Week ending 21st Sept 2024
# 1 Markets
Despite starting the week on a weak note, India’s key stock indices surged by about 1.5% to reach all-time closing highs on Friday, following a higher-than-expected rate cut by the US Federal Reserve, the first in four years. The Sensex crossed the 84,000 mark for the first time, while the Nifty inched closer to 26,000, capping off an eventful week on a high note. With an anticipated additional inflow of approximately $1 billion due to the semi-annual rebalancing by the FTSE All Cap indices on September 20, the bullish market sentiment is expected to continue. The weight of Indian stocks in the MSCI AC World Investable Market Index (IMI) touched 2.35% on Wednesday as against China’s 2.24% as the continued strong show by equities in Mumbai has led to more local stocks in the indices.
The Fed rate cut, and surging inflows further boosted bond markets, with the 10-year yield dropping below 6.76% — its lowest in 31 months — on Friday. Yields across other tenures also declined, with the 5-year benchmark closing at 6.67%, the lowest since April 2022. Foreign portfolio investors (FPIs) have injected $6.6 billion into index-eligible bonds since June 28, following the inclusion of government securities in JPMorgan’s Emerging Markets Index.
In a bold move, the US Federal Reserve initiated its monetary policy easing cycle with a 50-basis point (bps) interest rate cut, lowering the Fed funds target range to 4.75%-5%. The central bank has signalled an additional 50 bps of cuts this year, with a further 100 bps in 2025 and 50 bps in 2026, which would bring the policy rate down to the 2.75%-3% range. The larger-than-expected rate cut softened US Treasury yields, with the 10-year yield closing at a low of 3.71% on Friday, while the US 30-year fixed-rate mortgage fell to 6.09%.
Although US markets began the week with volatile trading, they gained confidence following the Fed’s 50 bps rate cut. On Friday, the Dow Jones closed 0.7% higher, the Nasdaq gained 1.4%, and the S&P 500 rose by 0.8%.
# 2 RBI
2.1 Key takeaways from the RBI Bulletin September 2024 released last week
- Corporate earnings in Emerging Market Economies (EMEs) are growing at an annual rate of 19%, compared to 10% in the US. This growth is supported by a strong base of domestic investors and improved profit margins.
- Despite a slowdown in India’s GDP growth in Q1:2024-25, private consumption and gross fixed investment remained robust. The gross value added (GVA) growth actually rose sequentially in Q1, indicating strong underlying economic momentum
- The increase in subsidies by the Union government (3.6%) and states (26%) offset gains in GDP growth, highlighting the impact of fiscal measures on economic performance.
- Record volumes of corporate debt are being issued to mitigate volatility from worsening macroeconomic data and to take advantage of falling borrowing costs
- Rural inflation was higher at 4.2% compared to urban inflation at 3.1%, indicating regional disparities in food price changes
- Despite the current trends, food price volatility remains a contingent risk, suggesting that fluctuations in food prices could still pose challenges to economic stability and consumer purchasing power.
- India’s net foreign direct investment (FDI) during the April-July (FY25) rose to $5.5 billion compared to $3.8 billion last year. Manufacturing, financial services, communication services, computer services, electricity, and other energy sectors accounted for more than three-fourths of the gross FDI inflows.
This contingent risk on food price volatility is perhaps playing heavily on RBI to carefully observe the inflation trajectory before taking any decision on cutting policy rates in India.
2.2 RBI last week, has sought granular data from select non-banking financial companies (NBFCs)
- The details sought are on the outstanding portfolio, product-wise, and the annualised interest charged on them.
- The annualised interest slabs mentioned are: Less than ten per cent, 10-20 per cent, 20-30 per cent, 30-40 per cent, 40-50 per cent, and above 50 per cent
RBI’s interest on knowing in detail on NBFCs loan book growth is to ensure that there is systemic hygiene, in the context of accelerated growth in unsecured lending segment.
# 3 SEBI
3.1 SEBI on Friday, allowed mutual funds to buy and sell credit default swaps (CDS).
- Mutual funds are now permitted to sell CDSs as part of investments in synthetic debt securities. This should be backed by cash, Govt. securities or treasury bills.
