FIIs are Back, As Markets Gear Up for Santa Rally
The markets were still somewhat flat, for the second consecutive day, as they awaited fresh cues
On Episode 456 of The Core Report, financial journalist Govindraj Ethiraj talks to Avinash Gorakshakar, Head of Research of Profitmart Securities.
(00:00) The Take
(04:50) FIIs are back, as markets gear up for Santa rally
(06:46) Chief Economic Advisor makes indirect case for bitcoins and crypto day after conservative RBI governor departure
(08:31) Rupee hits fresh low on reports of China loosening Yuan
(10:17) Asian Development Bank lowers India growth estimates
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
—
Good morning, it's Thursday, the 12th of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
The incoming governor of the Reserve Bank of India (RBI) Sanjay Malhotra unwittingly showed his age, being one day, whilst addressing the media at the RBI headquarters in Mumbai on Wednesday.
He was careful not to say anything that could be construed as a forward looking policy statement, that could rock the markets in coming days.
He was even more wise to not do a question and answer session with the gathered media who were, as I would, itching to ask some pointed questions, including, presumably, whether he would cut interest rates.
Interestingly, he spoke of policy stability and stability in general several times.
And while that applies to the RBI in general, it would actually apply in specific to his previous job at the Ministry of Finance where he was Revenue Secretary.
Which is why, for someone who heard of his move to RBI governorship at best a couple of days before the world did, he was perhaps reflecting more on stability in the context of economic policy than monetary policy.
In a manner of speaking of course.
If anything, RBI’s monetary policy has been too stable with interest rates locked now for 11 consecutive monetary policies while most major central banks in the world have cut rates in recent months and quite sharply at that.
India need not follow the same global path but this time around expectations were high because economic growth had slowed sharply to 5.4% in the previous quarter against the RBI’s projection of 7%.
Remember the rumor mills have been buzzing with the somewhat unlikely suggestion that one reason outgoing governor Shaktikanta Das did not get an extension after a 6-year term was because he did not lower interest rates.
To return to stability of policy.
In all my conversations with tax experts and businesses alike, perhaps the biggest grouse has been the lack of stability on policies.
Tax is a classic example and lets take the most recent cases.
Last week, it emerged that the Government is looking at raising goods and service tax on a wide variety of products including ready made garments to between 18 and 28 per cent.
The Clothing Manufacturers Association of India erupted in protest saying that not only would such a move benefit those who don’t pay tax or encourage others not to but lead to some 100,000 jobs being lost because of the jump in prices.
That may be a trifle dramatic but there is no denying that the tax slab suggestion came out of the blue for the industry.
In August 2023, the Government said it was going to license imports of laptops and tablets. Following a severe backlash, it flipped and flopped, backpedalled several steps and finally said a few months later it would not impose import restrictions.
Companies like Apple or HP breathed sighs of relief because they could continue to import laptops. That sword continues to hang over the industry though and could fall again since the Government would like these laptops to be made in India.
When it comes to taxes, both direct and indirect, the list of grievances is so long that it will require a year long special series of columns just to address them. Suffice to say that on taxes and overall policy, India has not been able to deliver stability that investors, whether domestic or international press for.
In a public appearance ahead of his appointment, the incoming Governor then as revenue secretary told tax officials to keep economic growth in mind and avoid saddling businesses with overly large tax demands.
“Revenue comes in only when there is some income,” he told officers at the Directorate of Revenue Intelligence, according to media reports. “Therefore, we have to be very cautious so that we do not, as they say, kill the golden goose.”
The Union Budget 2025 is expected to see, among other things, an attempt at reducing the sheer onerousness of the current Income Tax Act for which work is on and suggestions have been taken for several months now.
While the RBI has welcomed its new governor in the form of the self professed technology oriented Sanjay Malhotra, the Ministry of Finance also has a somewhat sudden hole which will not be easy to fill, as Business Standard Editorial Director Ashok K Bhattacharya has argued on The Core Report on Wednesday.
Right now, the Government needs more stability of economic policy and the RBI needs less stability of monetary policy, at least in the context of interest rates.
