Week Ending June 15, 2024

# 1 Market

Street stabilised after week of post-election turbulence and equity indices did record fresh new highs on Thursday, capped later cued to US Fed indication of one interest rate cut in 2024 as against three, with Sensex and Nifty closing at 76992 and 23454 on Friday. On the bond market, yield on 10Y retreated to 6.98% after India’s retail inflation eased to one year low of 4.75% in May.

Another record was created with MF assets touching nearly ₹ 60 trillion – it took five decades to build first ₹ 10 trillion since inception in 1964 but last 9 trillion was added in less than 6 months. Contrary to this SIP stoppage ratio (SIPs closed for every new account) reached a record 0.88 in May. Perhaps this was due to FinTech’s cleaning up Phantom SIPs in compliance with SEBI circular on inactive SIPs for 3 months.

In US, S&P 500 and Nasdaq rose basis likely easing of inflationary pressures and sooner rate cut expectations. Dow Jones ended a tad lower. Bond traders loaded back up on interest rate cuts despite Fed announcing no rush to shift gears waiting for more evidence on inflation and US 10Y softened by more than 20 bps to close at 4.22%.

2. US$ under check!

Significant and historic development in the forex market last week, as Nixon Saudi King – petrodollar – pact which mandated Saudi to sell oil only in US currency – came to end on 9th June.  Saudi has reportedly decided not to renew the 50-year-old pact and decided to sell oil in multi currencies.

• This is likely to dry investment of excess dollars in US Treasury by different nations like Saudi. China has already reduced its holding significantly.
• India could be beneficiary as it can buy oil against rupee which Saudi can invest in Indian Treasury and therefore a multiplier effect in the offing and will expedite internationalisation of Indian Rupee
• Treasuries need to keep higher rates in US as export of dollars would dwindle due to pricing of commodities in other currencies- already begun by BRICS nations; This will bring down value of $ and thus erode its supremacy.

We need to recall that US$ hegemony was established with Bretton Woods system in 1944 which required a currency peg to US$ which was then pegged to price of Gold. Thus Petro-dollar pricing only reinforced this supremacy from 1974. We, therefore, need to wait for a longer time to assess this impact, as Euro once hailed as big alternative to US$ on January 1, 1999, failed to make a dent. US$ continue to be involved on one side of 89% of all foreign exchange transactions and its quite unlikely some other currency would take its role for some more time. However huge $35 trillion debt on GDP of $28 trillion is a cause of concern for US$ in the coming months.

# 3 Banking

3.1 RBI on Tuesday said that banks may open additional special current accounts for settlement of both export and import transactions, in Indian Rupee.

• In November 2023, the RBI permitted authorised dealer category-I banks with special vostro accounts to open special current accounts only for exports.
• To provide operational flexibility, the facility is now extended for settlement of their export as well as import transactions.

This is in continuation of RBI’s efforts in promoting internationalisation of Indian Rupee

3.2 The Insolvency and Bankruptcy Board of India (IBBI) plans to reduce the compliance burden on debt resolution professionals so that they can concentrate on stitching together rescue plans for firms rather than on filling forms.

• The idea is to reduce the number of forms and volume of information that resolution professionals have to submit and to make the reporting process simpler and efficient.
• There will be a special emphasis on removing duplication, making the reporting process simpler and more efficient.

In FY24, a record number of 269 resolution plans were approved by the National Company Law Tribunal, against 189 in the year before, showing a 42% improvement in rescuing distressed companies, according to data available from the regulator.

Hopefully resolutions could be more speedier going forward.

# 4 SEBI

4.1 SEBI last Friday took another step towards deepening the bond market.

• proposed allowing greater flexibility to mutual funds in buying and selling Credit Default Swaps (CDS).
• Under the current framework, mutual funds are permitted to participate in CDS transactions only as users -to buy credit protection only to hedge the credit risk on corporate bonds held by them.

In market parlance, CDS means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Accordingly buying a CDS is akin to buying insurance. In case any debt security on which a CDS is bought defaults, the protection seller (seller of CDS) pays the notional amount (amount of debt security) and takes over the debt security in default.

