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Weekend Reflections – Week ending 28th Dec 2024

Week ending 28th Dec 2024

# 1 Markets

1.1 As India weathers yet another slew of volatile headwinds, we pay obeisance to Dr Manmohan Singh, architect of liberalised economy who opened up India in 1991 and freed it from restrictive licence raj policies.

1.2 The S&P 500, which tracks the stock performance of 500 of the largest listed companies in the US, has been the best-performing index this year compared to other indices on the asset quilt. In INR terms, the S&P 500 has delivered 26.9% returns, slightly ahead of BSE 150 MidCap (Total Return Index) TRI at 26.2%, followed by small cap (24.1%), Gold (19%) and large cap (13%). While the winners among asset classes keep rotating every year, the absence of any such pattern over the past 10 years reinforces the importance of asset allocation in building a balanced portfolio. Sensex and Nifty concluded with a modest gain marking a positive end to the week’s last trading day with Sensex closing at 78699 and Nifty 23800. Bond yields remained flat post hardening last week and closed at 6.78%.

1.3 Based on our analysis after reading various reports, we feel market is likely to grow in 2025:  

  • Price Earning [PE] ratio which were at 87% premium over emerging markets at beginning of 2024 continue to remain elevated at end 2024 and mean reversion has not happened– caused by strong relative growth of Indian corporates.
  • Large reservoir of reasonably sized corporates (> $ 500 mn. revenue) is certain to improve the breadth of public markets – For 1 listed company, which has grown by 20% in last decade, there are 2 in unlisted space. 
  • Despite bad macros in Pakistan, Sri Lanka and Argentina, their markets have done well which demonstrate that Indian markets have bottomed out.

1.4 All the three broad indices flat ahead tracking hardening bond markets. The yield on the 10-year US Treasury note rose above the 4.6% threshold on Friday, its highest since early May, due to fewer expected cuts, lower unemployment claims. 

# 2 RBI

2.1 Key takeaways from “Report on Trend and Progress of Banking in India 2023-24” by the RBI released last week  

  • Indian banks have shown sustained profitability for the sixth consecutive year. The return on assets (RoA) was 1.4%, and the return on equity (RoE) was 14.6%. The net profit of the banking system rose nearly 33% on-year at the end of March 2024 while operating profit rose by 16% on-year.
  • The GNPA ratio fell to a 13-year low of 2.5% at the end of September 2024 – Agri highest at 6.2% (due to farmers increasingly borrowing from the formal sector), industrial sector at 2.9%, and lowest for retail loans at 1.2%, 
  • Despite robust credit growth, India’s total credit-to-GDP ratio (including credit extended by banks as well as NBFCs) at 90.1% was below that of emerging market economies (EMEs) as well as the estimated threshold of 113.1%.
  • The capital to risk-weighted assets ratio (CRAR) of banks was 16.8% at the end of September 2024, with all bank groups meeting the regulatory minimum requirements
  • NBFCs exhibited double-digit credit growth, with the GNPA ratio dropping to 3.4% at the end of September 2024 
  • Banks reported lowest amt. of frauds in 10 years at Rs. 13175 cr. vs Rs. 23863 cr last year, though in H1FY25 there was 8x increase in amount compared to H124. Internet and card frauds share in total stood at 44.7% and 85.3% in terms of no of cases.

RBI has cautioned banks and NBFCs for (i) setting high ceilings for unsecured loans (ii) likely systemic losses due to their inter relationship on private credit with regulatory arbitrage.

2.2 RBI’s annual report on state finances provides critical insights into how states earn, spend, and manage their funds, directly impacting citizens’ lives. Here are the key takeaways:

  • Tax collection efficiency has improved post-pandemic, with buoyancy rising from 0.86 to 1.44. States also receive 41% of central taxes and grants.
  1. States have controlled their fiscal deficits, reducing them below 3% of GDP for three consecutive years. Reversion to the old pension scheme (OPS) by some states increases fiscal pressure.
  • State debt remains high at 28.5% of GDP, well above the recommended 20%. Heavy reliance on market borrowings through state development loans (SDLs) has increased exposure to market risks.
  • Subsidies like farm loan waivers and free electricity strain finances. Persistent financial losses (₹6.5 lakh crore) plague electricity distribution companies, despite reform efforts.
  1. Low spending (0.1% of GDP) on research and development could hinder long-term growth.
  • Collaborations with institutions like NITI Aayog are fostering data-driven policymaking.