- This means they can use the CDSs to create a new type of investment that mimics the characteristics of traditional debt securities.
- The credit risk rating of the synthetic debt security, i.e., the CDS, should be the same as the security it protects.
- Overnight and liquid mutual fund schemes cannot sell CDS.
- A mutual fund scheme’s exposure to the CDS should be less than 10 per cent of the asset under management (AUM) and within the derivative exposure limit,
Under the existing regulatory framework, mutual funds in India are permitted to participate in CDS transactions only as users, i.e, to buy credit protection only to hedge the credit risk on corporate bonds held by them. Earlier, only mutual funds with a fixed maturity plan (FMP) in their portfolios with a tenure of more than one year were eligible to carry out CDS transactions
This change in regulations to sell CDS as well, by all MFs, is likely to improve liquidity in the corporate bond market.
- SEBI last week, has amended rules for public issuance of debt securities
- The public comment period on draft offer documents has been shortened from 7 to 1 day for listed issuers and 5 days for others.
- The minimum subscription period is now 2 days, down from 3.
- If the price band or yield changes, the bidding period be extended by 1 day instead of 3.
- PAN and personal address of promoters are no longer required in offer documents for non-convertible securities.
- Issuers can now advertise electronically, with minimal newspaper ads containing QR codes for details.
These changes, effective September 17, aim to provide faster access to funds, improve ease of doing business and offer greater flexibility to issuers.
3.3 SEBI last Thursday, modified its earlier guidelines in the framework for the valuation of investment portfolios of AIFs.
- For securities not covered in specific paragraphs of the Master Circular, (thinly traded or illiquid securities) valuation must adhere to guidelines endorsed by an AIF industry association (presently it is IVCA) that represents at least 33% of SEBI-registered AIFs.
- Basis IVCA recommendations, IPEV guidelines will now continue for valuation of non-traded illiquid securities replacing the earlier guidelines which required applying Mutual Fund guidelines.
- Changes in valuation methodology or approach that comply with the new guidelines will not be considered a ‘Material Change’, ensuring flexibility in adapting to new standards – so no amendment to PPM but only disclosure to investors.
- New criteria for independent valuers have been established, requiring the valuer entity to be registered with the Insolvency and Bankruptcy Board of India (IBBI) and their members have relevant professional qualifications as being member of ICAI, ICSI or CFA etc.
- The timeline for AIFs to report valuations based on audited data from investee companies has been extended from six months to seven months, allowing more time for compliance
One sore point continues as the guideline continue to exclude experienced registered valuers who are not members of the abovenamed professional bodies. There are 15 Registered Valuer organisations including the likes of Houlihan Lokey or Duff & Phelps which collectively hold 5469 registered valuer individuals [RV] and 104 registered valuer entities [RVE] as of Dec 2023.
Valuation of a privately held asset requires a separate knowledge and experience in performing the valuation and by excluding the above, critical area continues to be missed. It is the international valuers that have domestic substance and presence that are losing out.
3.4 Competition Commission of India [CCI] introduced changes in Merger and Acquisition [M&A] regulations, aimed at simplifying processes and facilitate hostile take overs.
- A key amendment is the removal of the requirement for CCI approval when acquiring up to 25% of shares in a target company through secondary market transactions, before making a formal bid.
- The amendments also clarify that certain transactions, such as bonus issues, stock splits, and internal restructures, that do not change control, will no longer need prior CCI approval.
- However, after acquiring 25% of shares, an open offer must still be made to public shareholders under SEBI regulations, and management-related voting rights can only be exercised after obtaining CCI approval.
This may impact funding cycles for start-ups, as venture capital funding might breach thresholds requiring CCI approval, slowing down deals and affecting timelines for M&A transactions. Additionally, the new rules are retroactive, applying to deals signed before September 10, potentially causing delays in deal closures.
3.5 SEBI as per circular released last Monday reduced the time from the record date for credit and trading of bonus shares issued
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- introduced a new timeline to ensure timely credit and trading of bonus shares, effective October 1. The timeline allows them to be available within two trading days post the record date.
- The company proposing a bonus issue of equity shares will be required to apply for in-principle approval under the Sebi regulations within five working days from the date of the board meeting approving bonus issue.
