Weekend Reflections – Week ending 7th Dec 2024

Week ending 7th Dec 2024

# 1 Markets

While the regulatory diktat in September 2023 to prevent abusing the foreign portfolio investor (FPI) route sparked a sizeable chunk of the aggressive FPI selling in the recent past, they reversed their selling trend in December, recording net equity inflows of Rs 24,454 crore so far this month. While Interest rate sensitive stocks reacted positively to CRR cut by RBI on Friday, BSE Sensex closed almost flat at 81,709, gaining 2.32% on weekly basis, while the NSE Nifty50, gained 2.22% to close at 24,677. Interesting to note that India’s market cap to GDP at 145% ranks 3rd highest despite correction and money raised through IPOs till date at Rs. 1.41 lakh cr – 11x of raised in 2019 at Rs. 12985 cr .

10-year G.Sec yields opened the week negative, tracking UST yields as the investors remained cautious ahead of the MPC meeting. With pausing of rate cuts by RBI, G sec yields sold off by 3-5 bps across most segment of the yield curve and reversed part of the gain seen post weak Q2FY25 GDP release. The 10Y benchmark G-Sec rose and closed at a yield of 6.74% on Friday.

After tech companies talked up how much artificial intelligence is boosting their results S&P 500 and Nasdaq rose nearly rose ~2% last week. With unemployment results showing no signs of weakness, and rate cut fading away, Dow Jones lost its steam and closed lower for the week.

Nomination of conservatist, Scott Besant as Treasury Secy by Trump tempered inflationary expectations and bond yields softened with 10Y closing at 4.14% on Friday.

# 2 RBI

2.1 Key announcements by RBI on Monetary Policy on Friday and their immediate impacts

• Policy rates remain unchanged

• • • RBI’s reasons that adequate liquidity not there for bank to transmit reduction appear unconvincing, as it takes any way 3 months for transmission; we will be losing this entire fiscal now; Food inflation to be replaced by core inflation as being followed by developed markets for better control.

• Real GDP growth for 2024-25 is projected lower at 6.6%

• • Q3 growth as expected revised from 7.2% basis lower Q2 GDP release
  • Lower inflation forecast at 4.8%
• Reduction in Cash Reserve Ratio by 50 bps. to 4% – first reduction since March 2020.
  • Expected to release Rs. 1.16 lakh cr. in the banking system less than Rs. 4 lakh cr. sucked in by RBI due to forex sales and thus inadequate.
  • Bulk deposit rates may come down and lift profitability of lenders by up to 5 bps

Other announcements:

• • Interest Rates on FCNR(B) Deposits to NRIs increased by 150 bps. till March 2025
    • Another short-term measure by RBI to shore up forex reserves 
    • Unlikely to trigger much influx in the short term as current FCNR rates are way below the current ceilings
  • Expanding reach of FX-Retail Platform through linkages with Bharat Connect
    • Addition of access through BBPS will enhance outreach through bank and non-bank apps.
  • Introduction of the Secured Overnight Rupee Rate (SORR) – a benchmark based on the secured money markets.

• To be computed from first 3 hours of trade in Basket Repo and TREPs. Together they constitute 98% of overnight money market operations and thus will improve credibility and transparency of interest rate benchmarks in India.

• Introduction of Podcast facility as an additional medium of communication
  • Easier to stay informed about RBI policies and initiatives, terms and concepts.
• Collateral-free Agriculture Loan enhanced to Rs 2 lakhs from Rs.1.6 lakhs.
  • Simpler for small and marginal farmers to access credit.
• AI solutions to identify mule bank accounts – MuleHunter.AITM
  • This model enables detection of mule bank accounts in an efficient manner basis pilot with two large PSBs 
  • Felt need in times of larger digital scams and thus a welcome move

2.2 Lok Sabha approved 19 amendments to Banking Laws last Tuesday and the key take aways are:

• • Individuals can nominate up to 4 people for deposits, safe custody, and safety of lockers with options for successive or simultaneous nominations.

• Successive nominations ensure that if the first nominee is unavailable nominee next in line will become operative thus ensure continuity; provide flexibility and reduce complications to legal heirs.

