Do it yourself

In a keenly watched two-day meeting, the first after the inauguration of the new US President, the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) decided to pause its kept federal fund rates in 4.25%-4.5% range, after cutting it overall by 1% over its three previous meetings. The decision to pause is governed by a strong and resilient labor market and persisting inflation.

In a post meeting press interaction, Fed Chairman Jerome Powell noted that “The unemployment rate has stabilized at a low level in recent months, labor market conditions remain solid, and Inflation remains somewhat elevated.” He further added that the Fed needs to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.”

Most notably, he emphasized that we're meaningfully above the ‘neutral rate’. He said, “I have no illusion that anyone knows precisely how much that is and but having cut 100 basis points means that it's appropriate that we not be in a hurry to make further adjustments.” (‘Neutral rate’ is a fed rate that is considered neither stimulative nor restrictive of growth under the current circumstances.)

Higher for longer: The market participants have taken this to imply that the current rate cut cycle is certainly not over and may resume after a pause, as the Fed gathers more evidence on inflation. Nonetheless, analysts now appear less sanguine about the lower bound of the present rate cut cycle. The consensus amongst them is emerging that the long-term bottom rate may have risen to 3% from the earlier estimates 2.5%. The ‘Fed pause’ is also being influenced by uncertainties surrounding the new administration's direction - on fiscal, trade, and government spending matters. The Fed officials noted “they don't intend to react until policies reach the implementation stage and begin to impact incoming economic data”.

Markets: Post the Fed decision, stock prices ended lower (S&P500 -0.5%), USD marginally stronger (DXY +0.2%) and benchmark bonds stronger (US 10yr Yield -0.37%).

RBI: The ‘Fed pause’ has made the February 06^th rate cut by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), less certain. There are however more chances that RBI may change its stance to ‘accommodative’ from ‘withdrawal of accommodation’, signaling now growth is a priority over inflation.

The 3-day bi-monthly meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) begins today. This would be the last meeting before presentation of the Union Budget for the year FY26. The members of the MPC would draw inputs from the latest national accounts (2QFY25 GDP data); October 2024 inflation data; October 2024 Professional managers’ survey results; September 2024 IIP estimates; November 2024 PMI and core sector growth data; April-October fiscal balance data; global developments (political and geopolitical); global inflation, rates, currency and market trends; expert opinions and views of the members of MPC; and assessment of the current and future situation provided by the staff of RBI.

The statement of the MPC on macroeconomic outlook and likely direction of the monetary policy will be a key input in preparation of the Union Budget for FY26. However, the market participants’ interest in the MPC meeting appears limited to whether, or not, at 10AM on 6^th December 2024, the RBI governor announces a repo rate cut and/or a cut in the cash reserve ratio (CRR). Some TV show panelists might also bother to note the downward revision, if any, in the growth estimates for FY25.

If the MPC decides to maintain a status quo on its policy stance – considering growth slowdown a temporary blip expecting a recovery from 3QFY25; and continue to accord higher weightage to still elevated inflation and highly uncertain and volatile global conditions, the market participants may be hugely disappointed.

Not to cut: In the October policy statement, the governor had adequately hinted about its preference for price stability over growth (see here). Perhaps RBI is much more conscious about the looming external threats, especially the balance of payment situation if there are sudden FPI outflows; or the FDI flows get restricted; or remittances are affected.

Or to cut: In the recent weeks, RBI has allowed USDINR to sustainably breach 84 mark. It appears that it may want USDINR to weaken further before Trump takes over the US presidency on 20^th January, and urges its trade-surplus trade partners to strengthen their currencies. We have seen a similar weakness in USDCNY also, for example. A token 25bps or an aggressive 50bps rate cut could drive USDINR to 86 in near term, providing RBI a leverage to engineer a ~5% USDINR appreciation to ~83 level in the next three months.

In either case, the transmission of the lower rates may not be in the corresponding measure, as RBI might continue to control credit growth and liquidity to reign inflation, asset quality and excessive unsecured lending. I therefore would not expect a CRR cut. I am however mindful that the market is pregnant with the hope of a CRR and/or repo rate cut and no action in this regard may lead to a sharp sell-off in financial stocks, especially NBFCs.

The market participants may also take note of the following three potential near term risks:

·         Besides the real GDP growth, the nominal GDP growth has also fallen to 9% in the 2QFY25. A lower nominal GDP growth directly impacts the tax collections and corporate profitability. November manufacturing PMI is at 11 months low. Core sector growth has also been low in 3QFY25. Expecting an immediate revival of growth in 3QFY25 may not be prudent; and the RBI may not mind a transitory higher inflation to boost nominal GDP growth.

