Vijay Kumar Gaba

Credit-Deposit ratio to moderate after withdrawal of large currency (CARE Ratngs)

RBI announced to withdraw Rs. 2,000 denomination banknotes on May 19, 2023. The total value of these banknotes in circulation constitutes Rs. 3.62 lakh crore as on March 31, 2023.

The addition to the banking deposits due to withdrawal of Rs 2,000 banknotes is not anticipated to be material even under various scenarios which assume that 25%-50% of the currency remains as deposits with the banks. In percentage terms, the additions are expected to be 0.5%-1% of overall deposits in the banking sector. The banking system liquidity was already in surplus at the end of April 2023. The addition of Rs 1.0 lakh crore to 1.8 lakh crore over a period of four months (June 2023 to September 2023) will inject significant short-term liquidity into the banking sector over the next 2 quarters and is likely to reduce the banking sector’s dependence on short term CDs in the near term to some extent and the short-term deposit rates may ease a bit thereby muting the impact of rising deposit rates on NIMs. Even though the time frame of four months is given, CareEdge expects this to be front loaded due to the behavioural pattern of the masses. The banks may use incremental deposits to increase credit growth. Liquidity increase may impact RBI’s OMO during Q1FY24 and Q2FY24.

Credit offtake rose by 15.5% y-o-y for the fortnight ended May 5, 2023, compared to 11.8% from the same period in the last year (reported May 6, 2022). Sequentially, it increased by 0.3% for the fortnight. In absolute terms, credit outstanding stood at Rs.139 lakh crore as of May 5, 2023, rising by Rs.18.6 lakh crore from May 6, 2022, vs 12.7 lakh crore in the same period from the last year. The credit growth continued to be driven by a lower base of the last year (which will likely abate in FY24), unsecured personal loans, housing loans, auto loans, higher demand from NBFCs, and higher working capital requirements.

Credit offtake has remained robust even amid the significant rise in interest rates, and global uncertainties related to geo-political, and supply chain issues. The growth has been broad-based across the segments.

Personal Loans and NBFCs have been the key growth drivers, while other manufacturing-oriented segments could also drive growth. Meanwhile, credit growth is expected to be in sync with the GDP growth in FY24. A slowdown in global growth due to elevated interest rates, and geopolitical issues could impact credit growth, however, the Indian financial system is on more robust footing, vis-a-vis its global peers.

Rural checks: Q1FY24 starts on a weak note (Elara Capital)

Decline in crop prices drags realization: Our rural channel checks show rural demand remains sluggish in April and in the early parts of May as delayed harvest and a decline in the price of key Rabi crops have dragged farmer realization. While the impact of unseasonal rains is not found to be significant, the quality of output has been hampered. Relaxation of quality norms for crop procurement domestically and the decline in global prices have had an impact with prices of key crops declining.

Fall in key input prices yet to be reflected on the ground: The sharp decline in input prices of key agrochemicals is yet to be felt on the ground except in South India, as there was high-cost inventory in the system. We expect the impact of lower agrochemicals prices to be felt from the Kharif season.

Sluggish FMCG demand; Summer portfolio hit in the early days: Delayed harvest and weak realization have dragged FMCG sales. Our distributor checks show volume offtake was weak in April. Further, unseasonal rains and lower-than-usual mercury levels have led to a sharp demand contraction for a usual Summer portfolio for FMCG brands, such as beverages, which saw a huge reduction. Demand sensitivity to prices was found to be high for entry-level stock keeping units (SKU), especially for INR 5-10. Price hikes were passed on in higher SKU, suggesting entry-level demand remains weak. We expect FMCG companies to report sluggish volume in Q1FY24. Moreover, our checks suggest price cuts of inputs have yet to be passed on fully to end-consumers even as grammage hikes have been reported in soaps, detergents, biscuits, and processed food. Unless there is a sharp rise in spend on ads, promotions and freebies, FMCG should be able to report healthy margin in Q1FY24 as well.

Milk prices near their peak; expect a decline from CY24: Our checks show milk output is catching up gradually, with the deficit likely to reduce materially by end-CY23, resulting in lower prices. The impact of COVID-19 and lumpy skin disease on milk supply is beginning to wane and supply is set to rise materially during November-December 2023. This should provide a respite to companies, such as Jubilant FoodWorks, which have seen significant raw materials inflation due to rise in cheese prices.

Good start to the marriage season gives fillip to 2W demand: Our checks show the marriage season has seen a good recovery in demand; hence, entry-level demand for bikes should see improvement on sequential basis. The traction also was good in the two-wheeler category this marriage season as there was preponement of marriages, owing to Adhikmas (additional month in the Hindu calendar), which has reduced the number of auspicious dates in the later part of the year. Supply chain issues for brands, such as Honda, seem to be having a positive impact on demand for Hero MotoCorp bikes.

Currency outlook (Bank of Baroda)

INR under pressure: After remaining stable for most part of the last few months, INR has come under pressure in the last few sessions. In May’23, INR has depreciated by 0.9%. However, bulk of the weakness in INR can be traced back to the last couple of sessions. In fact, since 12 May 2023 (when INR was last below the 82/$ mark), INR has depreciated by 0.6%. Prior to this, INR was fairly steady in a narrow range of 81.5-82/$. This was underpinned by robust macro fundamentals, improvement in external position, lower oil prices and buoyancy in FPI inflows.

So what are the reason behind INR’s rather abrupt and sharp fall?: The most compelling reason for the rupee depreciation is a strength in dollar. In the last few sessions, dollar has once again strengthened amidst strong macro data from the US and hawkish Fed-speak.