- The company, while fixing the record date or the T Day and informing it to the stock exchange of the proposed bonus issue, should also record the deemed date of allotment on the next working day of the record date.
- After receiving the record date intimation and getting the required documents from the company, the stock exchange will issue a notification accepting the record date. The notification will mention the deemed date of allotment.
Presently, the equity shares from bonus issues are available in about two weeks from the record date. Come October 1, bonus shares will be available for T+2 trading, reducing the time from the record date for credit and trading and thus another step in accelerating the process of issue and settlement
#4 Economy
4.1 Govt. launched the Bharat Startup Knowledge Access Registry (Bhaskar), as the government envisions growing the number of startups to 5 million in the coming years.
- Bhaskar is a platform designed to centralize collaboration among startups, investors, mentors, service providers, and government bodies.
- Bhaskar aims to be a one-stop solution for startups seeking resources like mentors and finance.
- The initiative will assign unique Bhaskar IDs to stakeholders, enhancing interactions and personalized experiences.
- Bhaskar’s goal is to build the world’s largest digital registry for the startup ecosystem, promoting networking, collaboration, and resource sharing.
This is not the first time such initiatives have been taken. Earlier Startup India portal was operational aimed at connecting the stakeholders. Such transactional platform failed to take off as the investments by venture funds in startups depend on the conviction on the business model basis series of bilateral interactions with the promoter with common platforms failing to achieve results.
Let’s hope and see how Bhaskar is different!
4.2 As per S&P Global “India Forward: Emerging Perspectives” report released last Thursday,
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- India is on track to becoming the third-largest economy by 2030-31, driven by a projected annual growth rate of 6.7 per cent this fiscal.
- With 8.2 per cent growth rate in FY2024, continued reforms are crucial to improving business transactions and logistics, boosting private sector investment, and reducing reliance on public capital.
- Equity markets are expected to stay dynamic and competitive due to strong growth prospects and better regulation
To maximize trade benefits, India must develop infrastructure and geopolitical strategies, particularly regarding its extensive coastline.
4.3 As per paper “Relative Economic Performance of Indian States: 1960-61 to 2023-24’ submitted by the Economic Advisory Council to the Prime Minister (EAC-PM), and released last Tuesday
- Southern states had significantly outpaced others in the post liberalisation period in terms of their share in India’s GDP and relative per capita income,
- Five states, Karnataka, Andhra Pradesh, Telangana, Kerala and Tamil Nadu, collectively accounting for around 30% of India’s GDP in 2023-24.
- West Bengal has witnessed a continuous decline in economic performance
- Delhi has one of the highest per capita incomes throughout the study period
4.4 As per official data published Tuesday, India’s trade gap ballooned to a 10-month high of $29.65 billion in August compared to $24.02 billion last year
- Export was lower at $34.72 billion vs $38.26 billion last year
- Gems & Jewellery, Petroleum products and Rice grew lower by 23%, 37% and 16% respectively
- Imports were higher at $64.36 billion vs 62.3 billion last year
- Gold imports were all time high at $10 billon.
Huge slowdown in China, falling petroleum prices, a recession in Europe and transportation and logistics-related challenges caused muted global demand complimented by geopolitical challenges led to 9.3% contraction in exports.
4.5 As per data released last Tuesday,
- India’s wholesale inflation in August fell to a four-month low of 1.31%, from 3.36% in June and 2.04% in July.
- India’s retail inflation, measured by the Consumer Price Index (CPI), rose to 3.65% from 3.6% in July
- Food price inflation was 3.11%, compared to 3.45% in July, on a sequential basis, the index declined 0.45% from July.
- Fuel and power, core (non-food manufacturing), and crude petroleum and natural gas sub-groups together pulled down the headline WPI print by as much as 70 basis points in the month.
- Inflation in manufactured products—the largest component of the index—rose 1.22%, compared to a rise of 1.58% in July.
Lower inflation no’s due to fall in prices of 13 manufactured products and food items and Sept inflation print is likely to be at 2%.
RBI is unlikely to be moved as it waits to watch complete trajectory before taking any decision on rate cuts.