·         The president-elect Trump has explicitly threatened the BRICS nations to refrain from any misadventure that would impact supremacy of USD. It may purely be rhetorical to gain some upper-hand in trade/sanctions negotiation with Xi and Putin. Nonetheless, it could cause higher volatility in the global markets. It becomes critical given that BRICS members supply two thirds of global fossil fuels.

·         The outgoing president Biden has provided a complete pardon to his son, who was facing multiple criminal charges in the US. Biden had earlier categorically denied this favor to his son. Experts are interpreting this as an indication of rising fear of a widespread witch hunt by the Trump administration. The witch-hunt, if it does take place, may not remain restricted to the domestic political opponents of Trump. 

I shared some of my random thoughts with the readers last week (see here). Many readers have commented on my post. Some readers have raised some pertinent questions and also provided very useful feedback. Based on the readers’ comments, questions and feedback, I would like to share some more random thoughts. It is however important to note that I am a tiny insect living in a cocoon of my own. I cannot comment intelligently on the international markets, policy matters and geopolitics. Nonetheless, I reserve my rights to form strong views on global and domestic developments concerning markets, policies and geopolitics, for my personal strategy purposes.

The US debt end game

The current state of the Fed balance sheet and the US public debt is certainly not sustainable by any parameter. It is a matter of debate how the US government and the Federal Reserve would make fiscal and monetary corrections and eventually return to an acceptable level of public debt without pushing the economy into a deep recession (hard landing). One of the most talked about resolutions to this conundrum is to keep bond prices lower and buy back aggressively over the next few years. That may be one of the easiest ways to return to fiscal sanity. Creating an artificial shortage of USD and forcing UST holders to sell cheap could be one of the means to achieve this target. To create USD shortage, a reverse carry trade might be induced, by narrowing the yield spreads, besides reducing CAD through tariffs and other trade restrictions.

For context, the US is running a quarterly current account deficit in excess of US$260bn; a fiscal deficit of over US$1.7trn (2023) and USD supply (M2) of over US$21trn. The US GDP was US$27.4trn in 2023, accounting for roughly 26% of the global GDP.

The great gambler

The RBI governor's job in India might be the most unenviable one. He has to struggle 24X7 to maintain a balance between fiscal requirements, political consideration (inflation and small saving interest), growth needs (real rates) and balance of payment (USDINR exchange rates). Repo rate and open market operations are the only two major tools available to him.

The RBI has been maintaining a status quo on the repo rates for over a year now. This has sustained the US-India yield gap (to protect flows) to some extent, but the efficacy of high repo rates in ensuring price stability, which is the stated primary objective of the RBI’s monetary policy, is questionable. Besides, the RBI has been meaningfully enlarging its balance sheet in the post Urjit Patel era, while stated policy objective, until the last week, has been “withdrawal of accommodation”. This aspect is not talked about much in the public domain. One may speculate that the real objective of the RBI’s monetary policy has been to prevent USDINR appreciation (even if it means high imported inflation) and ensure sufficient inflow in small saving schemes, which are funding almost 45% of the union government’s fiscal deficit. It has been obviously playing a gamble with high stakes, US$700bn forex reserve notwithstanding.

 Indian lenders face challenges

The persistent negative credit deposit ratio of Indian banks has been a subject of discussion at all levels. The government, regulators (RBI and SEBI), bankers and analysts etc. have all expressed concern over the poor deposit growth, while the credit demand remains strong. The finance minister and RBI have even attributed the flow of funds towards capital markets as one of the reasons. In my view, high household inflation, poor real wage growth and very low real rates on deposits are the primary reasons for this trend. Besides, for most lenders the asset quality improvement trend that started five years ago may have already peaked.

I feel most Indian lenders may now face three challenges – declining margins as the cost of funds rises; flat to declining asset quality and slowing growth. Investors are cognizant about these challenges but as the response to a recent IPO of a housing finance company indicates, they may not have yet adjusted their respective investment strategies.

Focus on finding opportunities

As a wise man suggested, the small investors like me should not be wasting energy on bothering about these macro things and focus on finding the investment/trading opportunities which may be opened by policy missteps, fund flows, geopolitical tensions etc. I fully agree with this thought. For the next 4-5 months, I shall be focusing on finding opportunities and taking advantage of traders’ mistakes.

Last weekend I visited some villages in the Bareilly, Shahjehanpur and Hathras districts of Uttar Pradesh. I had an opportunity to speak with several medium, small and marginal farmers.

The US Federal Reserve (Fed) Chairman Jerome Powell has provided the much-anticipated fuel to the US markets, which appeared running out of fuel after a shocking job revision. Speaking at the annual Jackson Hole symposium, he unambiguously hinted that “The time has come for policy to adjust” as “inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic”. Though he qualified his remarks by adding, “the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks”.