The RBI has emphasised on reducing unsustainable freebies, prioritise future investments and standardise financial reporting – underscoring the need for disciplined fiscal management and transparency to ensure sustainable growth. 

2.3 Key takeaways from the State of Economy published in RBI Bulletin for December 2024, 

  • The global growth forecast for 2024 is maintained at 3.2%. India’s GDP growth is projected at 6.8% for 2024 and 6.9% for 2025, reflecting a stable outlook amidst global economic conditions
  • High-frequency indicators (HFIs) for the third quarter of 2024–25 indicate that the Indian economy is recovering from the slowdown in momentum witnessed in Q2, driven by strong festival activity and a sustained upswing in rural demand
  • Agricultural activity is expected to benefit from brisk rabi sowing, supported by favourable weather predictions.
  • There is a geographical shift in the job market, with cities like Coimbatore and Gurgaon emerging as new job hubs, indicating a decentralization of employment opportunities beyond major metros.
  • 40 country trade weighted REER index rose from 90.9 to 91.8 in one month while 6 major currency baskets rose from 104.4 to 105.3 pointing to overvaluation of rupee in relative terms.
  • NRI deposits doubled to $12 bn (Apr-Oct) from last year while FCNR(B) deposits tripled to $6.1 bn 
  • While Gross FDI rose to $48.6 bn (Apr-Oct), due to higher repatriation at $34.1 bn combined with net outward FDI at $12 4 bn, Net FDI slowed to $2.1 bn vs $7.7 bn last year 

2.4 RBI on Friday allowed UPI access for prepaid payment instruments (PPI) via third-party applications.

  • A prepaid payment instrument (PPI) is a financial tool that allows users to store funds on a card or digital wallet for future transactions. (PayTM)
  • Currently, UPI payments from/to a bank account can be done using the UPI application of that bank or of any third-party application provider. However, UPI payments from/to a PPI can only be carried out using the mobile application provided by the PPI issuer only.
  • The proposed guidelines would enable UPI payments from/to full-KYC PPIs through mobile application of third-party UPI applications other than the PPI issuer also 

RBI’s recent directive seeks to enhance payment interoperability in alignment with its payment vision 2025. With this move PPI holders can now seamlessly make and receive UPI payments using popular third-party apps like G Pay and PhonePe breaking from the limitations of PPI issuer specific platforms such as PayTM or AmazonPay.

2.5 RBI has formed the FREE-AI panel, led by Pushpak Bhattacharyya from IIT Bombay, to develop a framework for responsible AI use in finance. The committee will assess AI adoption, global regulations, and governance, with a report due in six months. Like Unified Lending Interface [ULI] RBI is leading in AI race in regulated space as well.

# 3 SEBI

3.1 SEBI on Friday issued clarifications on the transfer of shareholding among immediate relatives and the transmission of shareholding of investment advisers, research analysts, and KYC registration agencies (KRAs).

  • Transfer of shareholding by way of transmission to an immediate relative will not result in a change in control in situations such as bequeathing of partnership right to legal heirs in case of death of partner or inter se transfer among the partners where partnership has more than two partners. 
  • However, the induction of a new partner will be considered a change of control and prior approvals for change in control required to meet the fit and proper criteria 

# 4 Economy

4.1 As per survey report released last week by Govt, 

  • Urban-Rural gap in Monthly Per capita Consumption Expenditure [MPCE] declined to 69.7% in FY24 from 71.2% in FY23 and 83.9% in FY12. 
  • MPCE in rural and urban areas estimated to be Rs 4122 and Rs. 6996 respectively in FY24.
  • The Gini coefficient (a statistical measure of inequality) in the population declined to 0.237 in FY 24 from 0.266 in FY23 in rural areas 0.284 in FY24 from 0.314 in FY23 in urban areas.

 

While this looks good, private final consumption expenditure (PFCE), a proxy for private consumption, stood at 6% annually in the September quarter (Q2FY25), down from a seven-quarter high of 7.4% in the preceding first quarter as per GDP data released last month.

4.3 According to the factsheet of Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2023-24, the number of non-farm firms in the country comprising proprietorships, partnerships and self-help groups increased 12.84% to 7.34 crore:

  • Unincorporated Sector Enterprises [USE] adds 11 million jobs in 2023-24
  • the no. of workers in the USE (which includes both formal and informal sectors) stood at 120.6 million till September-end, which is 10% higher than last year. 