• Shifting of submission of Statutory reports by bank to the RBI from reporting Friday to the last day of fortnight/month/quarter.
• Extension of director tenures in cooperative banks from 8 years to 10 years
• Threshold for substantial interest shall be redefined from Rs 5 lakh to Rs 2 crore or 10% of paid-up capital
• Public sector banks [PSBs] gain discretion in setting auditor remuneration currently determined by RBI and Central govt.
• PSBs to transfer unclaimed dividends, shares, and interest or redemption of bonds to the Investor Education and Protection Fund, allowing individuals to claim transfers or refunds from the fund, thus safeguarding investors’ interests. Private sector banks are already doing this under Companies Act.

The amendments would help to improve governance standards, provide consistency in reporting by banks to RBI and improve audit quality in PSBs. Tweaks in Indian banking laws are welcome, but this sector needs a structural shift to enable more credit to small needy businesses. Bank credit to the commercial sector in India has hovered around 50% of GDP far below the figure for most developed countries and China.

2.3 As per CRISIL report released last week,

• RBI’s regulatory initiatives (increased risk weights on banks’ lending to NBFCs and unsecured loans) and asset quality trends will push NBFCs to slow down their growth in AUM to 15-17 % in FY25 and 26 as against 23% growth in FY 24. 
• The unsecured loans and microfinance segments, accounting for 23 per cent of the overall NBFC AUM, are expected to be impacted the most.
• Unsecured lending, which posted a compounded annual growth rate of 45% in the last three fiscals, will see an AUM growth of 15-16 5in FY25 and FY26 and the growth in MFI AUM will be muted.
• Bank lending to NBFCs has remained in the range of Rs 13-13.5 lakh crore since November 2023 and only the large NBFCs backed by strong parents have been able to tap into alternatives like commercial paper and bond markets
• Securitisation volumes to be highest ever this fiscal, as entities look at other funding alternatives.

2.4 As per ICRA report released last week,

• Microfinance companies in India are expected to face a squeeze in profitability in FY25 due to a sharp rise in credit costs and likely compression of interest rate margins – due to tighter lending practices (cap on no of lenders, amount of loan, overall limit) introduced by the sector’s self-regulators impacting business volume negatively.
• NBFC-MFIs to see a modest 0-5% AUM growth on an average in FY25 from a 29% expansion in FY24. This, along with declining lending rates and higher funding costs is likely to moderate the return on managed assets (RoMA) to 0.4-0.8% in FY25, down from a record 3.6% in FY24.
• Overall credit cost to increase to 5.4-5.6% for FY25 against 2.2% in FY24

2.5 RBI revised the transaction limits for UPI Lite to encourage the use of the Unified Payments Interface. 

• The per transaction limit has been raised to Rs 1,000 from Rs 500 earlier. 
• The total limit for offline transactions has also been increased to Rs 5,000 from Rs 2,000

The changes will enable faster, more reliable, and contactless payments for everyday small-value purchases and transit payments by eliminating the need for two-factor verification.

# 3 SEBI

3.1 SEBI on December 5, 2024, advised

• merchant bankers to upload and maintain due diligence documents related to public issues on the repository platform managed by stock exchanges. 
• Upload to be done within 20 days of filing the draft offer document with SEBI and within 20 days of listing on the exchanges from January 1, 2025
• All the documents must be available for SEBI’s supervisory functions

Online platform introduced by Stock exchanges where merchant bankers need to electronically upload and maintain due diligence documents for public issues, would streamline record management and improve access.  This will help bring confidence to investors and improve transparency.

3.2 SEBI on Thursday through discussion paper proposed introducing a close auction session (CAS) to determine the closing price of stocks in the equity cash market.

• Currently, the closing price of stocks in India is determined using the volume-weighted average price (VWAP) of the last 30 minutes of trading. While that facilitates determination of a fair market closing price, it does not allow trades at the exact closing price.
• CAS can be introduced as a call-auction mechanism for determining the closing price of each stock in the equity cash segment, replacing VWAP
• CAS may be implemented as a separate session of 15 minutes from 15.30- 15.45pm. It may be split into four sessions—a reference price determination period, an order input period, a no cancellation period including a random close of order entry followed by the final stage of trade confirmation and order matching.

Major jurisdictions around the world have a closing auction mechanism. Passive fund investing has been growing. As the weightage of Indian stocks in major global indices rises, challenges in tracking indices have emerged for passive funds. The introduction of CAS is thus a welcome move and would reduce price volatility at market close, especially on index rebalancing and derivative expiry days, ensuring better execution of large orders at the closing price.