These comments read with the minutes of the last meeting of the Federal Open Market Committee (FOMC) provide adequate ground to believe that—

(i)      The current rate cycle has peaked out; and the next policy move will be a rate cut.

(ii)     The policymakers are confident the spike in inflation that occurred in the aftermath of Covid-19 pandemic (massive cash stimulus fueling demand and logistic challenges causing break in global supply chains) has been successfully tamed.

(iii)   The economy is no longer overheated as the pandemic stimuli have been gradually withdrawn, the job market has cooled down, and commodity prices are behaving normally.

Though Mr. Powell did not make it clear that the FOMC will cut rate in the next meeting scheduled to be held on 17-18^h September 2024; the market consensus is assuming it to be a certainty. The debate is now circling around how aggressive the Fed could be in their pursuit of policy easing. Though, Mr. Powell emphasized that the rate cut will be data driven, a majority of market participants are expecting a 25bps cut each on 18^th September, 7^th November and 18 December. Some aggressive estimates are building 50bps cut each in September and December.

I am not competent to comment on the dynamics of the US monetary policy and its implications for the global economy and markets. My concern at this time is limited to how does the likely change in the Fed’s policy stance affects my tine portfolio of investments, if at all.

In this context I note that—

·            In its last meeting, the Monetary Policy Committee of the RBI retained its policy stance of withdrawal of accommodation and maintained the status quo on policy rates by a four to two majority vote.

One of the dissenting members, emphasized that “Global uncertainties continue. The Fed, in indicating a cut in its September meeting, pointed out that since monetary policy acts with a lag they can't afford to wait until they reach their inflation target before cutting. That lag may be responsible for the sharply adverse August jobs report that has stoked recession fears and created market volatility. That a series of small signals were ignored, may have led to a critical large one. Monetary policy needs to act well in time. Spillovers led the global manufacturing PMI into contraction zone in July at 49.7.” (See here)

The other dissenting member was even forceful in his dissent, stressing, “For the last several meetings, I have been expressing concerns about the unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive. The majority of the MPC however do not share this concern, perhaps because they think that the Indian economy is already growing at close to its potential growth rate. I think that such a view reflects (a) an unwarranted pessimism about the growth potential of the economy and (b) an overly sanguine expectation about growth in ensuing quarters. I disagree with both prongs of this assessment.” (See here)

This clearly highlights that despite being warned of the perils of running behind the curve and impairing the growth potential, the MPC decided to retain its stance. Maybe the RBI is not as sanguine about the price stability and growth potential as some of the members of the MPC.

·            The fourteen-month gap (July 2023 to September 2024) between the Fed pause and the first cut would be the second longest in the past five decades. The markets have been anticipating a Fed rate cut for almost a year now.

In this period, the stock markets, both the US and the Indian, have not witnessed any meaningful correction and are already at an all time high level. The question is whether the anticipated rate cut would provide immediate impetus to the markets; or the markets will be worried about further deterioration in economic growth.

It is pertinent to note that empirical evidence suggests that in the past three rate cycles, the US market has fallen 12 to 50% during the Fed rate cuts.

·         The governments in the US and India are not in a position to back up the monetary policy easing with fiscal stimuli.

Under the circumstances, for now I am more inclined to assume that:

·         It is not certain that the RBI will immediately follow the US Fed in cutting rates, unless strong evidence of growth collapsing emerges. Rise in the yield differential may attract stronger flows and support USDINR and markets.

·         A weaker USD may support commodity prices

·         A panic cut by RBI on the other hand may adversely affect the margins of banks (loans get repriced immediately while deposits take longer; CD ratio faces further pressure); and also affect the overall sentiments.

·         The earnings momentum appears to have slowed down in 1QFY25. A sharp cut by RBI might arrest the slowdown in earnings momentum; and also help higher equity valuations to sustain.

·         Negative real rates may adversely affect savers (consumption) and support capex.

I will review my portfolio in accordance with these assumptions in the next review. For now, I am just staying put.

The Consumer Price Index (CPI) inflation for the month of July came at 3.54%, the lowest in five years and below the RBI tolerance band of 4-6%. This has excited some market participants as their hopes of an earlier rate cut by RBI have been rekindled.

I am however not sensing any imminent rate cut, for the following simple reasons.

(i)      The headline inflation number is significantly impacted by a strong base effect, as the CPI inflation in the base period (July 2023) was 7.4%. Sequentially, the inflation has risen 1.42% MoM in July 2024 against 1.33% MoM rise in June 2024. As of now, there is no indication of a sustainable decline in inflation trajectory.

(ii)     Core CPI inflation in July 2024 was 3.3% against 3.1% in the preceding two months. This is the first rise in core CPI after twelve months of consistent decline.

