Weekend Reflections – Week ending 29th June

Week ending 29^th June 2024

# Markets

Last week, Sensex and Nifty surged to new heights, driven by strong gains in private sector lenders, buoyed by budget expectations and foreign inflows. On Friday, Sensex and Nifty closed at 79,032 and 24,010, respectively. As India celebrated a T20 victory on Saturday, after 11 year gap, the historical correlation between cricket wins and equity performance suggests potential positive market movements in the coming week.

In the US, stocks experienced volatility despite a robust quarter led by high-performing technology shares. Nvidia, in particular, saw fluctuations during its annual shareholder meeting. While Nasdaq and S&P 500 rose by 1%, the Dow Jones ended the week lower.

In India, bond inflows continue to ease yields, which marginally corrected on Friday, closing at 7%. Conversely, US bond yields hardened, ending at 4.39% amid diminishing hopes of a Federal Reserve rate cut.

The yen fell to its lowest level against the US dollar since 1986, reaching 160.63, influenced by significant interest rate differentials. The 10-year Japanese government bond yield was 1.03%, compared to the 10-year US Treasury yield at 4.304%. In China, the yield on the benchmark bond dropped to a two-decade low of 2.22%, reflecting ongoing concerns about the domestic economy and expectations for further stimulus.

# 2 RBI

2.1 The RBI’s 29th Financial Stability Report released last Thursday highlights India’s resilient financial system amid global economic risks, stating strong metrics for Indian banks. Key takeaways:

• Bad loans at multi-year lows, with a gross ratio of 2.8% in March 2024, expected to drop to 2.5% by March 2025. Could worsen to 3.4% in severe stress.
• The capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio of SCBs stood at 16.8 per cent and 13.9 per cent, respectively, at end-March 2024,
• Robust earnings support credit expansion and economic growth.

With Capital buffers exceeding regulatory minimum, all this points to a banking system that is well-positioned to expand credit and drive India’s economy forward.

• Loan growth driven by services and household consumption; industrial credit lags.
• Private Credit provided by NBFCs to corporates on bilateral basis, has grown 4x during last 10 years – now major source of financing amongst middle market firms with -ve earnings, high leverage and lack of high-quality collateral.

Potential inter-connectedness between banks and NBFCs could create systemic risk. private credit structures are becoming complex, adding multiple layers of leverage with liquidity risks and higher redemption rights pose challenges

• Concerns over high delinquency in consumer loans especially personal loans especially below ₹50,000 where more than half the borrowers are running at least three loans simultaneously; higher vintage delinquency amongst fintech lenders at 8.2% next to SFBs.

Higher growth may dilute underwriting standards besides causing systemic risks.

• Elevated credit-deposit ratio and narrowing credit-GDP gap (-2.1% in last quarter) serious concern; credit growth at 16.1% as on May 31, 2024, remains sustainable and within the range of 16-18% beyond which it may lead to higher impairments,
• Other emerging risks: cyber hazards, climate change, global spillovers. Artificial Intelligence and third-party IT risks in financial institutions; risk could intensify in tightly interconnected institutions. Urban cooperative banks face highest cyberattack risk (41%).
• Household savings declining to 18.4% of GDP (gross domestic product) in FY23 from an average of 20% of GDP over 2013-2022 and coupled with an increasing trend in financial liabilities; The share of net financial savings in total household savings has been declining. It stood at 28.5% in 2022-23, from an average of 39.8% during 2013-2022.
• Finds 28 debt schemes of 12 MFs, with assets of Rs, 1.76 lakh cr. under stress in April-note of concern for SEBI.

Liquidity risks appear evident in Debt MFs, amplified by growing retail presence

# 3 SEBI

3.1 Principal changes as decided in SEBI Board Meeting held on 27^th June

• SEBI restricts engagement by brokers and MFs with unregistered entities (finfluencers) providing securities advice.
  • Expected move to guard retail investors from reckless financial advice and curb manipulation in futures and options.
  • financial influencers engaged in investor education will be exempt from the new restrictions.
• Framework in the form of platform, provided for fee collection by Registered Investment Advisors and Research Analysts
  • likely to enhance confidence in using their services.
• On voluntary listing, introduces fixed price process. Fixed price offered by the acquirer shall be at least 15% premium over the floor price determined under delisting regulations.
• • Great move from the tedious reverse bidding process which was found highly complicated.

