Weekend Reflections – Week ending 12th October 2024

Week ending 12th October 2024

Rarely India witnessed mourning of this scale of a corporate icon, by all groups, capitalist or socialist with the passing of Padma Vibhushan Shri Ratan Tata.  To describe him merely as one of the greatest industrialists of our time is a gross understatement. Ratan Tata was a remarkable individual, possessing extraordinary capabilities that transcended traditional business boundaries. There is hardly any field where he has not left his mark. His direct investments in startups lent credibility and mentorship, focusing on long-term strategies, encouraging innovation and resilience among entrepreneurs during challenging periods. Vacuum would therefore be more felt in the start-up eco system.

# 1 Markets

Weighed down by foreign out flows aggregating Rs. 58711 cr. in October on “Sell India Buy China” trend, concerns over moderating earnings, geopolitical tensions, and high valuations markets continue to bleed amidst volatile sessions. Nifty and Sensex closed lower at 24998 and 81611 on Friday despite continuous buying by domestic institutions. MF SIPs crossed Rs. 24500 cr. in Sep hitting all time high for the 15th month with industry asset rose to Rs. 67 lakh cr. by end of Sept. 

FPI flows on account of inclusion of India’s sovereign securities in JP Morgan global bond indices remains buoyant and might continue in rest of the year. This is further complimented by FPI flows on account of inclusion in Bloomberg EM bond index (expected flows: USD 2 to 3 bn starting Jan-25) and FTSE Russel EM government bond index (USD 4 to 5 bn starting Sep-25). Draft circular released on LCR, if implemented, could increase the SLR demand by banks. Benchmark 10Y G sec (7.10 GS 2034) yields continues to trade in ~6.75% (~25 bps lower from end-June 2024 level) and closed at 6.78% on Friday.

Strong economic data and higher GDP in the second quarter furthered market rally and all the three broad indices ended higher – Dow Jones and Nasdaq ending 2% higher for the week while S&P ending higher by 1%. 

Economic data – CPI increase by 0.2% in September and modest increase in jobless claims – dampened the hopes of higher Fed rate cuts and yields hardened by 10 bps, last week with10Y bond yields ending higher at 4.07% on Friday.

# 2 RBI

2.1 RBI Policy  

Key announcements on 9th Oct 2024

1. Policy repo rate unchanged (at 6.5%), with a majority vote of 5 to 1. 
2. Decided to change the stance to neutral and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth. 
3. Despite lower growth in Q1FY25, maintained growth rate for FY25 at 7.2%.
4. Retained its average inflation forecast for FY25 at 4.5%

MPC decision to change the stance to neutral, as opposed to consensus market expectation of no change, came in as a pleasant surprise for fixed income markets and yields rallied by 5 to 10 bps across the curve. 

We however feel that basis the tone and tenor of press briefing later by Governor and Dy. Governor, RBI may keep policy rate unchanged in December as well as they may like to see weakening of inflation hump post festive season and oil prices due to escalating West Asia crisis.

Other major announcements:

• • Banks and NBFCs are not permitted to levy foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned to Micro and Small Enterprises (MSEs) 

• While this is in line with guidelines already in force for individual loans, will have a negative impact on the profitability of lenders, and could also potentially increase the loan prepayments and balance transfer.

• • Creation of data repository – Reserve Bank Climate Risk Information System (RB-CRIS) – a web-based directory listing data sources and a data portal comprising of processed data sets with access to banks and NBFCs. 
    • This may help bridge various gaps in the currently available climate related data differing formats, frequencies and units. 

• Access may help bridge the required risk mitigation in lending assessment models. 

• • The per-transaction limit under UPI123Pay (launched in March 2022, with a view to enable featurephone users to use UPI) has been enhanced from Rs.5000/- to Rs.10000/-

• New limits will allow 400 million feature phone users to access higher-value transactions, with UPI 123Pay utilizing four tech options to support this growth. 

• • UPI Lite wallet limit also enhanced from Rs.2000 to ₹5,000 and pertransaction limit to from Rs.500 to ₹1,000. 

