Weekend Reflections – Week ending 11th Jan 2025

Week ending 11th Jan 2025

# 1 Markets

1.1 The Sensex and Nifty extended losses for the third consecutive session on Friday, mirroring weak trends in global equities. Foreign Institutional Investors (FIIs) have offloaded nearly $2 billion worth of Indian equities in the first seven trading days of 2025. Key factors driving the sell-off include weakening corporate earnings, slower GDP growth, a record-low rupee, high US bond yields, tariff concerns, and competition from the US markets. Sensex and Nifty declined ~2% last week, closing at 77,378 and 23,438, respectively. Despite FIIs’ pullback, retail participation remains strong, with 36 million new DEMAT accounts added in the first nine months of FY24. Gains in the secondary market and record-breaking IPO activity fuel this surge.

1.2 After a brief resurgence in the domestic debt market, Foreign Portfolio Investors (FPIs) resumed withdrawals in January. The spread between the 10-year US Treasury yield and the 10-year Indian G-Sec yield narrowed by 13 bps, reducing the attractiveness of Indian debt. The Indian 10-year G-Sec yield rose 12 bps during the week, closing at 6.88% on Friday.

1.3 The struggling US government bond market found little relief as December’s employment report surpassed expectations. Employers added a robust 256,000 jobs, highlighting the economy’s resilience. Post-report, bond yields surged, with the US 10-year yield climbing 14 bps to 4.76%, and the 20-year yield crossing the 5% threshold for the first time since 2023.The stronger-than-expected jobs data dampened hopes of Federal Reserve rate cuts, leading to a weekly decline of 2-3% across major US indices.

# 2 Banking

2.1 As per the India Ratings report released last week,

  • The credit market is likely to face volatile and tough financial conditions in FY26.
  • Challenges include indebtedness in the retail lending segment, volatile banking system liquidity, and domestic growth-inflation conundrums.
  • The high volatility in the liquidity of the banking system also serves as a deterrent for commercial banks when it comes to addressing adverse loan-to-deposit ratios and asset liability pricing.

It’s clear that a sustained easing of the banking system’s liquidity has become necessary. Stable surplus liquidity will not only ease the pressure on banks’ lending rates but also ensure ease of financing. All eyes are on the new RBI Governor for either a rate cut or infusing liquidity.

2.2 The CRIF HIGH MARK (Credit Information Company) report was released last Wednesday.

  • The system’s microlending outstanding decreased by 4.3% to Rs 4.14 lakh crore during the September quarter.
  • Loans unpaid for 1–30 days increased to 2.1% from 1.2% in June, while those unpaid for 31–180 days witnessed a sharper rise at 4.3% as opposed to 2.7% in June.
  • While NBFCs saw a 0.7% q-o-q growth in their portfolio in the September quarter, all other entities, including banks and small finance banks, experienced a decline.
  • Delinquencies spiked across ticket sizes and lender types, particularly in the top 10 states.
  • Bihar, Tamil Nadu, Uttar Pradesh, and Odisha accounted for nearly two-thirds of the incremental bad loans.

It is clear that lenders are adopting a cautious stance amid deteriorating asset quality, as there has been a decrease in the number of borrowers with three or more active loans during the September quarter. 

# 3 SEBI

3.1 On Friday, SEBI proposed some changes through a discussion paper.

  • The proposal suggests increasing the threshold amount to Rs 50,000 cr, requiring foreign portfolio investors [FPI] to provide detailed information about any ownership or economic interest they may have.
  • The August 2023 circular advised FPIs holding over 50% of their equity AUM in a single corporate group or possessing an overall equity market holding exceeding Rs 25000 cr to granularly disclose all entities with ownership, economic interest, or control over the FPI on a look-through basis, with the exception of government-related investors.

The norms, designed to prevent potential round-tripping by certain promoters using the FPI route, have prompted FPIs to divest their holdings. The above change could probably bring back some of them.

3.2 SEBI imposed deposit requirements and restrictions on the scope of advice for Independent Advisors [IA] and Research Analysts [RA] last Wednesday.