3.3 SEBI last Friday issued a draft circular providing clarifications to its recent prohibitions issued to regulated entities to terminate their existing contracts with unregistered financial advisers by January 2025. In a clarification issued on Wednesday, the market regulator cited the confusion in the media about the obligation of digital platforms to be recognized as Specified Digital Platforms [SDPs] as the earlier circular excluded associations that were recognized as SDPs based on their ability to take preventive and corrective actions against prohibited activities. But finfluencers conveniently evaded as the circular was ambiguously worded and open to interpretation. 

• The draft circular aims to remove the ambiguity and apply to all entities regulated by it, including asset management companies (AMCs), investment managers of alternative investment funds (AIFs), infrastructure investment trusts (InvITs), real estate investment trusts (REITs), recognized stock exchanges, clearing corporations and registered depositories. 
• Association is clarified to involve transactions of money, client referrals, IT System interactions or other similar connections regardless of terminology. Collaboration for branding or marketing or investor education is permitted. Education should not involve giving advice or recommendation about securities using recent market price data. 
• It is neither mandatory for digital platforms to seek recognition as a SDP, nor are they directly governed by SEBI regulations

With the growing influence of social media on investment decisions, the risk of misinformation and half-baked advice has increased significantly. SEBI’s move to clarify the regulations, is both timely and necessary as these boundaries would protect retail investors. 

# 4 Economy

4.1 The Organization for Economic Co-operation and Development (OECD) in its Economic Outlook released on Wednesday, last week

• has raised India’s economic growth forecast for FY25 to 6.8% from 6.6% projected in May, driven by strong investment and agricultural output.
• Rapid increases in public infrastructure spending and ongoing strong private consumption growth in India are projected to sustain real GDP growth of just under 7% in 2025-26 and 2026-27.

4.2 As per HSBC India Activity Index released last week,

• Services Business Activity Index slid to 58.4 from 58.5 in October vs. 56.9 in Nov 2023.
  • Marginal fall in service activity was due to slower growth in new orders and output
  • Services growth should hold as better consumption amid a rural recovery boosts domestic trade, and government spending supports purchasing power
• Mfg. PMI fell to a 11-month low of 56.5 in November vs 57.5 in October
  • pricing pressures, along with fierce competition, hurt demand, dragging the headline index lower. 
  • The rate of new order intakes in November was the second weakest in 11 months.
• Composite PMI dropped to 58.6 in Nov from 59.1 in October 

As per report Services firms remain optimistic about the business outlook for the coming year, with confidence reaching its highest level since May. It has been above the 50-point threshold that separates expansion from contraction for more than 40 straight months.

4.3 As per UBS Billionaire Ambitions report released last week

• India, ranks third globally, 
  • With no of billionaires growing to 185 
  • With the combined net worth of its billionaires nearly tripling to $905.6 billion in 10 years as of 2024 
  • With 42% increase from $637.1 billion in 2023
• India (185) ranked third behind US (835) and China (427)
• Addition of 32 billionaires in the past year, reflecting a 21 per cent increase, and a remarkable 123 per cent growth since 2015. 

4.4 As per data released by DPIIT released last week,

• FDI in India rose by 45 per cent y-o-y to $ 29.79 bn. in H1FY25 vs $20.5 bn in H1FY24.
• On Q-o-Q basis inflows were at $13.6 bn in Q2FY25 vs $9.52 bn in Q2FY24.
• Total FDI, which includes equity inflows, reinvested earnings and other capital, grew by 28 per cent to $ 42.1 billion in H2FY25 from $33.12 billion in H1FY24.
• FDI in services has increased to $5.69 bn. during H1FY25 vs $ 3.85 bn in H1FY24.
• Inflows rose in services, computer software and hardware, trading, telecommunication, automobile, pharma and chemicals this fiscal.

During H1FY24, inflows rose from major countries, Mauritius (USD 5.34 billion), Singapore (USD 7.53 billion) US (USD 2.57 billion), the Netherlands (USD 3.58 billion against USD 1.92 billion).

4.5 As per Govt data released last week,

• Around 92,000 patent applications were filed in India during the last financial year, signifying India’s growing maturity as a hub for technological and scientific development, 

This means every six minutes one new technology is seeking IP protection in India,