(iii)   Food inflation remained sticky, rising 2.47% in July 2024 after a 2.69% rise in June 2024. Vegetable prices were higher by 14% MoM in July 2024. It is pertinent to recall that the RBI governor laid significant emphasis on food inflation in his bi-monthly monetary policy statement.

The governor stated, “our target is the headline inflation wherein food inflation has a weight of about 46 per cent. With this high share of food in the consumption basket, food inflation pressures cannot be ignored. Further, the public at large understands inflation more in terms of food inflation than the other components of headline inflation. Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably”.

He further added, “high food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation. Household inflation expectations, after witnessing a moderating trend between May 2022 and September 2023, have edged up on the back of high food inflation since November 2023.35 Persistently high food inflation and unanchored inflation expectations – if they materialise – could lead to spillovers to core inflation through pick-up in wages on cost-of-living considerations. This, in turn, could be passed on by firms in the form of higher prices for services as well as goods, especially in a scenario of strong aggregate demand. Third, these behavioural changes can then result in overall inflation becoming sticky, even after food inflation recedes.”

He categorically admitted that “The MPC may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so. It has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.”

(iv)    As per the latest Households’ Inflation Expectation Survey (August 2024), A larger share of households expects higher general prices and inflation as compared to the previous survey round. Households’ median perception of current inflation rose by 20bps to 8.2% in the latest survey round; their inflation expectations for the three months and one year ahead periods also increased by 20bps each.

The market trends in August indicate that vegetable prices have recorded material rise in the month of August also due to crop damage by excess rains and logistic issues. It is therefor likely that August food inflation may come even higher. Expecting any rate cut on 9^th October may therefore not be reasonable; unless the US Fed cuts dramatically in September, raising the
specter of recession.

 

 Sitharaman, Powell toss the ball in Das’s court

Wednesday night, the Federal Open Market Committee (FOMC) decided to maintain the status quo on policy rates for the fourth successive review. The Committee reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two percent.” The Committee however made it quite clear that any rate hike from the present level is no longer on the table.

In the post-meeting press meeting, Fed Chairman Jerome Powell indicated that FOMC may not consider rate cuts in its next meeting in March 2024. The market is thus expecting a rate cut in May 2024.

In another development, the Union Finance Minister, Ms. Nirmala Sitharaman, presented an interim budget for the fiscal year 2024-25. Two notable features of the interim budget were (i) Nominal GDP growth projection for FY25 at 10.5%, implying a well-controlled inflation environment; and (ii) Fiscal deficit of 5.1% of GDP for FY25BE, implying a strong commitment to fiscal discipline.

In line with the lower fiscal deficit projection, the borrowing program of the government has also been moderated. The finance minister has proposed Rs11.75trn of net borrowing from the market by way of fresh government securities in FY25BE against Rs11.80 borrowed in FY24RE. This shall leave decent scope for private investment.

In her speech, the finance minister also emphasized the supportive environment her government is building for acceleration in private capex to achieve the high growth targets. The minister has provided higher allocation for production-linked incentives (PLI).

With the global rate and monetary policy environment set to become benign in 2H2024; domestic macro (fiscal deficit, inflation, external conditions, etc.) improving and the government holding its side of promise to maintain fiscal discipline despite forthcoming general elections, the ball is now in the court of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to provide impetus to the economic growth.

The risks to inflation now mostly stem from food (inclement weather) and energy (geopolitical disruptions) which may not have a significant correlation with the policy rates. It would therefore be in order for RBI to guide a lower rate path and increase system liquidity.

The MPC meeting next week therefore will be watched with keen interest. I would not expect any immediate rate cut (though it will be welcome if happens), a clear guidance for lower rates going forward and enhanced system liquidity is what I do expect from MPC. If RBI delivers on these expectations, markets could rally to new highs led by financials and rate-sensitive sectors like auto and real estate.

From the Bollywood movie ‘Chak De India’ (Dir. Shimit Amin, 2007), the climax sequence has been particularly popular. It is perhaps one of the most popular, inspiring, and quoted pieces of Indian cinema. In one part of the climax, the protagonist (played by Shah Rukh Khan), who is the coach of the Indian national women’s hockey team, is guiding the team in the World Cup final match against the defending champion Australia. During a penalty shootout, the coach tries to anticipate the penalty shot of the Australian striker by reading her body language – leg position, eyes, hockey stick and wrist position etc. – and correctly concludes that the striker will hit the ball straight and guides the Indian goalkeeper to stay still in the middle of the goal post. The goalkeeper saves the critical penalty and India wins the match.