  • The deposit structure for IAs and RAs is tier-based, taking into account the highest number of clients they served on any given day in the previous financial year.
    • Up to 150 clients: ₹1 lakh
    • 151 to 300 clients: ₹2 lakh
    • 301 to 1,000 clients: ₹5 lakh
    • 1,001 and above: ₹10 lakh
    • Existing IAs are required to comply by 30 June, while RAs must comply by 30 April.
  • Allowed IAs greater flexibility in how they charge fees, with the option to change the mode—from assets under advice (AUA) to a fixed fee and vice versa—at any time, without the previous restriction of a 12-month waiting period.
    • AUA: Capped at 2.5% of AUA per annum per family across all services.
    • Fixed: The maximum that can be charged is ₹1,51,000 per annum per family, up from the previous ₹1,25,000.
  • The law permits individuals or partnership firms registered as RAs to pursue certification as IAs as well. These entities will now be required to comply with the rules and regulations under both the IA and RA frameworks. To maintain independence, they must ensure clear segregation between advisory and research functions.
  • Sebi’s purview explicitly restricts IAs to providing investment advice on securities.

The new guidelines aim to reinforce compliance and ensure better segregation of services between IAs and RAs. The deposit requirements and restrictions on the scope of advice may enhance transparency and protect investors. 

# 4 Economy

4.1 As per Advance Estimates (AE) (first estimates) of GDP last week,

  • The forecast for real GDP growth in FY25 is 6.4%, a decrease from the 8.2% growth in FY24. This is even lower than the Reserve Bank of India’s earlier forecast of 6.6% growth, announced in December.
  • Manufacturing growth has slowed significantly to 5.3%, down from 9.9% last year.
  • Mining growth has dropped to 2.9%, compared to 7.1% last year.
  • Agriculture grew by 3.8% this year, up from 1.4% last year.
  • Gross Fixed Capital Formation (GFCF) grew by just 6.4%, down from 9.0% last year.
  • Private Final Consumption Expenditure (PFCE) grew by 7.3% in real terms and 12.4% in nominal terms.
  • In real terms, imports dropped by 1.3%, but in nominal terms, they rose by 9.9%.

Our observations:

    1. A slowdown in manufacturing and mining is concerning, as together these sectors make up about 16% of Gross Value Added (GVA). Mining, which includes core industries, is also critical for the economy.
  • GFCF slowdown suggests both the government and private companies aren’t increasing their investments as quickly as needed, critical for long-term growth. Government spending on capital projects is falling short, with both central and state budgets focusing more on short-term expenses (like administrative costs and salaries) rather than building long-term assets.
  • India’s economy leans heavily on consumption, accounting for about 55% of GDP, and therefore PFCE growth is positive. But this growth isn’t evenly spread. Rural consumption is growing faster thanks to growth in agriculture than urban consumption. There is a need to prop up urban consumption.
  1. We imported fewer goods and services but paid more for them, largely because of currency depreciation.

This slowdown is not entirely unexpected for HFIs. We may acknowledge that these insights are derived from preliminary data, which limits us from drawing any definitive conclusions. Over time these estimates are revised 6 times over nearly 3 years. Historically, between 2016-17 and 2023-24, revisions to real GDP growth have been more frequent, sometimes by 100 bps. Though AE often underestimates actual GDP growth rate, we’ll keep watching high-frequency indicators to see how the situation unfolds.

4.2 As per data released by the government on Friday

The Index of Industrial Production (IIP) measured India’s factory output to a six-month high of 5.2% in November, up from 2.5% in November last year and 3.7% in October. The cumulative industrial growth so far in the current FY stands at 4.1%, compared to 6.5% last year.

  • Manufacturing, which accounts for 77.6% of the weight of the IIP, surged to an eight-month high of 5.8% in November from 4.4% in October and 1.3% in November 2023. Within manufacturing, 18 out of 23 sectors recorded positive growth in November 2024, compared with the same month last year.
  • Growth in mining and electricity rose to a four-month high of 1.9% and 4.4%, respectively, in November.
  • The capital goods segment, a key indicator of the investment sentiment, grew 9% in November as against 3.1% in October.
  • Consumer durables output grew 13.1% in November as against 5.7% in Oct.