• Enhanced limits will lead to an uptick in higher value offline digital transactions and a decrease in cash usage.

• Both the moves are a significant advancement for financial inclusion and the adoption of digital payments in India.

• Introduction of beneficiary account name look-up facility in RTGS and NEFT
  • Remitters can input the account number and the branch IFSC code of the beneficiary, following which the name of the beneficiary will be displayed as is already available under UPI and IMPS. 
  • Long pending demand as RTGS and NEFT continue to dominate large value payments in the system without this facility.
• Strong advisory to NBFCs, to follow a ‘compliance first’ culture, adhere to fair practices code, and take a sincere approach to customer grievances. 
  • NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks commensurate with the scale and complexity of their portfolio – more particularly underwriting standards and charging of usurious interest rates.
  • RBI feel driving retail credit growth than its actual demand causes ‘push effect’; consequent high cost and high indebtedness could pose financial stability risks if not addressed by NBFCs.

While NBFCs are playing a welcome role in expanding credit availability, especially to segments that are underserved by regular banks on account of geographical constraints or other restraining factors they must stay within regulatory bounds and deploy business practices that are sustainable and non-exploitative (usurious lending practices). RBI’s caution should serve as a wake-up call for them to take corrective action themselves before the regulator is forced to intervene. 

2.2 As per ICRA report released last week,

• Loan securitisation volumes of standard assets touched Rs. 60,000 cr. in the September quarter, growing 36% sequentially and 31% on year basis.
• The market is on track to reach Rs 2.1 lakh crore in the current fiscal compared to Rs 1.9 trillion in fiscal year 2024.

The sharp increase in the quarterly volumes has been fuelled by large private sector banks selling down their portfolio to improve their credit-to-deposit ratio, given the relatively lower pace of deposit accretion being witnessed.

2.3 RBI last Thursday has directed banks, NBFCs, and other entities to utilize all relevant information sources for risk assessments and has issued ‘The Internal Risk Assessment Guidance for Money Laundering/ Terrorist Financing’ for the REs, particularly for the dealing staff and the Anti-Money Laundering (AML)/ Countering Financing of Terrorism (CFT) / Counter Proliferation Financing (CPF) practitioners of the REs.

• The enterprise-level risk assessment forms the bedrock of RBA (Risk-Based Approach). It enables the REs to understand how and to what extent they are vulnerable to ML/TF/PF risks which help REs in determining the allocation of attention and AML/CFT resources necessary to mitigate that risk.
• REs should use information obtained from all relevant internal and external sources for the IRA exercise 

The ever-changing business environment and the increasing level of complexities in the banking and other financial products offered by banks and other REs, could cause exposure to the elevated ML/TF/ proliferation financing (PF) risks. The risks are further multiplied as use of emergent technologies and newer methods of payments enter the scene. 

The REs, in the light of escalating geopolitical tensions are required to have appropriate level of control/mitigating measures, to ensure that the elevated ML/TF risks do not result in the financial institution being misused for ML/TF, willingly or unwillingly and do not lead to loss of reputation and/or other financial losses for having allowed the suspicious transactions routed through the banking channels/ financial systems.

# 3 SEBI

3.1 SEBI vide its circular dated October 8, 2024, detailed the due diligence that Alternative Investment Funds (AIFs), their managers, and key management personnel (KMPs) must perform to ensure AIFs are not being used by Reserve Bank of India (RBI) regulated entities [REs]  to evergreen their stressed loans/assets; by ineligible investors to operate as qualified institutional buyers (QIBs) and qualified buyers (QBs); and by investors to get around the rules governing funds coming from land-bordering countries. Key aspects 

1. Due diligence for schemes where 50% or more of the corpus is contributed by investors from land bordering countries. 
2. AIFs holding 10% or more equity/equity-linked securities in an investee company must report the investment to their custodian within 30 days. Custodians will compile this data monthly and report it to SEBI.
3. Existing investments where AIFs hold 10% or more of equity must also be reported by April 7, 2025.