Recently released minutes of the meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) highlighted that the latest policy stance is primarily ‘Wait and Watch”. This stance is driven by the hopes of:

(a)   Mother Nature helping a bountiful crop (especially vegetables);

(b)   Current rise in inflation being transitory in nature; but MPC is ready to preempt the second-round impact;

(c)   Capex (both public and private) sustaining despite positive real rates and diminishing liquidity and continuing to remain broad-based;

(d)   Growth in the Indian economy staying resilient enough to withstand the external challenges; and

(e)   Government taking adequate steps to mitigate supply-side shocks, while maintaining fiscal discipline, trade balance, and growth stimulus.

Evidently, RBI has no solid basis for making these assumptions.

The monsoon is not only deficient, it is poor both temporally and spatially. Only 42% of districts in the country have received a normal (-19% to +19% of normal rainfall) so far. The remaining districts are either deficient (-20% to -85% of normal rainfall) or have received excessive rainfall (+20% to +156% above normal). Key Kharif states like Easter UP, Bihar, Jharkhand, West Bengal, Maharashtra, and MP are deficient. Whereas, the western states of Rajasthan and Gujarat and the Northern states of Himachal, J&K, and Uttarakhand are in the large excess bracket. Key vegetable producing states like UP, Karnataka, Maharashtra, and West Bengal are highly deficient. Besides, the reservoir levels in the key state have fallen below long-term averages and could have some impact on Rabi crop also. Apparently, assumptions of early relief in vegetable & fruits, dairy, oilseeds, and pulses inflation are mostly based on hope.

The impact of the supply side intervention of the government post MPC meet, e.g., export duties on onions, and rice, etc., and release of onion buffer stock; fiscal support like subsidy on tomatoes, etc., could prove to be short-lived. Tax collections have started to weaken, further impeding the fiscal leverage for stimulating the economy.

Foreign flows have moderated in recent months. The pressure on INR is visible. The imported inflation, especially energy, could be a major challenge. Most global analysts and agencies are forecasting higher energy prices this winter due to depleted strategic reserves, continuing production cuts, and persisting demand.

One of the key drivers of the overall India growth story, viz., private consumption, does not appear to be in very good shape. High inflation and rates may keep the consumption growth subdued for a few more quarters at least. In any case, we are witnessing signs of heating up in personal loans and the housing market.

The other key driver of growth, the private capex, has shown some early signs of revival in the recent quarters. However, positive real rates, cloudy domestic consumption demand, and poor external demand outlook could hinder acceleration in private capex. The government is front-loaded its capex budget in the first half of the fiscal year in view of a busy election schedule in the second half. The assumption of growth acceleration may therefore be misplaced. In fact, the RBI has itself projected a much slower rate of growth for 2HFY24 and 1QFY25.

Recently, banking system liquidity has slipped into negative territory. Besides a hike in effective CRR, the RBI has been ensuring the withdrawal of ‘excess’ liquidity from the system. We may therefore see a hike in lending rates as MCLR for banks rises (even if the RBI stays put on repo rates) as we approach the busy credit season. The credit growth may be impacted due to this.

 

 RBI monetary policy statement highlights

·         Status quo on policy rates and monetary policy stance (withdrawal of accommodation).

·         The MPC resolved to continue keeping a close vigil on the evolving inflation and growth outlook. It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

·         Domestic economic activity remains resilient in Q1:2023-24 as reflected in high frequency indicators. Purchasing managers’ indices (PMI) for manufacturing and services indicated sustained expansion, with the manufacturing PMI at a 31-month high in May and services PMI at a 13-year high in April-May. In the services sector, domestic air passenger traffic, e-way bills, toll collections and diesel consumption exhibited buoyancy in April-May, while railway freight and port traffic registered modest growth.

·         On the demand side, urban spending remains robust as reflected in indicators such as passenger vehicle sales and domestic air passenger traffic which recorded double digit growth in April. Rural demand is gradually improving though unevenly.

·         Money supply (M3) expanded by 10.1 per cent y-o-y and non-food bank credit by 15.6 per cent as on May 19, 2023. India’s foreign exchange reserves were placed at US$ 595.1 billion as on June 2, 2023.

·         Going forward, the headline inflation trajectory is likely to be shaped by food price dynamics. Assuming a normal monsoon, CPI inflation is projected at 5.1 per cent for 2023-24, with Q1 at 4.6 per cent, Q2 at 5.2 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent. The risks are evenly balanced.

·         The government’s thrust on capital expenditure, moderation in commodity prices and robust credit growth are expected to nurture investment activity. Weak external demand, geoeconomic fragmentation, and protracted geopolitical tensions, however, pose risks to the outlook. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5 per cent with Q1 at 8.0 per cent, Q2 at 6.5 per cent, Q3 at 6.0 per cent, and Q4 at 5.7 per cent, with risks evenly balanced.

·         The next meeting of the MPC is scheduled during August 8-10, 2023.

