Vijay Kumar Gaba

In December 2022, the rate of increase flipped with deposit rates growing faster than lending rates on fresh loans.

·         The weighted average lending rate (WALR) on fresh rupee loans of SCBs increased by 02 bps (basis points) from 8.86% in November 2022 to 8.88% in December 2022.

·         The weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits of SCBs increased by 16 bps from 5.62% in November 2022 to 5.78% in December 2022.

·         Private Sector Banks (PVB) and Public Sector Banks (PSB) have maintained high spreads between lending and deposit rates, with PVBs seeing higher spreads, as banks raised rates amid RBI’s tightening moves. Rate hikes and subsequent faster resets in lending rates vs. deposit rates have led to NIM expansion in the near term however, widening gap between credit and deposit growth amidst tightening liquidity is leading to aggressive pricing of deposits.

·         Expect the uptick in the deposit rate to continue given the widening gap between credit & deposit growth and tightening liquidity conditions. Further, given that the current budget proposals incentivise small savings by raising investable limits is also likely to add an edge to the banks’ deposit chase and rates.

US-China relations turn sour again (Danske Bank)

After a period of some improvement in US-China relations since the Xi-Biden meeting in November, the relationship took yet another turn for the worse following the shoot-down of a Chinese ‘spy balloon’ over the Atlantic. Below is a short Q&A on what happened and how we see the implications.

On Friday last week a large balloon flying over the US started to get media attention. It was suspected to be a Chinese ‘spy balloon’ as it was detected over Montana, a state where the US has nuclear missile sites. China’s Foreign Ministry said the balloon was a Chinese civilian airship used for research, mainly meteorological purposes and that it had deviated from its planned course due to the Westerlies and limited self-steering capability. It stated that “The Chinese side regrets the unintended entry of the airship into US airspace due to force majeure”.

Whether the balloon was indeed intentionally flying over the US is hard to tell and experts differ in their views on the matter. On the one hand, it seems like a strange gamble at a time when China seems to have moved to a softer foreign policy stance and is trying to get the US-China relationship on a more calm footing.

Phillips Capital India Index (PCI) dips (Phillips Capital)

PC India Index for December 2022 dipped due to significant fall in positives index and slight increase in the negatives index. PCI saw -5% contraction mom after two successive months of improvement; -8% lower yoy. The Index was dragged lower by higher commodity prices, capital flows, auto sales, INR depreciation and equities. Support was noted from lower inflation, trade deficit, yields, brent prices, stronger PMI, IIP, cement/steel production, air traffic, port volume, tax collections, LAF and forex reserves.

Data for January: Composite PMI robust; Oil prices rose; INR appreciated

•      Composite PMI was well above the long run average at 57.5 vs. 59.4 in the last month as both manufacturers and services remained robust with slight softening in growth pace.

•      Forex reserves increased by $11bn mom. INR appreciated by 79 paise mom.

•      Net liquidity declined while CP issuances increased.

•      Commodity prices up by 6% mom while oil prices saw 3% increased.

•      FIIs net flow into equities in January was down by Rs 415bn vs. Rs 142bn decrease in the previous month. DIIs became net buyers, net inflows at Rs 334bn vs. Rs 242bn net inflows in last month.

Disinflation And A Potentially Stubborn Fed (Evergreen Gavekal)

For the first time in this cycle, Federal Reserve chair Jay Powell cheerily intoned on Wednesday that “a disinflationary process has started”. Accordingly, the Fed further slowed the pace of tightening—hiking the main policy interest rate by 25bp (to just under 4.75%), as opposed to prior increments of 50bp and 75bp. So given this apparent disinflationary dynamic, why is Powell and his policymaking committee still signaling “ongoing increases” in rates?

First, consider the growing evidence of a slowdown in US inflation (a.k.a., disinflation). The Fed’s favored measure—the price index on personal consumption expenditures—is already trending back toward 2%. Over the last three and six months, annualized PCE inflation has averaged 2.1%, down from 5.0% over the past year, to put it basically on target.

While headline inflation can be volatile, most indicators suggest this disinflation is not “transient”. The less noisy core PCE index is trending lower, averaging an annualized 2.9% over the past three months, down from 3.7% in the past six months and 4.4% in the last year. While Fed vice chair Lael Brainard and other policymakers do not see evidence of an upward wage- price spiral, they must take comfort in the recent slowdown in wage growth. The best measure—the employment cost index—released earlier this week showed wage growth slowing to 5.1% year-on-year in 4Q22, down from 5.2% in 3Q and 5.4% in 2Q. Add in another sub-50 reading from the ISM manufacturing PMI (at 47.4 for January), and this week’s data generally supports the message that existing policy and financial conditions in the US are successfully weighing on demand and price pressures.