• When a mutual fund buys a CDS, it can simply translate into more predictable returns for its investors and increase their trust in the bond market. While the fund itself continues to focus on its investment strategies rather than being overly concerned about the default risk associated with the bonds.
• a mutual fund selling CDS essentially means taking the risk of default upon itself. And that could seem quite counterintuitive to the idea of buying CDS. But when a mutual fund builds a portfolio of investments, it could throw in some risky bonds and some not so risky ones. And low risk bonds are highly unlikely to default on their debts. So, selling CDS for them could actually mean that the mutual fund pockets some extra income in the form of premiums.

The bottom line is that a mutual fund will have to buy sufficient government bonds to back the CDS guarantees they’re taking up. And these government bond purchases will only boost the bond market further. India’s corporate bond market is a little less than half the size of its $5 trillion stock market. That’s a stark contrast to developed economies like the US where the corporate bond market outdoes the equity market. Let’s hope SEBI’s efforts help complement the efforts of RBI to deepen the bond market.

4.2 SEBI proposed last week to improve FPI’s participation in capital markets by amending regulations.

• Current cap stands at 25% of FPI corpus for single NRI, OCI and aggregate cap below 50% due to historical concerns on misuse of Overseas Corporate Bodies and other associated risks Single NRI, OCI, or RI contributions must be below 25% of the total
• Proposed to liberalise to 100% by NRIs, OCIs, and RIs in IFSC based FPIs regulated by IFSCA.

1. • Route 1: Requires submission of PAN and economic interest details.
   • Route 2: No document submission required but subject to specific conditions

The relaxation in NRI/OCI participation limits in IFSC-based FPIs is expected to boost Indian capital markets.

4.3 SEBI last Monday proposed stricter norms for the entry of individual stocks in the derivatives segment.

• The new proposal would weed out stocks with consistently low turnover from the Futures & Option (F&O) segment of the bourses.
• Stock should continue to be chosen from amongst the top 500 stocks in terms of average daily market capitalisation and average daily traded value on a rolling basis.

Review is required as last revision was done in 2018 and these proposals are aimed at ensuring that stocks have sufficient turnover, open interest and widespread participation. However, the following concerns remain:

• Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection
• Given all this, there is a need to ensure that only high-quality stocks in terms of size, liquidity, and market depth are available in the derivatives segment

SEBI is welcome to tighten the screws on trades that can hardly be distinguished from gambles. The F&O segment is meant to enrich the overall quality of market information and induce efficiency. Instead, we face the need to pre-empt a crisis arising from an insurge of retail investors who may be clueless of how reckless they are being. In general, we need deeper financial markets.

4.4 SEBI on Monday eased rules for existing investors by abolishing the norm of freezing demat accounts and mutual fund folios in case of failure to provide a ‘choice of nomination’.

Additionally, investors holding securities in physical form would be eligible for receipt of any payment, including dividend, interest or redemption payment as well as to lodge grievances or avail any service request from the RTA (Registrars to an Issue and Share Transfer Agents) even if they did not submit ‘choice of nomination.

Earlier, the regulator set 30 June 2024, as the deadline for all existing individual mutual fund holders to nominate or opt out of nomination. Failure to comply with the rule could have led to the freezing of their accounts for withdrawals.

Big relief to innumerable no of small investors especially senior citizens who could not complete the nomination exercise.

# 5 Insurance

5.1 IRDAI on Wednesday, released Master Circular consolidating all regulations relating to life insurance and General Insurance Key changes include:

Life Insurance

• the facility of policy loan is now mandatory in all life insurance savings products, enabling policyholders to meet liquidity requirements.
• the free look period, which provides time to review the policy terms and conditions, is 30 days as against 15 days earlier.
• the facility of partial withdrawal under pension products is allowed enabling the policyholders to meet their specific financial needs for important life events.

Insurance companies to offer a surrender value from the first year itself, a move that could impact their margins.