Credit Growth Remains Strong in April 2023, Industry Subdued (CARE Ratings)

Gross bank credit offtake rose by a robust 15.9% year on year (y-o-y) in April 2023 due to continued strong growth in services and personal loans especially driven by growth in lending to Non-Banking Financial Companies (NBFCs), vehicle loans, and unsecured personal loans1 segments.

·         Credit growth for the services segment was robust at 21.8% y-o-y in April 2023 as compared with 11.2% a year-ago period due to growth in NBFCs, retail trade and other services.

·         Personal loan growth accelerated by 19.4% y-o-y in April 2023 from 14.4% a year-ago period, driven by credit cards, housing, vehicle loans and other loans.

·         Industry credit offtake growth moderated at 7.0% (y-o-y) from 8.0% over a year ago, registering a lower growth compared to personal loans and services. Infrastructure witnessed a marginal rise of 1.7% due to growth in roads and others, however, power, ports, airports, and telecom dropped in the month.

·         Agriculture and allied activities rose by 16.7% in April 2023 vs. 10.6% in April 2022.

FY23 Corporate performance insights (Bank of Baroda)

FY23 Growth in sales was steady though lower than last year. Growth in net profits has slowed down for both the aggregate sample as well as the one which excludes BFSI companies. The difference from the past is that growth in net profit margin is positive indicating some recovery.

Table 1 reveals that growth in sales has slowed down from 21% in Q4-FY22 to 12% in Q4-FY23 for the sample of 2096 companies while that in net profits has moved from 26.1% to 17.3% during this period. There has been improvement in net profit margin in both the years.

Table 2 excludes BFSI companies. Here the performance is relatively muted with sales growth of 8.8% and net profit of 7.5%. The higher base effect as well as dilution of pent up demand in some sectors contributed to this slower growth. The net profit margin however has been falling over the last two years of this quarter though the dip in Q4-FY23 has been very marginal.

A significant observation here is that the interest cover ratio for the sample of 1797 companies came down to 5.82 from 6.45 last year after witnessing an improvement in FY22. This was a result of both lower growth in PBIT as well as higher interest costs due to the lending rates increasing in the banking system. PBIT had grown by just 4.8% this quarter compared with 9.4% last year. However, interest costs increased sharply by 16.3% compared with 4.7% in Q4-FY22.

 - The industries which grew at a higher rate than the average were: banks, insurance and Finance in the BFSI sector. Services received a boost from the pent up demand which got reflected in hospitality, diamonds and jewellery, logistics, IT, retail, and trading. Within manufacturing auto did well on the consumer oriented front while construction material, power and industrial gases performed positively on the industrial front.

- Low growth was witnessed in case of textiles, alcohol, plastic products, mining, gas transmission and iron and steel.

- Food based products and health care had maintained their sales growth at the average level which was also the case with paper.

- Industries like electricals, FMCG, chemicals, infra, capital goods, media, telecom, realty, consumer durables registered single digit growth. Price pressures did come in the way of demand; and rural demand was less robust than expected across some of these industries.

Real estate (Kotak Securities)

Cautious road, treading between vacancies and occupancies: Commercial real estate in top Indian cities is facing headwinds despite improved quarterly leasing. Existing vacancies are primarily in SEZ areas, which may be hard to fill up until the regulatory amendment comes through, while current occupancies have a large presence of IT companies, among which Cognizant is taking the lead to rationalize the need for office space among key Indian cities. In that backdrop, FY2024E may not be able to repeat the strong showing of FY2023, which saw leased area increase to 524 mn sq. ft, with record absorption (78 mn sq. ft/39 mn sq. ft of gross/net leasing). Yields have improved due to price correction, but visibility on FY2024E remains lackluster.

Healthy gross and net absorption, new supply falls further: All-India commercial real estate (aggregate of top 7 cities) had an outstanding stock of 615 mn sq. ft (+7% yoy, +1% qoq) as of March 2023, with gross absorption a tad lower on a sequential basis but still healthy at 18.4 mn sq. ft (+1% yoy, -8% qoq). Net absorption during the quarter stood at 9.4 mn sq. ft (+14% yoy, -1% qoq), while new supply in 4QFY23 slowed further to 7.6 mn sq. ft (-38% yoy, -11% qoq). Consequently, vacancy declined 2% qoq to 90.6 mn sq. ft, with vacancy improving to 14.7% (15.4% in 4QFY22 and 15.2% in 3QFY23).

