Weekend Reflections – Week ending 3rd August 2024

Week ending 3^rd August 2024

# 1 Markets

After a volatile period, the market appeared stabilizing with reduced volatility till Thursday. The India VIX dropped 2.3% on Thursday and nearly 7% in July. The benchmark index outperformed peers like S&P, Hang Seng, FTSE, and Nikkei, driven by both domestic and foreign investors. This was, however, short lived.  In the BSE 500, stocks trading above a 50 PE ratio increased from 93 pre-COVID to 228.  Heightened valuation concerns complimented by geopolitical tensions prompted correction on Friday, with the Sensex falling 900 points following global selloffs with BSE and NSE closing lower at 80981 and 24762 respectively.

The bond market remained strong, with foreign investment in Indian government securities via the Fully Accessible Route (FAR) exceeding $9 billion this year. The 10-year yield closed at 6.9% on Friday. The RBI has excluded new 14-year and 30-year government securities from the FAR to manage the rupee’s appreciation caused by inflows in sovereign bonds.

Fears of a US recession caused significant selloffs, with Intel shares dropping nearly 30% and the Nasdaq falling by 3%. Major US indices closed the week with a 700-point loss. The US Federal Reserve maintained its policy rate at 5.25%-5.5%, with cautious optimism about labour market normalization.  The US job market weakened, with only 114,000 jobs added in July and the unemployment rate rising to 4.3%. This data release on Friday raised doubts about the Fed’s decision on Wednesday to hold borrowing costs steady. Taking cue from Fed’s decision on probability of cutting rates in September, US 10Y came down lowest since Dec 2023 to remain below 4% and closed at 3.79% on Friday.

The Bank of England cut interest rates from a 16-year high, reflecting divided opinions on inflation pressures.

# 2 RBI

2.1 RBI on Tuesday issued a Master Direction on the Treatment of Wilful Defaulters and Large Defaulters under which banks and NBFCs will have to examine the ‘wilful default’ aspect in all non-performing asset accounts with outstanding amounts of Rs 25 lakh and above.

• Lenders should formulate a non-discriminatory board-approved policy that clearly sets out the criteria based on which the photographs of persons classified and declared as wilful defaulters shall be published.
• A lender will identify and classify a person as a ‘wilful defaulter’ by following a specified procedure. The evidence of wilful default will be examined by an identification committee,
• If a wilful default is observed in the internal preliminary screening, the lenders will complete the process of classification/declaring the borrower as a wilful defaulter within six months of the account being classified as NPA.

The primary objective of the directions is to provide for a non-discriminatory and transparent procedure, having regard to the principles of natural justice, for classifying a borrower as a wilful defaulter by the lenders, following Supreme Court ruling. The directions also aim to put in place a system to disseminate credit information about wilful defaulters for cautioning lenders to ensure that further institutional finance is not made available to them.

2.2 RBI released last week, Report on Currency and Finance 2024, its annual publication. Key highlights on digitalisation is captured in brief.

• Digitalisation is driving growth in India’s services exports and lowering remittance costs.
• The Reserve Bank’s initiatives for internationalisation of home-grown payment modes, cross-border fast payment network linkages and knowledge and experience sharing with peers are energising the transformation of its digital public infrastructure as a global public good.
• digitalisation will accelerate the internationalisation of the rupee. This will lower transaction costs for cross-border trade and investments and reduce exchange rate risk.

       Digital Economy

• The digital economy currently accounts for 10% of India’s GDP. By 2026 the digital economy is expected to double, contributing 20% to the GDP driven by rapid advancements in digital infrastructure and financial technology.
• There has been significant growth in digital payments with a CAGR of 50% in volume and 10% in value terms between 2017-18 and 2023-24.
• Over two lakh gram panchayats have been connected through Bharat Net in the last decade, enabling the provision of services like e-health, e-education and e-governance in rural areas.
• India’s cost per gigabyte (GB) of data consumed is the lowest globally at an average of Rs. 13.32 per GB.
• Collaborating with other nations to develop digital identity solutions under the Modular Open-Source Identity Platform (MOSIP) programme. Inter-linkage of the UPI with fast payment systems of other nations like Singapore’s PayNow, the United Arab Emirates (UAE) Instant Pay Platform (IPP) and Nepal’s National Payments Interface (NPI) for cost-effective and fast remittances.

• Average cost of remittances, through FinTech’s was the lowest at 4.2% compared to 5.4 % through money transfer operators and 11.5 % through banks for every $200 remitted in 2023
• India already has the highest relative artificial intelligence (AI) skill penetration rate and has seen a 16.8% jump in AI talent recruitment, indicating the growing shift towards digital-intensive roles.