General Insurance

• offer a basic insurance product with essential minimum coverage, which will be clearly displayed on their website- This will allow customers to compare it with other available options and to add extra coverage if needed.
• No claim shall be rejected by general insurance companies for want of documents. Insurers need to collect all necessary documents while issuing policies to customers.
• Companies need to introduce a product with a policy duration of less than a year, with or without provisions for extension or periodic review based on specified criteria, which may include reported or settled claims.
• Companies to give customers ‘Pay as you drive, Pay as You go and Pay as you use’ comprehensive customised insurance cover, including coverage for depreciation.
• Insurers cannot reject a claim wholly or partially if the breach of warranty or condition is irrelevant to the nature or circumstances of the loss.
• In cases of partial loss, the insurer assumes responsibility for collecting the salvage amount, while the customer receives the claim amount.

Comprehensive reforms announced by IRDAI would increase transparency, enhance policyholders’ experience.

# 6 Economy

6.1 As per Global Economic Prospects report released by World Bank last Tuesday,

• India’s GDP growth projected at 6.6% for FY 25, 6.7% for FY26 and 6.8% in FY27.
• India is set to remain the fastest-growing major economy globally
• Growth has been driven by its industrial and services sectors, which have offset a slowdown in agricultural production caused by monsoon disruptions.
• Domestic demand remains strong, buoyed by infrastructure investments, even as post-pandemic pent-up consumption demand eases

6.2 As per data released by Govt on Friday, 14 June 2024

• The Index of Industrial Production (IIP) in India slowed to 5 per cent in April, a three-month low, as against 5.4 per cent in March 2023 and 4.6% in April 2023.
• Growth rates of the three sectors in April 2024, Mining, Manufacturing and Electricity stood at 6.7 percent, 3.9 percent and 10.2 percent year-on-year respectively.
• Capital goods segment expanded by 4.4 per cent while output of consumer durables grew by 9.8 per cent during April while non-durables decreased by 2.4%

India’s retail inflation eased further to a 12-month low of 4.75% in May, but food inflation remained elevated and almost unchanged at 8.69%; Wholesale inflation rose to a 15-month high of 2.61% in May from 1.26% in April as food inflation rallied further and global metal prices fed into manufactured product inflation.

India’s goods exports rose 9.1% to a three-month high of $38.1 billion in May, outpacing imports that grew 7.7% on a higher base to $61.9 billion. The trade deficit zoomed to a seven-month high of $23.8 billion.

6.3 As per ICRA report released last week,

• Indian banks and Non-Banking Finance Companies are well placed to seize the opportunity from the country’s strong economic prospects through lending in various sectors, even though loan growth is expected to moderate by about 3%.
• Loan growth is expected to moderate over the next year as banks seek to align their loan growth in line with deposits, as deposits are not growing as fast as loans. Loan growth will reduce to 12% -14%, from 16% last year.
• Deposit growth has fallen to 14% in the last fiscal, from a peak of 18% in fiscal 2020, as people seek better returns and invest in the stock market or mutual funds.
  • The extent of growth of systemic liquidity and deposit in India will continue to remain a key driver for credit growth for banks amid strong demand for credit.
• The growth rate of NBFCs will moderate to 18% in FY25, from 24% in the last two fiscals as tighter liquidity will keep the cost of funds elevated

6.4 In its report titled ‘Credit Conditions – Asia-Pacific H2 2024 Credit Outlook,’ released on June 13, Moody’s highlighted that

• India to remain fastest-growing Asia-Pacific economy in 2024 – Growth driven by domestic factors and infrastructure investment
• Moody’s forecasts 6.6% GDP growth for India in FY25
• It noted that strong credit demand and robust economic growth would benefit the profitability of non-bank finance companies (NBFCs).

6.5  In 2024, the corporate profit to GDP ratio for the Nifty-500 Universe and listed India Inc. swelled to 4.8% and 5.2%, respectively, scaling a 15-year high. The YoY improvement was led by the BFSI, Oil & Gas, and Automobile sectors, which contributed 95% of the total improvement.