Among cities, Gurgaon led the improvement in occupancy, with gross and net absorption of 2.3 mn sq. ft and 1.1 mn sq. ft, respectively, and nil new supply during the quarter. Accordingly, vacancy declined to 26.1% in 4QFY23 (27.4% in 4QFY22 and 27.3% in 3QFY23). Mumbai also saw an improvement, with net absorption and new supply at 1.3 mn sq. ft and 1.2 mn sq. ft, respectively, and vacancy at 15% (17.7% in 4QFY22 and 15.3% in 3QFY23). Bengaluru saw a slight increase in vacancy to 6.9% (from 6.8% in 3QFY23, 4QFY22 at 7.5%), as net absorption of 2.2 mn sq. ft lagged new supply of 2.6 mn sq. ft. Hyderabad, Pune, Noida and Chennai saw net absorption of 1.7 mn sq. ft, 1.8 mn sq. ft, 0.7 mn sq. ft and 0.6 mn sq. ft, against new supply of 1.1 mn sq. ft, 1.2 mn sq. ft, 1.5 mn sq. ft and nil, respectively. Blended rentals saw sequential moderation (+4% yoy, -6% qoq)—most large cities saw a correction. Total leased area rose 8% yoy and 2% qoq to 524 mn sq. ft as of March 2023.

SEZ clarification key for further occupancy improvement: Commercial asset owners suggest that the demand scenario is robust, with rising occupancy across geographies. Clarity on the DESH bill and allowing floor-by-floor de-notification are key, although any occupancy improvement would take at least 2-3 quarters post the amendment as the non-SEZ occupancy is already at 93-94% levels for most asset owners. Accordingly, an improvement in overall occupancy should only be very gradual hereon. Exhibit 4 highlights the break-up of vacancy between SEZ and non-SEZ areas. In our view, even if the regulatory amendment comes through in 1HFY24, the process of de-notification and leasing of vacant spaces will only close by end-FY2024.

Leasing trends: GCC expansion to offset some weakness in IT but overall improvement may take time Cognizant has announced its plans to vacate 11 mn sq. ft of space in tier-1 and metro cities (with subsequent plan to acquire space in smaller cities), we would watch out for commentary from other large employers (tech, BFSI) for cues. For now, asset owners see the Cognizant announcement as a part of regular business, stating that the vacancy should happen only gradually, while also offering asset owners the opportunity to mark-to-market the rents in some of their old contracts. Data on non-software service exports corroborates the strength in GCC growth in India—assets owners remain optimistic that GCC strength will help absorb any release of office spaces by technology companies, and also help improve overall rent rates for their portfolios. IT companies have seen a slowdown in hiring over the past few quarters, with 4QFY23 seeing a decline in headcount across tier-1 IT companies in comparison to expansion in every quarter since the beginning of the pandemic. Global Capability Centers (GCCs) continue to expand in India, especially in Bengaluru.

Electrodes: Demand Headwinds Likely to Impact Near-Term Pricing (Jefferies)

Weak demand (global & domestic) impacted Electrode pricing and utilization in Q4FY23. Exports are ~70%/50% of HEG/GRIL's sales. We foresee demand headwinds to persist in FY24e, and lower our est for electrode ASPs and utilizations (now to ~65%) for both cos. We cut

FY25-26e EBITDA by 8-16%, but expect higher impact in FY24e. Beyond the near-term headwinds, decarbonization stays a medium-term tailwind; 7mnMT EAF capacity has commissioned in US in last 12M. Buy.

Demand Headwinds Persist: In FY23, global crude steel production dipped by 4-5%YoY amid weaker offtake across many regions. But Indian production grew by 5-6%YoY. Domestic demand accounts for ~50% of GRIL's sales mix, but is lower at ~30% for HEG. Weak global offtake impacted HEG's capacity utilization to 75% in FY23 (-1,200bps YoY). Electrode pricing has also declined by ~3%QoQ in Q4. Industry channel inventory is est to be higher-than-normal currently. We foresee demand headwinds to continue in FY24e as well, and hence cut our estimates for electrode ASPs and utilizations for both companies. HEG's 20K MT extra capacity is likely to commission in Jun'23. While we expect HEG's FY24e utilization to decline to 65% (75% in FY23), absolute volumes could grow by +10%YoY due to its higher total capacity now at 100K MT. We cut GRIL/HEG's capacity utilization by -10%/-14% resp in FY24e to 65-66%, but pencil in revival to 75-80% in FY25e led by a recovery in demand.

EBITDA Pressure: Softer demand offtake (lower volumes) and weaker pricing are likely to impact EBITDA margins of both GRIL & HEG. Resultant impact on EBITDA is est to be higher in FY24e than in FY25-26e. Needle Coke (NC) prices are also softening, but the drop in electrode pricing is likely to be higher than NC in FY24e. We cut electrode cos' FY25-26e EBITDA by 8-16%, while FY24e cut is est to be sharper owing to steeper cut in utilizations and pricing. We est FY24e EBITDA margin at +12%/16% for GRIL/HEG resp.