RBI has already issued guidelines in March 2024 to limit investments in AIFs by REs having direct or indirect exposure to their portfolio entities and this circular from SEBI is a reinforcement to ring fence the problem of ever greening and aims to ensure transparency, prevent regulatory circumvention, and safeguard the integrity of AIF structures. 

At present, AIFs have been designated as qualified institutional buyers (QIB) and can avail certain benefits under SEBI guidelines. AIFs should not facilitate investors who are ineligible for QIB status on their own and availing the benefits using AIF structures.

3.2 SEBI last Thursday extended the deadline to implement guidelines mandating the direct pay-out of securities to clients’ demat accounts to November 11. This rule was originally set to take effect on October 14.

• SEBI mandated earlier in June, to credit pay-out securities directly to the client’s demat account to improve operational efficiency and reduce risk.
  • Currently, the clearing corporation credits the pay-out of securities in the pool account of the broker, who then credits the same to the respective client’s demat accounts.

The extended timeline is due to delay in issue of operational guidelines by Clearing Corporations after extensive consultation in Brokers’ Industry Standards Forum (Brokers’ ISF). 

The extended timeline is expected enable smooth transition to the faster settlement. With this, the securities will be credited to the investors’ demat account on the same trading day instead of one working day from the receipt of pay-out from the exchange.

# 4 Economy

4.1 World Bank in its South Asia Development Update released on Thursday

• Maintained India’s GDP growth projection at 7% for FY 25 and 6.7% for FY 26.
  • Larger than expected agricultural output and policies designed to raise employment growth were expected to contribute to strong private consumption growth.
• Projected that India’s manufacturing output would increase by 9% if more women joined the workforce

4.2 As per estimates released by MoSPI on Friday, India’s industrial output contracted in August—for the first time since October 2022 

• Index of Industrial Production (IIP) fell 0.1%, a stark contrast to the 4.7% growth recorded in July
  • Index of 8 core industries (coal, crude oil, gas, refinery products, cement and electricity) fell by 1.85 in August vs 6.1% increase in July while fertilisers and steel reported a sequential increase.
• Mining and electricity output contracted by 4.3% and 3.7%, respectively, compared with 3.7% and 7.9% growth during the previous month, primarily due to heavy rains.
• Output of primary goods contracted 2.6% after growing at 5.9% in July. 
• Production of capital goods rose 0.7%, much slower than the 12% growth in July.
• Output of consumer non-durables contracted by 4.5%, vs. 4.4% in July.
• Production of infrastructure and construction goods rose by 1.9%, against July’s 4.9% 

The decline in industrial output, first time in the last 22 months was impacted by a sharp base effect across sectors, compounded by excessive rainfall in several regions. 

# 5 PE VC

5.1 According to Saviille India report released last week,

• Private equity investments in the real estate sector jumped over twofold to $ 2.2 billion in July-September compared to $ 934 billion year ago.
• Total PE inflows stood at $ 3.9 billion in Jan- Sep period of this year crossing the total investment registered in entire 2023.
• Industrial and logistics spaces segment attracted $ 1.7 billion in PE investments, capturing 77 per cent of the total investment volume.

This could be attributed to rising opportunities in the segment due to growing demand from e-commerce players and the government’s push towards establishing India as a manufacturing hub

5.2 As per an interesting report released by Private Circle, research analytics firm last week,

• 60% of the 261 unicorn founders in India built a startup valued at over $1 billion in their first attempt 
• 29% of them took two attempts to build their first unicorn
  • second companies achieved unicorn status in a median time of 1.5 years, significantly faster than it took to build their first unicorn.
• India’s Fintech sector likely to have 150 unicorns worth $150 bn by 2030
• Unicorn creation has slowed with reduced late-stage funding by major investors.

In 2024, we witnessed five startups becoming unicorns. They are Krutrim, founded by Ola founder Bhavish Aggarwal, Perfios, ride-hailing platform Rapido, electric scooter maker Ather Energy and fintech lending startup Moneyview.