’s computer services exports rose 13%, Ireland +9%, aided by demand for AI, digital transformation, and cybersecurity.

Digital services expected to sustain momentum amid continued enterprise tech adoption and consumer digitalisation.

# 5 PE VC

5.1 Supreme Court judgement on 24^th July on Hyatt case, has serious implications for the services industry especially AIFs in India. Key highlights and impact.

1. Issue

• Whether Hyatt’s UAE entity, providing strategic oversight to Indian hotels without a formal office or long-term employee presence in India, constituted a “Fixed Place Permanent Establishment (PE)” under the India–UAE tax treaty.
• Hyatt claimed it was merely a foreign service provider without a PE, hence exempt from Indian taxation.

2. Supreme Court Decision

• Hyatt was held to have a “Fixed Place PE” in India, despite not owning office premises or directly employing staff in India, camouflaged or structured employee visits to avoid the 9-month threshold for “Service PE.”
  • Hyatt exercised de facto control over hotel operations (appointments, policies, pricing).
  • The hotels were effectively managed and operated by Hyatt, making them a “place of business.”
  • India is entitled to tax profits attributable to this PE, treating it as a stand-alone taxable entity, regardless of global profits or losses.

3. Impact — Specifically for AIFs and Foreign Fund Managers

• This ruling expands the scope of what qualifies as a PE, focusing on functional control over operations in India, not just physical or contractual presence.
• AIFs and foreign fund managers operating from outside India but exercising significant control over Indian investment decisions, portfolio operations, or governance, may now face increased PE risk.
• Discretionary advisory roles, investment committee participation, or continuous involvement in portfolio management could be interpreted as “management and control” akin to Hyatt.

• Tax authorities may look through legal structures to assess “effective control” or “substance” and attribute income to a deemed PE and raise tax demands in India.

The Hyatt ruling marks a significant expansion in India’s interpretation of Permanent Establishment, emphasising substance over form. Foreign AIF sponsors and fund managers with material influence or operational involvement in India may now face increased tax exposure, even without formal presence — warranting a careful re-evaluation of India-facing structures and functions.Bottom of Form

5.2 India Insurance Sector: Key Highlights from HDFC report

Structural Opportunity

• ​​India’s insurance sector stands at ~$53 billion (FY24), with insurance penetration at just 3.7% of GDP — considerably under-penetrated versus global peers.

• Demographics, a regulatory push, digitisation, and untapped segments underpin a robust multi-decade growth thesis.

Thematic Trends

• ​Digital insurance platforms are expected to drive non-linear growth and offer operational efficiency, with high value in data/analytics-enabled distribution in life insurance space.
  • The banca (bancassurance) channel (51% of new business) currently dominates life insurance via a ULIP-heavy approach but faces product and service limitations.
• Product mix to become more diversified, lesser reliance on ULIPs; Agency/broker channels also set to evolve.
• General Insurers face the “Impossible Trilemma” across underwriting profits, combined ratios, and EOM (expense of management) compliance—must balance profit, regulatory compliance, and growth.
• Anticipated price hikes in third-party (TP) insurance would disproportionately benefit PSU insurers.
• After post-pandemic surge, health insurance NOP (number of policies) CAGR slowed (3% over FY22-24).
• Sector moving to “unbundled” product structures to control costs and enhance affordability (e.g., more modular coverages/features).
• Data shows medical inflation is moderate (~5-6%), with current loss ratio spikes more due to higher incidence (frequency) rates than claim size.