• Alternate delisting framework for Investment Holding Companies [IHC] published. Listed IHC that has at least 75% of their fair value (net of liabilities) comprising direct investments in equity shares of other listed companies will be permitted to transfer the underlying equity shares held by it in other listed companies to its public shareholders proportionately

• • Unambiguous process laid out to bring out correct valuation of Investment holding
  • companies.
  • Shares of listed holding companies such as Pilani Investment and Industries Corp., Kalyani Investment Co. and Nalwa Sons Investments jumped as much as 20% last week.
• Exempts university funds and university related endowments eligible to be registered as Cat I FPI, from additional disclosure requirements (including underlying beneficiaries).
• Move will help genuine FPIs from frustrating compliances.
• Streamlines public issue process for debt securities – comprising reduction in timelines, for- public comments for draft offer, minimum subscription period, listing timelines, flexibility in release of advts. through different modes etc.
  • Move will facilitate enhanced retail participation and bring higher confidence.
• Implements measures for ease of doing business to promote the attractiveness of Infrastructure Investment Trusts as an asset class.
• Cat I and II AIFs while borrowing for temporary shortfall in meeting investments to pass on the expenses to the respective clients and roll over only after a gap of 30 days.
  • What happens to temporary shortfall for meeting its own expenses is not clear.
• Large Value Funds [LVFs] can now extend period only by 5 years maximum
  • Goes against the very spirit of LVF where investors with participation of Rs 70 cr commitments require higher operational flexibility
• Introduced a product success framework and updated eligibility criteria for stocks in derivatives segment.
• The revision was overdue as the parameters were set in 2018 while the market has grown (turnover, volume and volatility) in the last 6 years; will now lead to addition and deletion of about two dozen stocks.
• This would prevent stocks with low liquidity and high volatility from entering the F&O segment, curbing manipulation.

3.2 Key takeaways from SEBI Circular dated 27^th June on Participation by NRIs, OCIs, and RIs in FPIs

• SEBI issued a circular allowing up to 100% contribution by NRIs, OCIs, and RIs in FPIs based in IFSCs in India.
• SEBI has tweaked the guidelines for registration of foreign portfolio investors (FPIs) pertaining to NRIs, overseas citizens of India and the resident Indians as participant of such foreign investors.
• Under the new rule, FPIs applying for registration need to ensure that the contribution of a single NRI or overseas citizen of India (OCI) or resident Indian in its corpus is below 25 per cent.
• Further, at an aggregate level, the applicant FPI needs to ensure that their contribution in its corpus is below 50 per cent.

The circular aims to regulate FPIs and protect investor interests in the securities market.

 3.3 SEBI last week has given flexibility to senior executives of listed companies relating to their trading plans under insider trading norms.

• Reduced the minimum cool-off period between disclosure and implementation of trading plan to four months from six months.
• Allowed flexibility during formulation of trading plan, to provide price limits — upper price limits for buy trades and lower price limits for sell trades.
• 20 % price range for buying or selling of shares in the trading plan.

The proposed changes to trading would provide a good relief to senior executives or key managerial personnel in listed firms as presently they have a very small window for carrying out their trades, due to being in possession of inside information most of the time. This is more so in the event of corporate actions related to bonus issue and stock split cases where the insider could make adjustments now with the approval of compliance officer.

3.4 SEBI last week recalled its earlier directive on Private Equity firms relinquishing special rights ahead of listing 

• This is a modification of the regulator’s earlier directive, asking the investment bankers to ensure that special rights lapse at the filing of the updated draft red herring prospectus [DRHP] itself.
• PEs get special rights under Articles, Shareholders Agreement or through additional documents to protect their interest. Companies get 12 months to list post DRHP approval. If the market is not favourable, then they may not list at all. Then the PE investor may be left holding shares in the company without the rights to protect their investment in the company unless those rights are reinstated.

This communication should therefore come as a relief to PE investors.

3.5 SEBI last Tuesday revised its oversight framework for stock exchanges and other market infrastructure institutions (MIIs), on the recommendations of SEBI’s committee on Strengthening Governance of MIIs.

• the structure and responsibilities of various statutory committees to enhance governance has been defined
• Statutory committees of MIIs can be divided into different categories, such as functional, oversight and investment
• specific responsibilities and terms of reference for each committee spelt out

Hopefully, scams on the likes of NSE Co location may not recur.