       Financial Inclusion and Digital Payments

• A significant % (65%) of personal loans are availed by borrowers aged less than 35.
• The adoption of mobile money has increased household resilience to economic shocks and improved sales for firms.
• Internet penetration in India stands at 55.3% which is below the global average of 67.1%
• India is the No 1 receiver of remittances in the world, accounting for 13.5 per cent of the total, with its share increasing over time; estimated to increase to around $160 billion in 2029 from $ 115 billion in 2023.
• The remittances-to-GDP ratio for India has gradually increased from 2.8 per cent in 2000 to 3.2 per cent in 2023, and now exceeds the ratio of gross FDI inflows to GDP (1.9 per cent in 2023), providing strength to India’s external sector.
• Going forward, India is poised to be the world’s leading supplier of labour as the country’s working age population is expected to rise till 2048, even as this number has started dwindling for major AEs (advanced economies).

 

       Challenges and Recommendations

• Strengthening cybersecurity measures to mitigate the increasing cost and frequency of data breaches.
  • The average cost of data breaches in India reached $2.18 million in 2023, marking a 28 per cent increase since 2020, but still below the global average of $4.45 million in 2023, a 15% increase over three years. Globally, cybercrime costs are expected to reach $13.82 trillion by 2028, up from $8.15 trillion in 2023.
  • The most common attacks in India are phishing which was at 22 per cent and stolen or compromised credentials was 16 per cent
  • Addressing challenges such as data privacy, third party risks and fraud claims.
• Improving mechanisms to handle complaints related to digital payments.
• Establishing self-regulatory organisations in the fintech industry to promote responsible practices and maintain ethical standards.
• Enhancing cyber infra to handle the growing no of digital transactions without compromising security.
• Increased inter-connectedness may lead to systemic risks.

2.3 The RBI on Tuesday in its Master Directions on Cyber Resilience and Digital Payment Security Controls for non-bank Payment System operators [PSOs] has revised its guidelines, which include:

• PSOs will have to put in place real time fraud monitoring solution to identify suspicious transactional behaviour and generate alerts.
• PSOs will have to ensure that online session on mobile application is automatically terminated after a fixed period of inactivity and customers are prompted to re login.
• PSOs should ensure that an authenticated session, together with its encryption protocol, remains intact throughout an interaction with the customer.
• card networks should facilitate implementation of transaction limits at card, bank identification number (BIN) as well as at card issuer level.
• the card networks should institute an alert mechanism on a 24×7 basis, to be triggered to the card issuer in case of any suspicious incident.
• card networks will have to ensure that card details of the customers are stored in an encrypted form at any of their server locations

2.4 RBI on Wednesday declared its plan to publish a framework on Alternative Authentication mechanisms.  The framework provides the broad principles which have to be complied with by all the participants in the payment chain while using various forms of authentication. The RBI stated that all payment system providers and participants will have to ensure compliance with this framework within three months from the date of issue of these direction

• It has proposed alternate methods of additional factor authentication (AFA) for digital payments including password, PIN, software token and biometrics like fingerprint.
• AFA is proposed for all digital transactions done using cards, prepaid instruments and mobile banking channels. While no specific factor was mandated for authentication, the digital payments ecosystem has primarily adopted SMS-based OTP as AFA.
• All digital payment transactions, other than card present transactions, will have to ensure that one of the factors of authentication is dynamically created, after the initiation of payment, is specific to the transaction and cannot be reused

 

2.5 As per RBI publication last week, RBI’s Digital Payments Index (RBI-DPI) stood at 445.5 at the end of March 2024 compared to 418.77 in September 2023 and 395.57 in March 2023.

• Digital payments across the country registered a 12.6 per cent on-year rise as on March 31, 2024, according to RBI’s index that measures the adoption of online transactions.
• The index comprises five broad parameters that enable the measurement of the deepening and penetration of digital payments in the country over different periods.
• These parameters are Payment Enablers (weightage 25 per cent); Payment Infrastructure Demand-side factors (10 per cent); Payment Infrastructure Supply-side factors (15 per cent); Payment Performance (45 per cent); and Consumer Centricity (5 per cent).
• The index is published on a semi-annual basis from March 2021 onwards with a lag of four months.

# 3 SEBI

3.1 As per consultation paper released last week, SEBI has proposed tighter derivatives regulations to boost market stability and protect small investors:

• The regulator is proposing to allow weekly contracts of one index of an exchange. If this comes to pass, there will be two expiries a week compared to everyday expiry at present.
• The minimum size required for the contract is Rs 5 lakh to Rs 10 lakh, which was set in 2019 is proposed to be increased to Rs 15-20 lakh in the first phase, and then Rs 20-30 lakh in the second phase.
• Proposes collection of upfront payment of Option premiums as well.
• Strike interval to be uniform near prevailing index price (4 percent around prevailing price) and the interval to increase as the strikes move away from prevailing price (around 4 percent to 8 percent).