This has resulted in markets repricing the trajectory of Fed rate path. While markets widely anticipated that the Fed was done with its rate hike cycle after a final 25bps rate hike last week, macro data since then has dimmed those expectations. Strong labour market, rebound in housing sector, more than expected uptick in households’ inflation expectations as well as positive developments surrounding US debt ceiling have all contributed to the belief that the Fed rate may still be behind its peak.

Reinforcing this view, several Fed members have gone on record to say that inflation still remains a big challenge, warranting even higher rates. As a result, DXY has strengthened by 1.1% in the last 3 trading sessions alone. Most global currencies have seen depreciation.

Another reason, though not as significant, is a moderation in FPI inflows. FPI inflows which were showing some traction since the beginning of the month have lost momentum amidst a weakness in domestic equity markets and safe haven flows.

Will the trend continue?: With the changing narrative around US Fed rate path, some short-term pain for the INR cannot be ruled out. However, the extent of INR deprecation is likely to be mild, aided by effective intervention by the RBI. Fed Chair’s testimony, due later today, will be key in determining the future trajectory of rates and dollar. While the dollar may strengthen in the short-term, as investors await more clarity on the Fed rate trajectory, it is likely to be temporary. Hence, we continue to remain bearish on the domestic currency over the long-term. This will be reinforced by improvement in external outlook, range-bound oil prices, foreign inflows and buoyancy in remittances and services receipts.

Copper price slides as global demand drops sharply (Financial Times)

The price of copper has widened to the biggest discount against its futures equivalent in almost two decades, in a warning sign of a sudden weakening in global demand as China’s economic rebound stalls.

Copper for settlement in two days was $66 cheaper on Monday than buying a contract to deliver the metal in three months’ time, a difference that traders said reflected concerns that China’s industrial rebound was not materialising. The gap between the two prices is the largest since 2006, according to the London Metal Exchange.

The sharp fall in spot price reflects a rapid rise in stockpiles of the metal outside China in LME warehouses, as US and European industrial activity begins to slow after a year of rapid interest rate rises.

Known as Dr Copper for its ability to gauge the health of the global market, the metal is widely used in buildings, infrastructure and household appliances.

Natalie Scott-Gray, base metals analyst at broker StoneX, said that copper prices were starting to be driven by real world signs of weak demand rather than big macroeconomic factors, such as the US dollar and sentiment towards China’s reopening.

“It’s the first physical evidence we’re seeing that demand is being impacted worse than expected in the west,” she said. “It’s the pace of change that has caused the gap”.

The price of copper has fallen 11 per cent in a month to almost $8,000 per tonne, its lowest level since November, in part because China has not grown as fast as expected since it lifted its tough coronavirus restrictions near the end of the last year.

Positive sentiment around the reopening of Asia’s biggest economy helped leading industrial metals to rally more than a quarter between November and January.

“It hasn’t been as dire as this for many a year,” said Al Munro, metals strategist at Marex, a London-based broker. “The bullish scenario was all based on a China rebound which hasn’t materialised as we in the west suffer from an economic slowdown.” (Read more)

India steel index remains in negative zone; near-term outlook bleak (SteelMint)

SteelMint's flagship India Steel Composite Index, a barometer of the domestic steel market, edged lower by 0.8% w-o-w to 150.4 points on 19 May, 2023 compared with 151.6 points, as assessed last on 12 May.

Notably, the Flat Steel Composite Index slipped sharply by 1.2% while the longs composite index witnessed a drop of 0.3% w-o-w.

Amid the general weakness in the domestic steel market, prices have been on a decline; however, flat steel prices seem to be more influenced by global trends, partly due to export market exposure. Long steel prices, on the other hand, are also battling weak demand but the upside comes from low availability of ferrous scrap.

·         Domestic steel prices subdued amid global downturn

·         Coking coal prices drop sharply, bottom not in sight

·         Scrap shortage likely to keep IF/EAF steel market supported

Agri input: NPK producers better placed than DAP (Elara Capital)

The Ministry of fertilisers has reduced H1FY24 Nutrient Based subsidy (NBS) on nitrogen (N), phosphates (P), Potash (K) and sulphur (S) by 22% to INR 76.5/kg, 39% for INR 41.0 per kg, 33% for INR 15.9/kg and 54% to INR 2.8/kg, respectively, vs Q3FY23 subsidy. Based on existing DAP inventory, our channel checks show manufacturers stand to make hardly any profit. NPK remains profitable for the industry.

DAP manufacturers to have a hard time: DAP manufacturers that have an inventory of existing finished goods or raw materials may not incur any material profit. If they are producing through new raw material stock, especially ammonia, then profitability may sustain, given ammonia prices have fallen by more than 50% since March to ~USD 250/tonne. Increased competition from importers is putting pressure on liquidation of domestic stocks.

Imported DAP more profitable than domestically manufactured: At the current subsidy rates, DAP imports below USD 600/tonne are more profitable than domestically manufactured ones. In the past week, DAP prices fell to USD 500/tonne from USD 550/tonne. With declining ammonia prices globally, DAP prices may fall further, implying imports are likely to continue to rise in India in FY24.

NPK manufacturers to make good profit, but lower than H2FY23: NPK manufacturers continue to make good profit even on existing stocks as the phosphate component is lower in other grades except in DAP (18:46:0:0). Profitability would increase further based on newer stocks of ammonia.