The top stories and themes for the day:
FIIS are back, as markets gear up for Santa rally
Rupee hits fresh low on reports of China loosening Yuan.
Chief Economic Advisor makes indirect case for bitcoins and crypto day after conservative RBI governor departure.
Asian Development Bank lowers India growth estimates.
Is A Santa Rally Coming
The markets were still somewhat flat, for the second consecutive day, as they awaited fresh cues.
FIIs are back in the market, after all their earlier bouts of profit booking.
The BSE Sensex and NSE Nifty50 closed in the green but only slightly with the 30-stock Sensex closing at 81,526.14, up 16.09 points while the NSE Nifty50, on the other hand, ended higher by 31.75 points at 24,641.80.
Among the broader markets, Nifty Midcap100 and Nifty Smallcap100 indices ended higher by 0.27 per cent and 0.38 per cent, respectively.
Foreign institutional investors are back to big deals in December.
Against the $2.5 billion sell-off seen in November, FIIs have already bought Indian stocks worth around $3 billion in the first 10 days of the December month, leading to the Nifty already rising 2% this month, the Economic Times is reporting.
The Nifty is only 6% away from its record peak touched in September-end while Nifty Smallcap 100 and Nifty Microcap 250 have already touched new highs to signal that the market is back in a risk-on mode.
Suggesting an upside potential of about 14% in the next one year, Morgan Stanley has already given a target of 93,000 in its base case scenario for Sensex.
"With strong earnings, macro stability and domestic flows, it is hard to argue against India's investment case. That said, potential global growth risks plus a bunching up of IPOs and near-term growth concerns present challenges," said Morgan Stanley's Ridham Desai.
Alphabet shares rose 6% on Tuesday, the day after the company hailed its latest quantum computing chip as a “breakthrough.”
The Google parent company on Monday revealed “Willow,” a quantum computing chip that the company said performed significantly better on a quantum computing benchmark than its predecessor did in 2019.
A Case for Crypto
Interestingly, India’s chief economic advisor, a day after the departure of the more conservative RBI Governor Shaktikanta Das made an indirect case for crypto, bitcoins and online gaming.
“In India, where there is extensive financial illiteracy, he said that regulators need to distinguish between not standing in the way of moonshots and in which sectors do we need to be more conscious of social cost and benefits, whether it is crypto, bitcoins and online gaming,” he said while speaking at a Government function on policy, reported by website Moneycontrol.
“We should be sure of the criteria we want to set for the regulator to not stand in the way of innovations. The same principle of transparency and social cost benefits that we want to apply to regulated entities and some of their financial innovations should also apply to the regulator themselves,” he said.
The regulators are expected to live by the same principles of transparency that the regulated entities are expected to live by, which means information sharing by regulators. Regulators must be conscious of the limits of their unelected powers, he said.
The finance minister has been wary of bitcoins and highlighted in the past the challenges of working with a currency without an underlying asset.
A reminder, the largest token Bitcoin, recently broke the $100,000 ceiling.
Some countries have embraced cryptocurrencies or Bitcoin, El Salvador saw its reserves cross the $600 million mark, while Vancouver city in Canada is mulling allowing cryptocurrencies for payments and taxes.
Rupee Slides With Yuan
The Indian rupee weakened to another record low on Wednesday thanks to a fall in the Chinese yuan and heightened dollar bids in the non-deliverable forwards (NDF) market.
The rupee hit a low of 84.8650 against the U.S. dollar before closing at 84.83, up marginally on the day, Reuters reported.
The rupee has weakened 0.4% in December, now underperforming many of its regional peers as concerns over slowing economic growth.
The appointment of the new RBI chief Sanjay Malhotra has fuelled expectations of rate cuts next year, hurting the rupee more.
Earlier, China’s yuan slid the most in a week on a Reuters report that Beijing is considering allowing the currency to weaken next year.
The offshore yuan dropped as much as 0.5% to 7.2921 per dollar before trimming declines, after a report that policymakers are mulling the possibility of allowing the yuan to depreciate.
The move triggered drops in regional currencies, with China proxies such as Australian and New Zealand dollars sliding at least 0.2%, Bloomberg said.
