Do it yourself

JPM Bond Index inclusion (YES Bank) JP Morgan included India's government bonds to its Government Bond Index-Emerging Markets Index (GBI-EM) and assigns the highest weight of 10% in the index. The inclusion will be phased over 10 months, starting from 28 June 2024 to 31 March 2025. We expect the cumulative flows to India to be ~ USD 30 bn, considering USD 23.6 bn flows through passive investments, topped up with investments from some active funds. The new entity on the demand side would be in addition to recent large investments by non-bank entities in the G-sec market, thereby potentially leading to demand exceeding supply of G-sec fresh issuances in any particular year. India 10Y bond yields could fall to 6.45%-6.55% in FY25, assuming a 75bps cut in the repo rate in FY25. However, we are not expecting any meaningful impact on USD/INR as RBI could be seen creating additional buffers to mitigate risks of larger potential outflows in the event of risk aversions. India gets the i...

Continuing from yesterday ( see here ). I am convinced that the current global monetary and fiscal conditions will have an enduring impact on the global financial system, trade, businesses, and markets. We may feel comfortable with the resilient performance of the Indian economy and markets in the past couple of years, but it would not harm if we factor in the global conditions and trends in our investment strategy. In particular, household investors with relatively smaller portfolios need to exercise due precautions to protect their portfolios from a negative shock. I have negligible knowledge of global economics, financial systems, and markets. I therefore usually approach these larger issues with common sense and my elementary understanding of the basic concepts of economics. History, of course, always provides some useful support. I usually study the historical behavior of economies and markets to anticipate the likely actions and reactions of the current set of market participants...

Post the latest meeting of the US Federal Open Market Committee (FOMC), the market narrative is primarily focused on the following five points – (i)       Whether the Fed is done hiking rates or it may hike once more in 2023. A larger section of market participants believes that the Fed may hike another 25bps by the end of 2023 and then pause for 6-9 months before cutting the rates from 4Q2024. Another section is however of the view that the economic conditions are too tight to tolerate another hike. This section believes that the hiking cycle of the Fed may well be over and we may see rate cuts from 2Q2024 itself. (ii)      Whether the treasury yields and other lending rates in the US economy will stay “higher for longer”, as forecast by the US Fed, or we shall see a faster decline, as the economic conditions deteriorate. The higher rates have already started to reflect a slowdown in the US housing market. The rate of bankruptcy fili...

  The recent household finance data published by the Reserve Bank of India has made it to media headlines. Reportedly, the net financial savings of Indian households have crashed to a nearly five-decade low of 5.1% of GDP; while the financial liabilities of households shot up by 5.8% of GDP in 2022-23. Obviously, it is a worrisome trend from many aspects. Traditionally, household savings have been a stable and cost-effective source of funding for both - the government and corporate. High domestic savings provided a critical cushion to the Indian fiscal position from external shocks during the Asian currency crisis, the dotcom bubble, and the subprime crisis. Of course, the weakening of this cushion should be a cause of worry. However, there is nothing surprising in this data. Household savings have been consistently declining for the past many years. I have highlighted this trend on several occasions. For example, check Household savings – 1 , Household savings - 2 , Household sa...

Banking system liquidity deficit worsens (Miscellaneous) As per the latest RBI data, liquidity deficit as measured by fund injections by the Reserve Bank of India (RBI) into the banking system was INR1.47trn as of September 18, the highest since April 2019. The Reserve Bank of India (RBI) injected Rs 1.47 trillion on Monday and Rs 1.46 trillion on Tuesday. Market participants believed that the disbursement of Rs 25,000 crore as the second tranche of incremental cash reserve ratio (I-CRR) will not be enough, and the liquidity might tighten further to Rs 2 trillion in short term due to tax outflows and arrival of the festival season. “For now it looks like going into the festival season there would be more outflow and cash leakage from the system. It will lead to higher deficit for the banking system,” said Naveen Singh, head of trading and EVP at ICICI Securities Primary Dealership. “There are other factors at play. We are not seeing much dollar flows coming into the system and th...

The Federal Open Market Committee (FOMC) of the US Federal Reserve (the Fed) decided unanimously to keep the benchmark fund rate in the range of 5.25% - 5.5%; pausing one of the sharpest hike cycles in the past four decades. Beginning in March 2022, the Fed has hiked the benchmark rate 11 times to the highest since 2001. The latest FOMC decision may be influenced by the recent evidence showing that the hikes already implemented are beginning to impact inflation, despite strong economic outcomes. Notwithstanding, its latest decision to pause, 12 out of 19 FOMC members felt that one more rate hike would be needed in 2023 before the current rate hike cycle ends, as inflation is still running above the Fed’s 2% target. The persistent strength in the economy requires caution as inflation might bounce back again. In particular, FOMC members sounded cautious about the tight labor market, as wage growth has so far accounted for the bulk of price pressures in the service sector, Higher for ...

  Reliance on imported energy, especially crude petroleum, has been one of the weakest aspects of the Indian economy for the past many decades. Though we have made significant progress in the adoption of renewable and clean sources of energy, about 70% of our primary energy demand is still met by coal and crude oil. Renewable energy meets less than 5% of the primary energy and is mostly replacing traditional biomass in the overall primary energy mix. India meets most of its petroleum requirements through the import of crude oil. Notwithstanding the ethanol blending policy, in FY23, over 87% of the domestic petroleum consumption requirements were met through imported crude oil; up from 83.8% in FY19. Despite incentives and many policy changes, domestic oil production in India has consistently declined since peaking in 2011. The current annual production of crude oil in India is around 620 thousand barrels a day; the same level it was in 1995-96, before the New Exploration Licensing ...

Mad (-cap.) dash (Kotak Securities) We see limited point in trying to find fundamental reasons behind the steep increase in stock prices of several mid-cap. and small-cap. stocks. There is no meaningful change in the fundamentals of most companies; in fact, they have worsened in many cases. The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months. Varying degrees of exuberance in the mid-and-small-cap space We do not see many fundamental reasons for the meteoric rise in the stock prices of many mid-cap. and small-cap. stocks in the past few months. The fundamentals of most sectors have not changed much. However, market sentiment is quite exuberant, based on (1) steep increase in the prices of many mid-cap. and small-cap. stocks; (2) large inflows into mid-cap. and small-cap. mutual funds; and (3) huge number of new retail participants in...