Clearly, there has been a positive shift during the festival season. The uptick in consumer durables may be due to the festive demand and some discretionary spending. We need to closely monitor this, as it may not be a trend. Growth in manufacturing is largely due to a favourable base effect and festive spending. Hopefully, the growth numbers for last quarter could cheer the markets.

4.3 As per World Economic Situation and Prospects 2025’ The United Nations Department of Economic and Social Affairs (UN DESA) released a report last week.

  • India’s economic growth for FY26 is projected at 6.6%, driven by strong private consumption and investment growth.
  • For 2024-25, India’s growth is pegged at 6.8%.

The report indicates that India will have the highest growth rate among South Asian nations.

4.4 DGCIS has revised the gold and silver import numbers for April–Nov 2024.

  • Data for November gold imports was revised to $9.84 billion, from the $14.86 billion announced last month.
  • The cumulative gold imports during the first eight months of FY25 are $37.38 billion, as against the earlier estimate of $49.08 billion.
  • Similarly, the revised silver import data for April-November dropped from $3.27 billion to $2.33 billion.
  • The trade deficit therefore narrowed for the month to $32.8 billion, from the record $37.8 billion estimated earlier.

Despite a steep downward revision of $5 billion due to double counting, gold imports in November increased by 186% year-over-year. The high trade deficit had sparked concerns and contributed to the weakening of the rupee against the dollar. It is time the government addresses transmission errors of data from SEZ to the Indian Customs Gateway to prevent such large errors.

4.5 The HSBC PMI survey was released last Monday.

  • India’s services activity surged to a four-month high of 59.3 in December, from 58.4 in November, as strong demand drove business expansion and output growth.
  • New orders rose for the 41st consecutive month in December, clocking the highest increase since August 2024.
  • Sector-wise, finance and insurance recorded the largest increase in new orders and business activity, spurring new job creation.

The strength in the services purchasing managers index (PMI) contrasts with the growing signs of a slowdown in the manufacturing industry, as the Manufacturing PMI dropped to a 12-month low of 56.4 in December, according to data released last week.

# 5 PE/VC

5.1 The following are key takeaways from the “Avendus Alternatives Report” released last week:

  1. The global alternatives market is valued at $20 trillion, representing 20% of total Assets Under Management (AUM) and is rapidly expanding due to diversification beyond traditional assets.
  2. India’s mutual fund, AUM, has reached $800 billion, growing five times over the last decade, indicating a significant shift from a savings-led to an investment-led landscape.
  3. Globally, alternative asset managers enjoy a significant valuation premium over traditional asset managers due to their higher alpha, return potential, and stickier inflows.
  4. Indian alternative funds are expected to list at premium valuations due to their superior alpha-generating potential.
  5. India’s alternatives market currently stands at $400 billion AUM and is projected to grow exponentially to $2 trillion over the next decade. driven by increasing demand for high-alpha products from HNIs
  6. HNIs now control 48% of global wealth, up from 41% a decade ago, and projections indicate that this percentage will rise to 55% in the medium term.

5.2 Key takeaways from the VCC Edge Annual Report released last week 

  • There has been a 9% decline in PE deal volume and deal value compared to 2023.
  • Q4 2024 marked a sharper fall with 185 deals valued at $3.1 bn.
  • The decline from 2023 to 2024 was less steep than from 2022 to 2023.
  • The level of deal activity in the first three quarters of 2024 was similar to that of 2023.
  • B2B startups raised $10.4 bn across 579 deals, 40% more than B2C startups.
  • Series B and Series E+ rounds saw significant growth in volume (22% and 85%, respectively) and value (52% and 86%, respectively) compared to 2023.
  • Series A dominated VC deals, accounting for nearly 50% of all transactions (142 deals).
  • There has been a minor decrease in transaction volumes exceeding $100 million.
  • Deals valued between $25-$50 million saw a 29% jump in deal value, increasing their share of total deal value to 12% (up from 9% in 2023).
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