Week ending 31st August 2024
# 1 Markets
Indian Markets had their longest winning streak in 31 years recording positive uptick in continuous 12 sessions. Notably both indices touched fresh highs at opening bell on Friday with Sensex closed at 82365 and Nifty at 25235 tracking continued gains in the rest of the Asia. It was pushed by chunk of the FPI inflows due to rebalancing of indices by MSCI with inclusion of seven stocks. Traders carried forward mostly bullish futures bets to the September series on the expiry of the August contracts on Thursday thus indicating continued bull rally. The outcome of the rate-setting meetings of US Fed and the Bank of Japan scheduled in September will determine the market direction.
The number of Americans filing for unemployment benefits fell slightly last week as the US labour market remains healthy in the face of high interest rates. The Commerce Department said the personal consumption expenditures (PCE) price index rose 0.2% last month, matching expectations. Dow and S&P closed 1% higher on Friday following robust U.S. economic data, while artificial intelligence chipmaker Nvidia slipped post its results, causing Nasdaq to close the week with only a marginal high. Incidentally Warren Buffet’s Berkshire Hathaway became first non tech US company to cross market cap of $ 1 trillion.
Indian bonds continue to soften with inflows unabated with 10Y yields closing at 6.74%.U.S. Treasury yields advanced on Friday, with the benchmark 10-year note set to snap a two-week streak of declines, after economic data raised expectations for rate cut. The U.S. 10-year Treasury note yield rose to 3.905%, on track for its fifth straight daily gain while the yield was still on course for fourth straight monthly decline.
# 2 RBI
2.1 RBI on Monday unveiled a tech platform that is expected to streamline the lending process like how the Unified Payment Interface (UPI) transformed the digital payments ecosystem.
- The new digital platform, Unified Lending Interface (ULI), is designed to streamline credit appraisals by providing lenders with seamless access to a wide range of digital information including land records from States.
- The digital platform would connect seamlessly in ‘plug-and-play’ mode, make available both financial and non-financial data and thus remove hindrance in frictionless delivery of loans and speed up loan process particularly Agri and MSMEs. This eliminates the need for extensive documentation while processing loan applications.
- The platform, according to RBI, is seen as a transformative step in India’s digital credit landscape, similar to how the Unified Payment Interface (UPI) revolutionized payments
Designed to draw data from various sources with the consent of loan-seekers, the new interface promises to smoothen credit appraisals and fit snugly into India’s digital public infrastructure based on Aadhaar IDs and mobile connectivity. Should it work as envisaged, it would place India in a position to close last-mile gaps in formal credit delivery and rescue people from moneylenders. The day New to Credit borrowers get timely and adequate credit like others, we can say India’s ULI platform has succeeded.
2.2 As per RBI data on sectoral credit as at July end, released on Friday,
- MSME credit by banks grew by 15% and stood at Rs 25.10 lakh cr. compared to Rs 21.82 lakh cr. year before.
- Credit growth to industry increased by 10.2 % compared with 4.6% last year.
- Credit to agriculture and allied activities rose by 18.1%, compared with 16.7% year before.
- Credit growth to services sector on the other hand moderated to 15.4 % from 19.7 % a year ago, driven down by lower credit to NBFCs.
- Retail loans growth was lower at 17.8 % compared to 18.4 % a year ago, largely due to moderation in growth recorded in ‘unsecured loans’ and ‘vehicle loans’
The impact of Reserve Bank’s regulatory measures cautioning and restricting banks on loans to NBFCs and unsecured lending is seen on lending patterns of commercial banks
2.3 The Global Fintech Fest last week, was simultaneously opening and closing the doors on the future of payments. We are talking of UPI going global
- Unified Payments Interface (UPI) processed ₹80.8 lakh crore ($964 billion) in April-July 2024, marking a 37% year-on-year increase. UPI has become the world’s leading alternative payments method, surpassing Alipay, PayPal, and Brazil’s PIX in transaction volume.
- PwC in its India Payments Handbook has predicted that the total transaction volume on UPI is expected to increase to 439 billion by 2028-29 from about 131 billion in the last financial year and account for 91 per cent of overall retail digital payments
Last Wednesday was, however, a day of contrasts when two central bankers showed how prepared they are or would be receptive to future innovations in payments. While RBI has grandiose plans for linking UPI globally, to reduce cost of international remittances, Christopher Waller, member of Fed, was doubtful about the interlinking of fast payments systems at the global level as not many US banks could participate in such a model
It will be interesting to watch how India overcomes world’s strongest economy’s reservations to complete global linkage of UPI.