SEBI noting that 92.5 lakh retail traders and proprietorship firms suffered trading losses amounting to Rs 51,689 cr in FY24, proposes to bring the above measures aimed at enhancing investor protection and market stability.

3.2 SEBI plans to create a new system to speed up approvals for initial public offers (IPOs) and other fund-raising plans of corporates.

• SEBI plans to create a template where IPO-bound companies would need to just fill in the blanks to get the go-ahead.
• SEBI is also developing an artificial intelligence tool to verify IPO offer documents being filed by companies for faster approvals.
• SEBI is also working on a new process of fundraising for listed companies, which will be a combination of rights issues and a preferential share allotment.

It means that the entire end-to-end process can be completed in 23 days as compared to even a preferential allotment which at present takes 42 days as per SEBI. Under the proposed innovation, the regulator is eliminating the need of merchant bankers as the fundraising document will be a simple two-page one stating the purpose for raising money.

3.3 SEBI Chairperson launched last week India’s first dedicated website for Passive Funds by NSE.

• This new platform (indiapassivefunds.com) offers detailed industry data, fund-specific information, and tools for comparing funds based on various parameters, including underlying index, AUM, tracking error, and trading volume.
• The website aims to improve transparency and accessibility in the passive funds sector.

Going by the recent surge in demand for Passive Funds, this move by NSE is a right move facilitating informed decisions by retail investors.

3.4 SEBI has floated a consultation paper proposing to include more people in the ambit of its insider trading regulations, including those who may be unofficially connected to company officials in possession of price-sensitive information.

 

• Connected persons are deemed to have access to unpublished price-sensitive information (UPSI). They are associated with a company during six months before the commissioning of an insider trading act either directly or indirectly in any capacity.
• SEBI reasoned that certain categories of persons who are not covered under the definition of connected persons may still be in a position to have access to UPSI due to their close relationship with such connected persons.
• Paper proposes to rationalise the definition of relative in line with the definition of relative under the Income Tax Act, to include spouse, sibling, sibling of spouse, sibling of parent, or lineal ascendant or descendant.

# 4 Economy

4.1 As per data released by Commerce Ministry on Wednesday

• For the first quarter (April-June 2024), the eight core industries output grew 5.7 per cent, lower than 6 per cent in same period last fiscal. These 8 core industries comprise 40.27 per cent of the weight of items included in the Index of Industrial Production (IIP).
• Pulled down by a high base effect despite a strong show from coal and electricity sectors, on monthly basis, the country’s eight core industries output growth slid to a 20-month low at 4 per cent in June.

4.2 As per HSBC India Manufacturing Purchasing Managers’ Index, July no stood at 58.1 compared with 58.3 in June.

• India’s manufacturing activity appeared to have slowed marginally in July amid favourable demand conditions and high employment levels even as inflation pushed up input costs
• Key positive developments included one of the fastest expansions in international sales for over 13 years. Stronger demand from Asia, Europe, North America and the Middle East led to a robust increase in international sales in July.

4.3 A World Bank study released on Thursday warned that more than 100 countries—including India, China, Brazil, and South Africa—face serious obstacles that could hinder their efforts to become high-income countries in the next few decades. The report provides a comprehensive roadmap to enable developing countries to escape the “middle-income trap”, proposing a “3i strategy” for countries to reach high-income status. As per the report

• it will take India 75 years, China more than 10 years, and Indonesia nearly 70 years to reach one quarter of the US per capita if they stick to current strategies.
• Drawing on lessons of the past 50 years, the report finds that as countries grow wealthier, they usually hit a “trap” at about 10% of annual US GDP per person—the equivalent of $8,000 today. The report calls it the ‘middle-income trap’ because that amount is in the middle of the range of what the World Bank classifies as middle-income countries.
• India needs to adopt a ‘3i’ strategy with focus on investment, infusion, and innovation.
  • Low-income countries can focus solely on policies designed to increase investment—the 1i phase, the report said.
  • But once they attain lower-middle-income status, they need to shift gears and expand the policy mix to the 2i phase: investment and infusion, which consists of adopting technologies from abroad and spreading them across the economy.
  • At the upper-middle-income level, countries should shift gears again to the final 3i phase: investment, infusion, and innovation. In the innovation phase, countries no longer merely borrow ideas from the global frontiers of technology—they push the frontier.

4.4 As per data released by Controller General of Patents, Designs & Trademarks (CGPDTM)

• Patents approved for non-resident Indians and entities stood at 74.46 per cent in 2022, which is among the highest in any major economy globally. The comparable number in the case of China stood at 12.87 per cent
• Driven by increased applications in sectors such as chemicals, pharma, computer science and information technology, domestic patent applications in FY24 have for the first time outpaced foreign applicants, even though foreign entities maintain a dominant share of patents granted in India, at nearly two-thirds of the overall applications cleared.