# 4 Economy

4.1 Water to impact India’s ratings?

As per new Moody’s report released last week,

• Delhi and Bengaluru’s water crises, triggered by low rainfall, poor water management, weak conservation efforts and opportunistic politics, could impact India’s sovereign credit strength.
• How we manage our resources is affecting how India’s perceived as a place for doing business.
  • Reduced water supply can disrupt farming and industrial operations, leading to food price inflation and harming the credit health of water-dependent sectors like coal and steel.
  • Rivers are polluted, traditional water harvesting systems are gone, catchments are deforested, groundwater levels are depleting, and water bodies are disappearing.

As India has over 18% of the world’s population, but only 4% of its freshwater resources, the report suggests that steps must include public availability of accurate water data, large investments for water conservation and fixing transmission leaks, and an overhaul of the water governance structure.

4.2 As per data released by RBI last week, India’s balance of payments (BoP) current account swung to a surplus of USD 5.7bn (0.6% of quarterly GDP) in Q4FY24 from a deficit of USD 1.3bn (0.2% of GDP) in Q4FY23.

Key movers>

• net portfolio investment [FPI] inflows (of USD 11.8bn in Q4FY24 and USD 44bn in FY24) big contributor and compensated for a sharp reduction in net FDI inflows (just USD 9.8bn),
• The merchandise deficit shrank to a 10-quarter low of 4 50.9 bn as exports rebounded by 5% YoY, slightly outpacing import.
• In fact, Merchandise exports up nearly 24-fold in the last 33
• Services trade surplus with services exports growth of 4.1% due to rising shipments of software, travel and business services. There’s a bit of a slowdown in IT exports. This is probably related to a drop in US tech spending and some of the impact of reorganization as interest rates rise in the US and AI provides a bit of a cushion.
• Total invisible’ exports up 67-fold in the last 33 years

After 2021, we’ve seen the first quarter when India’s current account turned a surplus for the quarter. This has been very interesting as the deficit was very low in the last few quarters. Gold is a big portion of the current account.

Meanwhile, as India migrates away from crude oil-based products slowly, we will see the trade deficit remain shallow. Let’s hope for two things:

• Hope the RBI allows the rupee to appreciate back to below 80, and
• Hope the surplus situation continues on the current account

4.3 S&P Global Ratings last week, maintained India’s GDP growth forecast at 6.8% for the current fiscal year, citing high interest rates and reduced fiscal stimulus as factors tempering demand.  Agency has also projected growth rate of 6.9% and 7% for FY25=6 and FY 27.

4.4 Morgan Stanley report released last Wednesday indicated that India’s consumption growth is expected to average 6.1% in FY25 and 6% in FY26. improving from 4% in 2023-24. It said that private consumption growth could recover further on moderation in inflation. Inflation
while recovering, is tracking at 4% – below capex growth of 6.5% and gross domestic product (GDP) growth of 7.8% in the quarter ended March 2024.

# 5 Credit Card Relief – soon?

Last week, a US judge rejected a $30 billion antitrust settlement involving Visa and Mastercard to limit merchant fees; settlement aimed to resolve litigation over swipe fees dating back to 2005.

• Swipe fees totalled $72 billion in 2023, benefiting banks and card issuers.
• Merchants view the 1.5% to 3.5% fees as excessive and object to rules limiting fee disclosure.
• Critics argue fees raise consumer prices, with discounts sometimes for cash payments.

The above rejection doesn’t impact a separate $5.6 billion class action settlement pending against both the card issuers.

There are 5 card networks in India right now – Visa, MasterCard, Rupay, American Express and Diner’s Club. Rupay debit cards have a 0% MDR.  In India, despite promoting RuPay card with 0% MDR and giving discretion to customers to opt, Visa and Mastercard continue to dominate 77 % card transactions. Hopefully, customers could soon have a sign of relief!

# 6 Fintech

As per ASK Hurun India Future Unicorn Index 2024, released last week

• India is home to 30 future Unicorns in the Fintech sector, with consumer lending emerging as the dominant subcategory, constituting more than half of the FinTech future Unicorns
• SaaS stood as the second-largest sector, showcasing a count of 20 future Unicorns. The SaaS startups collectively raised a substantial investment of USD 2.1 billion, reflecting investor confidence and support in this sector’s growth and potential
• The total worth of India’s future unicorns will stand at USD 58 billion, an increase of 1.2 per cent as compared to last year.