Compared to the 7.34 crore USEs, the number of incorporated companies are fewer at 17.9 lakh, signifying that the vast majority of businesses are small scale. This also shows while corporate sector is witnessing a stagnation in employment creation and wages, jobs have started rising again among the smaller units, which were hit hard by the pandemic. 

4.4 As per report released by National Stock Exchange [NSE] last week,

  • India’s share in global merchandise exports rose from 0.9% in 2005 to 1.8% in 2023, while its share in services exports more than doubled from 2% to 4.3%.
    • India’s export share grew from 1.2% in 2005 to 2.4% in 2023. 
    • Services accounted for 43.8% of India’s exports against global average of 24.7%
    • India’s share in imports grew from 1.5% to 2.9% 
  • This growth has been driven by factors such as robust trade agreements, a diversified export portfolio, improved logistics infrastructure, and government initiatives like the Make in India campaign and the Production-Linked Incentive (PLI) scheme.

Growth has been driven mainly by factors like multilateral and bilateral trade agreements, initiatives like Make in India and Production Linked Incentive (PLI) schemes, diversification of export baskets, and development of logistics infrastructure.

4.5 Basis reports published by leading agencies (Goldman Sachs, UBS etc.,) we expect year 2025 might see moderated growth but remains a stepping stone for India’s longer-term economic journey. Our key observations:

  • India’s GDP growth for FY25-26 at 6.5%–7%; Goldman Sachs is slightly cautious at 6.3%.
  • Earnings for Nifty 50 projected to grow by: 7% (FY25), 14% (FY26), and 12% (FY27) and Mid and small caps to grow by 27% and 25% in FY26, respectively.
  • Goldman Sachs predicts Nifty 50 could reach 27,000 by 2025, though with potential volatility. Earning is now the main contributor to total returns (vs. valuation multiples in 2020).
  • A shallow rate cut cycle is anticipated, with rates dropping by 50–75 bps in early 2025. Government bond yields likely to remain between 6.5%–6.75%.
  • Trump’s Potential Presidency (2025) could disrupt global trade and weaken global demand, affecting India’s exports.
  • Potential for delays in new investments and challenges with a trade imbalance due to a weaker Chinese currency.
  • “China +1” trend could accelerate, benefiting India as supply chains diversify.

# 5 PE VC

VC 5.1 As per India Bran Equity Foundation [IBEF] report released last week,

  • Venture capital (VC) investments in India have surged in 2024, reaching $16.77 billion across 888 deals from January to November
  • This represents a 14.1 per cent increase in funding value and a 21.8 per cent rise in deal volume compared to the same period in 2023.
  • The technology sector led the growth, attracting $6.50 billion, a 52.5 per cent year-over-year (YoY) increase. The consumer related sector followed with $2.30 billion, up 32.2 per cent, while the financial sector saw a slight decline to $2.20 billion.

PE 5.2 As per data provided by LSEG last week

  • Funds raised by PE firms fell to a 7 year low to just $3.98 billion
  • Funds raised is just 62% of last year’s at $6.4 billion and fraction of $13.5 billion in 2022.

Startups 5.3 As per Inc 42 Annual Funding report –

  •  Indian startups cumulatively raised more than $12 Bn in fresh funds this year, up over 20% from the $10 Bn raised in 2023.  
  • Early-stage startups cumulatively raised $893 Mn (up 31% YoY) via 433 deals while Late-stage funding zoomed 25% YoY to over $7 Bn in 2024, growth-stage startups raised $3.5 Bn via 282 deals. 
  • Fintech continued to be the favourite choice for VCs as the sector bagged $2.5 Bn across 162 deals, followed by Enterprise tech and consumer services with each bagging $1.8 Bn. 
  • 32 new-age tech stocks, ended the year with a total m-cap of $101.22 Bn in FY24 compared to 19 listed startups in 2023, with a cumulative m-cap of $40.6 Bn. 
  • IPOs of eight new-age internet companies this year unlocked over Rs 8,500 cr. for employees from their outstanding stock options with nearly Rs 34,000 crore  by founders and promoters through equity and share options.
  • Total exits by risk investors aggregate $5 billion from startups in 2024 via secondary transactions, OFS in IPOs and public market block deals – principal being Swiggy, First Cry and Go Digit Insurance.

AI – 5.4 As per data released by Venture Intelligence 

  • Indian Artificial Intelligence startups raised $747 million in 2024, down 26% from last year but the number of deals in the space increased to 121 from 78 in 2023.
  • Building the infra layer which is more promising appears challenging as most are focussed on consumer and enterprise applications
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