Steel: Price hike fails to lift up the sentiment (ICICI Securities)

HRC prices in traders’ market during the week ended 2nd Feb’23 rose further by Rs1,800/te WoW to Rs60,400/te on average- the highest level since June-22 factoring end-Jan’23 and Feb’23 hikes by steel companies. However, rebar market continues to fare better with list price still at a premium of Rs1,500/te to HRC price.

That said, pellet and secondary rebar prices have corrected by Rs500/te as restrictions on sponge iron operations in Odisha have eased out. Regional HRC prices rose US$10/te on average with Indian export price at the highest level of US$690/te. On raw material front as well prices have firmed up, however, we see weakness in global iron ore prices of late as post-holiday demand recovery in China has not been as strong as expected.

We would await more clarity on stimulus and policy in China as key debt and money supply indicators as yet do not show signs of any pick up. Besides, inventory depletion post CNY has been a tad slow.

Union Budget deals a double blow to Life Insurance (Emkay Research)

Union Budget FY24 appears to have dealt a double blow to the life insurance sector via a couple of crucial changes on the personal income-tax front. By tweaking the ‘New Tax Regime’ (launched in the FY21 Budget), the government has attempted to make it attractive – it has brought down taxes under this ‘exemption-free’ regime, thus reducing the tax-saving value of tax-saving instruments (such as life insurance policies) under Sections 80C, 80D, etc.

By removing exemptions under Sec10(10D) of the Income Tax Act, the Budget has also proposed taxing the maturity & surrender amount of Non-ULIP policies (purchased after 1-Apr-2023), if the total premium paid by an individual under such polices is more than Rs5lakh (Rs0.5mn) in a year. ULIP policies have already got a limit of Rs2.5lakh (Rs0.25mn) in the FY22 Budget. On net, the two alterations will have a material impact, with Sec80C/D-related changes hurting growth in the masses segment and the removal of exemptions U/S10(10D) hitting growth of high-ticket non-ULIPs in the affluent segment as well as margins (if players choose to sacrifice margins for keeping the product competitive). Accounting for the changes, we reduce our estimates and longer-term assumptions for life/health insurance companies.

Industrials and Infrastructure (Axis Capital)

Aggregate capex for Railways, Roads and Defence in FY24BE is up 17% at Rs 7.4 trn. Capex is led by Roads (+25%) followed by Railways (+15%) and Defense (+8%). Key PSUs driving capex across O&G, steel, coal, power, renewables and infra saw 17% growth in cumulative allocation at Rs 2.7 trn for FY24. Budget proposals seek to encourage participation of private sector in Green investments. Center’s capital investment outlay for FY24 stands at Rs 10 tn (+37%); including grants-in-aid to states, the effective capex is budgeted at Rs 13.7 trn (+30%).

Capex for new lines, road over/under bridges, track renewal and gauge conversion are up by 20%+. Gross Road capex target (NHAI + MoRTH) for FY24 at Rs 2.6 trn is up 25% YoY.

Earnings so far (Motilal Oswal Financial Services)

The 3QFY23 aggregate earnings of the aforesaid 127 MOFSL Universe companies (representing 51% of total market cap and having 81% weight in Nifty) have been below estimates and have risen only 7% YoY (v/s est. +11% YoY). This aggregate underperformance has been led by a sharp drag from global commodities.

Excluding Metals and O&G, the MOFSL Universe and Nifty both have posted a solid 28% earnings growth (v/s expectations of 25% and 22%, respectively), fueled by BFSI and Autos. Along with Metals and O&G, the Cement sector too has dragged 3Q earnings.

EBITDA margin of the MOFSL Universe (excluding Financials) has contracted 260bp YoY to 13.3%.

Profits of the 35 Nifty companies that have declared results so far have risen 18% YoY (v/s est. 15% YoY), fueled by financials. Excluding these, profits would have grown 12% YoY (v/s est. 9% YoY). Twelve companies in Nifty have reported profits below our expectation, while ten have recorded a beat .

Nifty EPS remains unchanged: FY23 and FY24 EPS estimates remain unchanged at INR822 and INR990 (v/s INR820 and INR990 earlier), respectively, as downgrades in Metals and O&G are offset by upgrades in Automobiles and Private Banks.