Pressure on the yuan has intensified since the re-election of Donald Trump who threatened tariffs on China and other countries earlier this month.
So investors are speculating Beijing will abandon its current policy of maintaining a stable currency to allow it to weaken to compensate for any tariff impact.
The yuan touched a one-year low versus the dollar earlier this month.
This quote summed up the uncertainty best and why threats of US tariffs will have knock on effects elsewhere too, affecting global economies.
“It was inevitable due to Donald Trump’s tariffs threats,” said Ken Cheung, strategist at Mizuho Bank in Hong Kong. “We believe a sharp yuan drop wouldn’t be allowed due to capital outflow risks and fragile confidence in China 's growth, but this was something markets were preparing for.”
ADB Lowers Growth Rate
The Asian Development Bank (ADB) on Wednesday lowered India's economic growth forecast to 6.5 per cent for the current financial year from its earlier estimate of 7 per cent due to lower-than-expected growth in private investment and housing demand, Business Standard reported.
The multilateral development bank has also lowered India's growth forecast for the 2025-26 financial year.
Changes in US trade, fiscal, and immigration policies could dent growth and add to inflation in developing Asia and the Pacific, according to the latest edition of Asian Development Outlook (ADO).
The report also said Asia and the Pacific's economies are projected to grow 4.9 per cent in 2024, slightly below ADB's September forecast of 5 per cent.
"India's outlook is adjusted downward from 7 per cent to 6.5 per cent for this year, and from 7.2 per cent to 7 per cent next year, due to lower-than-expected growth in private investment and housing demand," ADB said.
India's growth will remain robust, with the economy supported by higher agriculture output resulting from the summer (or kharif) crop season (which will also put downward pressure on food prices); continued resilience of the services sector; and lower-than-expected Brent crude prices in 2024 and 2025, ADB added.
It further said strong forward-looking and labour market indicators, such as PMI for industry and services, urban labour force participation and Reserve Bank of India's industrial outlook, suggest that economic momentum will recover in the coming quarters.
Importantly, the report said Southeast Asia's growth outlook has been raised to 4.7 per cent this year from a previous forecast of 4.5 per cent, driven by stronger manufacturing exports and public capital spending.
Last week, the Reserve Bank also significantly lowered the growth projection for the current fiscal year to 6.6 per cent from 7.2 per cent earlier and hiked the inflation forecast to 4.8 per cent in view of slowdown in economic activity as well as stubborn food prices.
—
And now a quick view on the markets. FIIS look like they are returning so what are the macro and micro signals now from the analyst community.
I reached out to Avinash Gorakshaker, head of research of ProfitMart Securities in Mumbai and began by asking him if he was seeing a change in mood ?
INTERVIEW TRANSCRIPT
Avinash Gorakshakar: You're right, Govind, that FII flows have started coming back in small numbers. And although the trend is not consistent, I think one good part is that the big panic which was seen earlier is now more or less completely out. More importantly, you know, I think markets are looking at possibly a faster kind of incremental inflow of FII money only after Donald Trump takes over, you know, in the US as the US president from 20th of January.
So I think, you know, once Mr. Trump takes over, I think you could see a lot of flows coming back to India, whatever money has been going to China, probably, you know, is unlikely to go now because clearly Mr. Trump has made his intentions very clear. And I think Q3 numbers, according to me, are going to be much better compared to Q2. So I think, you know, even on the corporate earning side, FIIs are sensing that sectors like metals or for that reason, real estate, automotives, or that reason, consumer durables, all domestic facing teams are doing pretty well.
In fact, even on the IP side, you know, we have been getting a lot of reports that there are several green shoots which are expected once, you know, the US market starts, you know, announcing big order wins once the new president comes in. So I think my guess is that, you know, mood in the market has now become slightly moderated on the positive side. Although, you know, there is a little volatility in the market and you must accept the fact that post 15th of December, you know, FIIs go out for holidays.
So you're going volumes, you know, shrinking quite significantly. So now whatever movement comes in the market would be coming in the month of January. And I think that is the time when possibly we could see a sort of a small Santa rally because markets would also start discounting the oncoming budget.