# 3 SEBI
3.1 SEBI in its consultation paper released last Wednesday has proposed
- mandating Qualified Stockbrokers (QSBs) to offer the facility of trading in the secondary market (only in cash segment) using the UPI-based block mechanism to their clients, similar to the ASBA facility in primary market.
- The facility is currently optional for investors, and not mandatory for Trading Members (TMs) to offer as a service to clients.
- In the alternative QSBs could offer 3-in-1 trading facility which could be used without any amount restrictions in both cash and derivatives segment.
3.2 SEBI through a circular on Friday has tightened the eligibility criteria for stocks to be a part of the futures and options (F&O) segment and has introduced a product success framework for stock derivatives.
- A new set of criteria for entry and exit of stocks into and from the derivatives segment been introduced along with a product success framework like Index derivatives.
- A stock’s eligibility will now be measured in the number of entities participating in its trading, the duration for which it has been traded during a review period, its turnover volume and notional interest.
- Median quarter sigma order size criteria increased to 3 times from Rs, 25 lakhs to Rs, 75 lakhs (as market size has increased now 3.5 times).
- Stocks average daily delivery value in cash market over previous 6 months are not less than Rs. 35 cr.
The regulator wants stocks that are part of the derivatives market to be more liquid and traded by a wide set of market participants to prevent manipulation and lower risks to the system. Irrational exuberance being witnessed in some set of stocks, is likely to diminish with the new set of criteria.
3.3 SEBI in a discussion paper released last week has proposed to revamp rules for merchant bankers handling public issues
- the net worth increased 10 times to ₹50 crore from ₹5 crore,
- minimum liquid net worth of 25% of net worth requirements introduced
- prohibit them from holding securities in the issuer company to avoid conflict and compromised due diligence.
- propose two categories of merchant banker based on net worth and activity.
- Category-1, would have to always maintain a net worth of Rs 50 crore and would be allowed to undertake all permitted activities
- Category- 2 would be required to maintain a net worth of Rs 10 crore and would be able to undertake all permitted activities except main board issues.
This is understandable going by the spate of fraudulent issues especially in SME Exchanges, in line with increased issuances which has crossed 240 this year with most of them oversubscribed including a recent one by 1963 times. The latest jaw dropper is the over-revved response to the IPO of Resourceful Automobile, a dealer of Yamaha motorcycles in New Delhi with a couple of outlets, and a few dozen employees. For the ₹12 crore it wanted to raise, the company got applications worth ₹4,800 crore.
SMEs making unrealistic projections presenting an optimistic view of their operations, followed by bonus issues, stock splits, to inflate valuations. Promoters then exploit to sell their holding at premium prices disadvantaging investors. This revamp in Merchant banking is thus overdue and hopefully things will improve.
3.4 The Department of Economic Affairs has eased listing requirements for Indian companies seeking to list in IFSC
- The new rules now allow these companies to maintain a minimum of 10% public shareholding, down from the previous 25% required for continued listing.
- This amendment is aimed at facilitating easier access to global capital, particularly benefiting Indian startups and companies in the technology sector.
While companies consider several factors, including liquidity, cost of listing and regulatory environment, this amendment would certainly nudge Indian and foreign companies to explore the option of listing on IFSC exchanges. While the change is expected to attract foreign investments, though it could result in fewer shares being available to the public.
# 4 Economy
4.1 As per data released by Govt on Friday, GDP growth during April-June slowed to a five-quarter low of 6.7% (nominal growth of 9.7%) from a year earlier, as agriculture and trade-related services output eased. This is lower than RBI forecast of 7.1%. Reasons attributed include tepid corporate results and slowdown in government spending. Key features:
- Government expenditure in the first quarter was ₹4.14 lakh crore, down from ₹4.15 lakh crore in the year-earlier period.
- Industrial production growth in the first quarter of FY25 was 5.2%, higher than 4.7% registered a year ago
- Agriculture grew 2%, lower than 3.7% a year ago, while manufacturing expanded 7% from 5% in the first quarter of FY24.
- Gross fixed capital formation, an indicator of investments, grew 7.49% in the quarter, slower than 8.5% year ago.
