Weekend Reflections: Week ending 13th July 2024

Week ending 13^th July 2024

# 1 Markets

Markets recorded closing high on Friday, despite mid-week corrections, propelled by a surge in IT stocks following strong quarterly TCS results taking Nifty to 24502 and Sensex to 80519. Demat account additions cross 40 lakh for the fourth time in June signalling significant retail participation in the story.

US Consumer inflation fell for the third straight month to 3% in June the lowest in one year. This cooler-than-expected inflation report had traders fleeing technology stocks and piling into small caps. While Nasdaq fell, Dow Jones and S & P inched higher by 1% last week

Fed Chair Jerome Powell’s recent congressional testimony that the US is no longer an overheated economy suggests the worst is likely over. Aided by cooler inflation, rate cut expectations prompted US10y to move down from 4.28% to 4.19%.

Overseas investors bet on longer dated securities in India. Government securities maturing in over five years have seen the highest investment from foreign investors. The 7.41% GS 2036 and the current 10-year benchmark, 7.10% GS 2034, have emerged as the top securities in attracting funds from overseas, witnessing Rs 2,134 crore and Rs 1,159 crore, respectively. 10Y G Sec softened and closed at 6.98% on Friday.

# 2 RBI

2.1 The value of the Financial Inclusion [FI]-Index for the year ending March 2024, published by RBI stands at 64.2 vis-à-vis 60.1 in March 2023, with growth witnessed across all sub-indices. Improvement in FI-Index is mainly contributed by Usage dimension, reflecting deepening of financial inclusion.

• The FI-Index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with Government and respective sectoral regulators.
• The FI-Index comprises of three broad parameters (weights indicated in brackets) viz., Access (35%), Usage (45%), and Quality (20%) with each of these consisting of various dimensions, which are computed based on a number of indicators.

Going by the surge in the index, it is clear there is significant progress in financial inclusion and growth across all segments.

2.2 RBI on Wednesday issued a circular expanding the scope of norms related to remittances to International Financial Services Centres (IFSCs) under the Liberalised Remittance Scheme (LRS). This can be for any permissible purpose under its Liberalized Remittance Scheme (LRS), such as tourism, maintenance of relatives, gifts, investing in stocks/ETFs/bonds or education.

• If you are a frequent traveller to foreign countries, buying foreign currencies in India can be expensive and cumbersome. Banks and other foreign exchange dealers charge huge spreads (5-10% for small amounts). It also means filling out a form each time and providing details such as passport number.
• If you are a student or a parent, you can park the money in the Gift City account and remit it whenever needed for university or hostel fees and living expenses. This would also save you forex conversion charges (you are generally offered a better rate on a bulk amount).
• Similar benefits apply if you support relatives outside India or gift money to them. If you also invest outside India, the account can be used to stagger your investments (say, a systematic investment plan in a stock or fund abroad).
• Cannot be used for purposes prohibited by RBI, such as for forex or derivatives trading.

Not only will this amount to significant savings when buying foreign currencies for overseas travel, it will also make spending towards fees or investments abroad a much smoother process, though the remittance would be subject to TCS @ 20% for amounts above ₹ 7 lakh in most cases.

# 3 SEBI

3.1 SEBI last week in a consultation paper, has proposed that mutual funds should disclose risk-adjusted returns (RAR) in the form of information ratio (IR).

• The IR is calculated by dividing the active return (the fund’s return minus its benchmark index return) with the tracking error (the standard deviation of the active return). This metric highlights not only the level of outperformance, but also its consistency as volatility is also reckoned. It distinguishes whether a fund manager achieved significant outperformance sporadically or moderate outperformance consistently each month. A higher IR indicates greater consistency in a manager’s performance relative to the benchmark.
• Consider two funds, say, Fund X and Fund Y. Fund X has consistently delivered moderate returns over five years, while Fund Y has given exceptional returns in the past year. Investors might favour Fund Y due to its recent success, without fully understanding its higher inherent risk and susceptibility to significant losses during market downturns.
• While many uses Sharpe ratio which compares returns to risk free rate, IR uses a benchmark, offering a precise assessment reckoning volatility of returns.

While SEBI’ aim is to give investors a clearer picture of a fund’s performance by accounting for risk, helping them make more informed investment decisions, market players feel IR is too technical and fails to provide a complete picture of fund’s performance.  We are of the view that all kinds of ratios to be used for investment decision, but IR should be given higher weight because it allows us to understand how much risk was taken to generate those excess returns.

3.2 SEBI Working Committee on Futures and Options last week, has proposed several measures to control the rapid increase in derivatives trading volume. Key recommendations include

• raising the minimum lot size of derivative contracts from ₹5 lakh to a range of ₹20 lakh-₹30 lakh – making trading unaffordable for small traders
• limiting weekly options to one expiry per stock exchange per week and reducing the number of strike prices for options contracts – limiting weekly expires to reduce trading opportunities.
• Upfront collection of option premium, intraday monitoring of position limits and higher margin closer to expiry.

SEBI data shows a substantial rise in derivatives turnover from ₹210 lakh crore in FY18 to ₹500 lakh crore in FY24, with retail investor participation in the F&O segment increasing by over 40 percent from FY23 to FY24. Individual participation in index options has surged from 2 percent in FY18 to 41 percent in FY24.