Decarbonization - A Medium-Term Tailwind: Exports account for ~70% of HEG's sales mix, and ~50% for GRIL. While global EAF steel production is 45-50% ex-China, China is still lower at low-double-digit (2x since 2016). US is ~70% EAF production now, and now accounts for ~10% of HEG's sales mix, having risen 2-3x in the last 4 years. New EAF capacity of ~7mnMT has already commissioned in last 12M, and incremental ~17mn MT of EAF is expected to commission in the USA in the medium-term.

India Pharma: Moats intact, volume recovery key (Axis Capital)

Promising trends: strong pricing, growth in chronic/ new-age drugs IPM grew a steady 9% YoY in FY23 (3-year CAGR at ~9%) after 2% /15% Covid-affected growth in FY21/22. Despite various disruptions (GST, NLEM*, Covid, etc.), IPM has seen steady ~10% growth over the past 10 years led by volume (despite the impact of trade generics, Jan Aushadhi, etc.), price hikes (higher inflation) and new launches (following the expiry of patent exclusivities). Key trends:

Price growth is likely to remain high, at 5-6%, due to the 12.1% hike taken in NLEM products (~14% of IPM) and ~5% hike on the rest in the wake of inflation.

Volume growth in Chronic has started to improve after a dip in demand due to Covid fatalities in the co-morbid cohort. Within Acute, a strong flu season saw the recent recovery in anti-Infectives/ Respiratory, which had moderated post the Covid spike.

Growth in Respiratory is led by price and volume, while growth in Cardiac is largely led by price hikes with tepid volume growth.

Prescription growth in traditional anti-Diabetes is slowing, while new-age molecules like DPP4, SGLT2 and combinations are picking up, increasingly prescribed by general practitioners (GPs) in addition to conventional prescriptions by specialists.

India formulations– superior business model: India sales (20-100% of company sales) remain the key earnings contributor for most pharma companies due to steady growth visibility, higher return ratios, and superior FCF. Notably, branded generic models allow for price increases (to help offset rising costs). We expect domestic-focused companies to outperform IPM growth given:

Focus on building mega brands (sales of Rs 500 mn to Rs 2+ bn)

Expanding field force – to increase coverage in newer markets (tier 2/3 cities)

M&As (strong balance sheet) that can fill gaps and augment existing therapies

Risk from pricing control/ generics – limited impact: NPPA’s price control list, last revised in Dec’22, has partially impacted Q4FY23 growth –which pharma companies expect to counter with increased volumes (given strong brands) and price hikes (from Apr’23). Pricing policies are unlikely to impact sales beyond a point given competitive pricing by most. Trade generics, private label and Jan Aushadhi are seeing a brisk ramp-up in sales, however, this model faces challenges in supply, SKU shortages and concerns regarding quality from patients and doctors. More inside: market shares, companies (not covered, not listed as well)

Market share across therapies, companies, brands, bonus contribution, NLEM, Jan Aushadhi, trade generic coverage, etc.

Snapshots on major pharma companies highlighting (a) 5-year trends in volume, price and new introductions, (b) market share/other trends across key therapies/brands, (c) trends in Chronic vs. Acute mix, etc.

Specialty chemicals: Growth continues to moderate (nuvama institutional equities)

Overall, sales for the sector grew a mere 6% YoY/3% QoQ, driving EBITDA growth also at 6% while maintaining EBITDA margins at 22%. Demand for specialty chemicals catering to agrochem innovators such as PI and SRF remains strong while players catering to generic molecules witness weakness as supplies from China increases. Fluorpolymers demand remained strong; however, refrigerant gas prices have started softening. Overall, trends in specialty chemical demand remains weak as softening RM prices are leading to inventory liquidation across the channel.

Multiple headwinds hamper FY24 growth: Refrigerant gas players such as SRF, Gujarat Fluoro gave cautious commentary on softening refrigerant gas prices; however, specialty chemicals catering to agrochem (PI, SRF, Anupam Rasayan) remains confident of ~20%-plus growth. Players with higher share of commodity – Aarti, Deepak Nitrate and Jubilant Ingrevia continue to maintain weak commentary as demand from end-user industry remains sluggish.

However, they expect a pickup in H2FY24. FMCG-led players like Galaxy and Fine Organics are seeing strong demand in domestic market; however, facing challenges in Europe and US given the inflationary scenario and inventory liquidation.

Outlook and valuation: Growth moderation factored in: Most players set a cautious tone on the back of: i) inventory liquidation impacting demand; ii) slowdown in markets like Europe and US; and iii) price correction in categories like refrigerant gases. However, the industry is witnessing strong domestic demand and growing enquiries in exports as global players continue to look for alternatives to China and increasing outsourcing to reduce cost.

We acknowledge headwinds in FY24 – factored in to our estimates. We expect growth driven by sustained capex, FY25 to witness growth revival while current valuations (sector average at 23x Y25E P/E) limit downside.