4.2 Moody’s in its Global Macro outlook 2024-25 released on Thursday
- revised India’s economic growth forecast upwards to 7.2% for CY2024 and to 6.6% for CY2025 from its earlier estimates of 6.8% and 6.4%, respectively, citing strong broad-based growth and signs of a revival in rural demand on the back of improving prospects for agricultural output amid above-normal rainfall.
- potentially higher growth forecasts for India if the cyclical momentum, especially for private consumption, gains more traction.
- India recording growth despite persistence of tight monetary policy and demonstrated progress on fiscal consolidation
4.3 Fitch Ratings on Thursday
- reaffirmed India’s sovereign debt rating at ‘BBB-‘, with a stable outlook, citing the country’s robust medium-term growth prospects and solid external finance position.
- A key factor in the positive outlook is India’s recent progress in fiscal credibility; government’s ability to meet deficit targets, along with enhanced transparency and buoyant revenues, with likely going down of govt. debt.
The global rating mechanism needs to be subjected to an independent review as it is surprising that Fitch has maintained its rating for India at ‘BBB-’ for 18 years now. Its global peers—S&P and Moody’s—also hold similar ratings indicating no progress during the last 18 years in India despite India ranking up globally to 5th largest economy.
4.4 The Cabinet last week has approved the setting up of a dozen industrial smart cities under the National Industrial Corridor Development Programme with an investment of ₹28,602 crore.
- These will operate on a ‘plug-and-play’ model, implying that they will have all infrastructure in place so that businesses can start operations quickly.
- The broader idea is to promote the creation of activity hubs and boost domestic manufacturing.
Conceptually, it seems workable. But we have seen similar announcements in the past, such as for smart cities or even special economic zones, whose operationalisation has been less than impressive. Various other reforms need to be fast-tracked. The proposed cities mustn’t risk ending up as white elephants.
4.5 As per Hurun list released last week
- India minted a new billionaire every 5 days last year!
- 1539 individuals in India with a wealth of at least Rs, 1000 cr.
- 534 individuals with a wealth of Rs 5000 cr.
- 102 NRIs, with nearly 79% being self-made.
- 334 billionaires in 2024, an increase of 75 from the previous year
- Interesting to note that while China experienced a 25% decrease in its billionaire population India saw a 29% increase in number of Indian billionaire population
- Cities represented in the rich list has grown from 10 to 97 in the last decade.
Using another lens, it seems the gap is getting wider due to rising income inequality -with rich becoming richer and richer, poor becoming poorer and poorer- with economic growth benefitting very few. Broad based growth is the need of the hour.
# 5 PE/VC
5.1 As per Venture Intelligence report released last Friday
- PE/VC investments reached nearly $20 billion between Jan-August this year with 579 deals (CY2024) – lower by $4 billion compared with CY2023 same period.
- Investments in August stood at $ 2.2 billion (65 deals) an increase from $1.9 billion (72 deals) in July this year.
Major deals highlighted included Zepto raising $340 million, $334 million raised by DMI finance and Fourth Partner Energy raising $275 million.
5.2 Sundaram Alternate Assets (Sundaram Finance Group) in its report released last week has
- Predicted a 14% CAGR growth for the Indian family offices and a 5% increase in the alternative investments over the next 3 years
- Noted that Alternative Investment Funds (AIFs) are gaining traction among Indian family offices as a preferred tool for accessing private markets and startups.
- Indicated that Indian family offices are increasingly embracing alternative investments, with a projected 5% increase in allocations to 18% over the next three years, which aligns with a global trend, where family offices allocate more than 50% of their assets to alternatives.
- Submitted that AIFs offer a diversified portfolio that mitigates risks compared to single investments, reflecting a strategic move toward diversification, niche investment strategies, and active participation in India’s growth story, particularly through startups and innovative ideas.
The expertise provided by AIF managers in selecting opportunities across the risk-return spectrum is driving this trend, with many family offices opting for co-investments with existing funds to execute high-conviction strategies with minimal operational challenges.
Share of family offices in this asset class is likely to go up.
5.3 The Delhi High Court last week overturned the Authority of Advance Rulings’ (AAR) decision that denied Tiger Global Management the benefits of the India-Mauritius Double Tax Avoidance Agreement (DTAA) during its 2018 sale of Flipkart shares.
- The High Court ruled that Tiger Global’s Tax Residency Certificate (TRC) was sufficient to establish tax residency and qualify for the DTAA benefits, exempting the firm from capital gains tax. This ruling enhances the confidence of foreign investors in India’s tax system, potentially encouraging further investments.
A welcome news from the PE/VC ecosystem perspective.