These measures aim to curb excessive speculation driven by high retail participation in the derivatives market. Despite, the robust margining system, there are social concerns due to high retail participation, with many individuals borrowing money to trade options, leading to significant losses.

3.3 SEBI, last Thursday, has issued new guidelines to improve the governance of credit rating agencies (CRAs), focusing on specific timelines for appeals related to rating actions during periodic surveillance.

Key changes include:

1. CRAs must communicate ratings to companies within one working day of the rating committee meeting.
2. Companies have three working days to request a review or appeal the rating decision.
3. CRAs must publish the rating decision on their website and notify the stock exchange or debenture trustee within seven working days of the rating committee meeting.
4. CRAs must maintain records of these disclosures for ten years, accessible to debenture trustees upon request.
5. CRAs must update the list of non-cooperative issuers daily and maintain information on unaccepted ratings for 12 months.

These measures aim to promote ease of business, uniformity, investor protection, and the development and regulation of the securities market

3.4 Concerned over the irrational rise in share prices on the listing day of small and medium enterprises’ (SME) initial public offerings (IPOs), the National Stock Exchange of India (NSE) last week imposed a price control cap of 90% over the issue price. The rule means that the listing-day gain can’t be more than 90% of the issue price.

• Analysis of 281 SME IPOs listed on NSE since 2021, revealed that around 43% of these small businesses saw their closing prices up to 40% higher than the offer prices. Around a quarter of these firms saw gains between 40% and 90%, and nearly 20% soared over 90%.
• Of the 20% of SME firms that made a phenomenal market debut, shares of around 88% are trading at 90% above the issue price.
• Nifty SME Emerge Index which is designed to reflect the performance of a portfolio of eligible small and medium enterprises, has been on a tear, rocketing nine-fold since the start of 2021, compared to the nearly 74% rise in the Nifty 50 index.

This new rule, people believe may bring stability and discourage speculation. It may also hurt valuations and hamper efforts to raise capital, reducing initial investor enthusiasm and first day gains

# 4 Economy

4.1 As per data released on July 12,

• The industrial output growth surprised in May rising to a seven-month high of 5.9 percent from 5 percent in the previous month staying above 5 percent for four consecutive months.
• Electricity growth soared to 13.7 percent in May compared with 10.2 percent in April
• Manufacturing, which accounts for nearly two-thirds of the index, was up 4.6 percent in May from 3.9 percent earlier.
• Growth in the core industries, which account for 40 percent of index, had eased to 6.3 percent in May compared with 6.7 in the previous month.
• Consumer non-durables rose 2.3 percent in May from a  2.5 percent contraction in April.

4.2 As per IMF Report released last week:

• Shifting employment to construction, services, and manufacturing could boost India’s GDP growth by 0.2 to 0.5 percentage points.
• India needs to create 143-324 million jobs by 2050 to enable workers to move to more dynamic sectors.
• Structural reforms are essential for creating high-quality jobs and accelerating growth.
• Agriculture’s share in aggregate output decreased from over 40% in 1980 to 15% in 2019 but still employed 42% of workers in 2019, resulting in low productivity.
• Economic activity has mainly shifted to services, with construction also becoming a significant employer, but productivity remains low in both sectors.

4.3 Govt platform – World’s largest!

The Government e-Market (GeM) portal, launched in August 2016, has seen a significant surge in procurement, surpassing Rs 1.24 lakh crore in the first quarter of 2024-25.

• GeM aims to become the world’s largest platform by the end of the fiscal year, offering a wide array of goods and services to government buyers and sellers.
• Currently, South Korea’s KONEPS is the largest such platform in the world. GeM stands at the second position and followed by Singapore’s GeBIZ.

Next to UPI, this is a major indicator of India’s digital economic revolution.

4.4 GST on Corporate guarantee – a retrograde step!

India Inc will be liable to goods and services tax, applicable from October 2023, on intra-group corporate guarantees that will be 1% per annum of the value of the loan guaranteed, according to a notification that brings into effect the provision approved by the GST Council.

• There was confusion as to whether GST would apply one-time for the entire period of guarantee, or every year, and the latest notification brings clarity on the issue.
• GST at the rate of 18% would be applicable on 1% per annum of the value of the loan guaranteed. As per the notification, invoice value would be accepted as the taxable value for the service of corporate guarantee between related entities where the recipient is eligible for full input tax credit.

4.3 Moody’s maintains India’s economic growth forecast at 6.8% for 2024 and predicts 6.5% growth for 2025, as per its Global Market Outlook report released last week. India is expected to remain the fastest-growing G-20 economy through the forecast period.

• • Increased domestic and overseas demand supports GDP growth in emerging markets, with notable variation by country.
  • Growth driven by robust manufacturing activity and infra spending.

# 5 PE/VC

As per Grant Thorton Deal Tracker report for Q2, 2024

• Indian dealmaking reached 501 deals valued at $21.4 billion, the highest volume since Q2 2022.
• M&A and PE deals together totalled 467 deals worth $14.9 billion, a 9% volume increase but a 28% value decrease from the previous quarter, mainly due to the prior Reliance-Disney merger.
• PE deals rose to 335, totalling $8.7 billion, marking significant increases in both volume and value from Q1 2024.

Domestic investments surged, reflecting confidence in the local climate despite declining cross-border deals due to geopolitical instability. Traditional sectors like pharma and manufacturing saw strong growth, driven by high-value deals.