Week ending 20th July 2024
# 1 Markets
Sensex, Nifty slide on Friday as investors booked profits after four-day record breaking rally, touching all time high of 81000 mid-week and closing at 80604 and 24530 respectively on Friday. Global weakness and IT outage also contributed to the correction. The rally earlier during the week was led by IT stocks after announcement of encouraging results by IT Companies. Movements in the coming weeks would largely depend on budgetary announcements and the focus of the Government’s capex and investment plans ahead.
The US Markets tumbled on July 19 as investors moved away from tech stocks towards more cyclically oriented names. The Dow Jones Industrial Average fell over a percent to 40,250. The index was dragged mainly by American Express, Intel and IB which shed up to 9%. S&P 500 fell 0.62% to 5,512 and Nasdaq Composite declined 0.66% to 17754. Earlier during the month tech stocks had driven the benchmark indices to new record highs. However, with revived hopes for Federal Reserve’s rate cuts investors are now looking at other sectors.
The European Central Bank kept interest rates unchanged as expected at a record high on Thursday last week and reaffirmed its commitment to fighting inflation, giving not a hint that policymakers are starting to contemplate policy easing.
With continuing inflows post JP Morgan Index inclusion, bond yields in India continue to soften with 10Y G sec closing at 6.96% on Friday. US Bonds bounced back from its lows due to fading hopes of rate cuts and higher inflation nos. and closed at 4.24% from 4.18%.
# 2 RBI
2.1 As per RBI Bulletin released last week,
- As of March 2023, total household financial assets are estimated at ₹363.8 lakh crore, equivalent to 135% of GDP. In contrast, outstanding liabilities totalled ₹101.8 lakh crore or 37.8% of GDP.
- Net Financial Wealth [NFW] of Indian households estimated at ₹ 262 lakh therefore stand at 97% of GDP as of March 2023, much higher than the pre-pandemic level of 85%.
- In FY23, with the resumption of normal economic activity, NFW also normalised due to a strong revival in both bank and non-bank lending to households, coupled with a relatively moderate growth in financial assets
RBI also reported that the second quarter of 2024-25 has seen a surge in economic activity, with a positive outlook for agriculture and a revival of rural spending. The RBI also noted that global trade in goods and services is gaining momentum. However, consumer price inflation increased in June 2024, halting the overall disinflation.
The study assumes significance as RBI’s recently published Financial Stability Report had expressed concerns, endorsed by many economists over rising household debt. Concerns raised over rising household leverage may therefore be overdone.
2.2 RBI last week while revising its master directions on fraud risk management mandated banks
- to send separate detailed show cause notices to the defaulter even in cases of consortium lending
- to provide complete details of transactions and events on the basis of which declaration and reporting of a fraud is being contemplated.
- to give a reasonable period of at least 3 weeks to respond to the show cause notice.
- to ensure that the principles of natural justice are strictly adhered to before classifying / declaring an account as fraud be it sole lending or consortium lending.
This is in line with Supreme Court judgement which asked banks to hear a borrower before an account is classified as fraud. The tortuous process involved in formally declaring a loan account as defaulting and then fraudulent may have been overlooked by Indian courts—including the apex court—while ruling that the long-established principle of a fair hearing be made part and parcel of bank-fraud protocols.
However, this may delay recovery process and it is felt that separate notices will likely have variations in language and content, potentially giving the defaulter grounds to approach the court, claiming inconsistency among the notices. This is also contrary to single notice being issued by the lead bank under SARFAESI Act
2.3 As per RBI’s latest KLEMS (Capital, Labour, Energy, Material and Service) database released last week,
- As many as nine out of 27 industries saw their labour productivity contract in FY23 compared to the preceding year, with eight of these industries belonging to the manufacturing sector
The report highlights India’s lack of competitiveness in industrial sectors as labour productivity is an important metric in an economy as it measures the efficiency with which inputs are used to produce goods and services, and it offers a measure of economic growth, competitiveness, and living standards
# 3 SEBI
3.1 SEBI has proposed a new asset class, in a consultation paper released last Tuesday, a midway option between Mutual Funds and Portfolio Management Services [PMS]. MF houses that meet specified criteria will be allowed to operate these new funds, which will be given a name that sets them apart from MFs. The goal is to satisfy demand
- This will plug a yawning market gap between the risk-return profile of mutual funds (MFs), which allow investments starting with as little as ₹100, and that of portfolio management services (PMS), for which investors need at least ₹50 lakh
- With an entry ticket of ₹10 lakh, it would offer an attractive mix of risk and reward to investors who find MF strategies too conservative but PMS investments too aggressive.
- the new asset class would be able to take exposure in derivatives for purposes other than hedging and portfolio rebalancing.
- AMCs that are offering this new asset class should have been in operation for at least 3 years with an average AUM of ₹ 10,000 cr in the preceding 3 years.
The lack of a midway option has led many investors to dubious schemes and dicey avenues, exposing them to unwitting risks. The new asset class sought to provide investors with a regulated investment product featuring higher risk-taking capabilities and higher ticket size. This is also aimed to curb the proliferation of unregistered and unauthorised investment products.
# 4 Economy
4.1 Asian Development Bank [ADB] in its latest report has kept India’s GDP forecast at 7% for the fiscal FY25. The growth will be driven by manufacturing and strong demand in construction. Agriculture is also expected to rebound amid forecasts for an above-normal monsoon, while investment demand remains strong, led by public investment, the report added. ADB has also maintained its growth forecast at 7.2 per cent for fiscal year 2025-26.
4.2 International Monetary Fund [IMF] on Tuesday last week in its economic outlook, pegged India’s growth at 7 percent, up from 6.8 per cent for 2024-25, driven by rising private consumption, particularly in rural areas.
# 5 GST Googly to AIFs!
India’s $100-billion private equity and venture capital world is in the crosshairs of the goods and services tax (GST) office. As per reports in the press, about a dozen such alternative investment funds (AIFs) have recently received notices, with the revenue department questioning why their schemes, housing the fund pools, are not registered under GST.
- Schemes or the Funds do not provide any service and their earnings do not attract GST. In an AIF, the service is provided by the Fund Manager who pays GST on the fee received from the Fund. Earning streams of AIFs – interest and capital gains are not subjected to GST.
- The GST is normally paid by the supplier of the service irrespective of whether it is in a position to recover the tax from the receiver of the service. However, in certain cases, which are termed as ‘reverse charge’, the liability to pay the tax shifts to the receiver of the service. Now, if a fund has certain expenses borne for having received services falling under the reverse charge list, it may have to pay GST.
- Most of the AIFs are registered as Trusts, a pooling vehicle for collecting money and deployment using the services of Fund Managers.
It is therefore evident that GST is not applicable for AIFs and the notice served appears arbitrary.
Very recently appellant tribunal reversed an earlier decision to include ‘carried interest’ – or ‘carry’ in trade parlance, which is a fund manager’s share of profits from managing investors’ money – under service tax, treating this wrongly as a ‘performance fee’. Hopefully, better sense would prevail on GST authorities to reverse this retrograde step soon and AIFs are not subjected to GST.
# 6 Private Credit
6.1 Key takeaways from the “India Private Credit Report – H1 2024” published last week by ReOrg, a global provider of credit intelligence, data and analytics for leveraged finance and restructuring professionals.:
- The total private credit deal volume in H1 2024 was $4.45billion in H1 2023, despite an increase in the number of deals from 32 to 57.
- The top three issuers—Vedanta Resources, GMR Group, and Shapoorji Pallonji Group—raised a combined total of $2.24 billion, accounting for 50% of the market share, down from 60% in H1 2023.
- Nearly 70% of the total issuance volume was in the form of Non-Convertible Debentures (NCDs), with 32.4% of the issuance volume coming from the metals and mining sector, followed by 14.5% from industrials and materials.
- The breakdown of private credit deals by use of proceeds showed that $ 69 billion while $1.17 billionwas acquisition related. The remaining amounts were allocated to capital expenditures and property-related needs.
- In H1 2024, 47%of the private credit volume offered an IRR of 18-20%, a significant decrease from 69% in H1 2023. This indicates a shift in the risk-return profile of the deals being offered.
6.2 As per Tracxn data released,
- Funding for AI startups in India stood at $8.2 million in the April-June quarter, declining about 91% sequentially and by 82% year on year,
- Funding accounted only for about 0.3% of the overall tech startups funding.
- This, however, comes on a nearly 110% sequential growth in funding in the previous quarter, and 56% in the quarter ended December 2023.
Globally, however, AI startups have been defying the ‘funding winter’ plaguing startups post pandemic. In the US, for instance, AI startups received $27 billion in funding in April-June, accounting for nearly half of all startup funding in the country