So I think, you know, although we don't know what can come in the budget, but I think broadly the market is looking forward. Q3 numbers will be better, flows will come in. And I think the markets have also reflected that in the index level.
We are almost about 24,500 for a long time. And in today's markets also, we saw the broader market doing in fact much better than the frontline indices. So I think a lot of money is also coming in the broader market, specifically the mid caps, small caps, where I think, you know, FIIs are selectively making some buy.
Govindraj Ethiraj: How are you seeing domestic flows? I mean, we saw some reduction in bulk investments in mutual funds in the last month. But anyway, that could be a one off.
But how are you seeing flows overall? No, I think see mutual fund SIPs have been doing pretty well.
Avinash Gorakshakar: In fact, my sense is that going, you know, with interest rates still down. And I think typically, most importantly, I think equity as an asset class has caught on very well with the retail investor. Today also, we saw buying of almost 2000 odd cores when FIIs were sellers.
So I think, you know, this kind of money is now a sustainable kind of flow. So I would not be surprised that for the coming financial year domestic mutual fund money is going to play a significant role. But I think clearly now, as you rightly mentioned in your first question, you know, the alpha generation this year is going to be a much more challenging task.
You know, whatever kind of money the markets have made in the last one to two years, I think going forward, investors would also have to be ready for moderate returns of say 15-20%. And I think if they can achieve even these returns, then I think it should be a great achievement. So I think broadly, return expectations have to be moderated because obviously valuations are not cheap.
So I think clearly you have to take that into account in spite of heavy flows, you're not going to see a runaway rally.
Govindraj Ethiraj: Right. And just to come back to the sectors that you were referring to, Avinash, you talked about metals, you talked about automotive and even consumer durables. All these have been under fair amount of pressure and at least the numbers and Godrej just the other day said that they were expecting a weak Q3 as well, even if they did not say it in as many words, but they did talk about pressures.
So are you confident that Q3 will see a recovery, I mean, or rather the recovery will be so quick?
Avinash Gorakshakar: Yeah, I think you've got to look at it from a sector point. I think FMCG, according to me, has been badly hit. If you talk about agrochemicals, you talk about consumer durables, you talk about real estate, you talk about building products, these are sectors where there's a lot of growth.
In fact, construction, EPC companies are doing very well, order books are overflowing. But I think, yes, in terms of automotive, you know, the passenger car segment has taken a beating, the commercial vehicle segment has taken a beating. So maybe, you know, companies like Tata Motors, Ashok Leyland, or for that reason, Maruti, Hyundai, you know, these could possibly show a muted or maybe an underperforming kind of performance in Kingston.
So I think it's going to be a pick and choose, Govind. Maybe not all sectors, you know, gather momentum, but my sense is that typically the fourth quarter for the automotive sector is supposed to be a bumper quarter. So I think we're keeping our fingers crossed.
But I think hopefully the two-wheeler market has been doing very well. Almost all the two-wheeler companies are doing pretty robust volume numbers. So I think, you know, I agree to your point that we may not see a very robust performance across all sectors, but yes, selectively, sectors which have got a strong tailwind, and where the order book is good, I think we should do, you know, reasonably well.
So I think, at least compared to the quarter two, quarter three will be slightly a tad better.
Govindraj Ethiraj: Is there any sector or, yeah, I guess sector is the ideal theme here, that looks like could be new or sort of a sunrise kind of sector for you for 2025?
Avinash Gorakshakar: I think sunrise sector, Govind, is a difficult call.
Govindraj Ethiraj: Or something new, I mean, or something that we've not spotted or perhaps was beaten down too much.
Avinash Gorakshakar: I think, Govind, we have been very positive on the agrochemical sector. If you see the performance of the sector last year, you know, most of the stocks were beaten down because there was a lot of inventory pile up in the system. Prices had come down suddenly and quite significantly.
But this time, you know, the market has picked up significantly. So my sense is, you know, the agrochemical sector looks interesting. You know, large players like UPL have been beaten down, but numbers on the ground seem to be suggesting that there is a turnaround happening.
We can look at numbers like, you know, from companies like Rallis or Sharda Crop Chem or Sumitomo. So I think all these companies are buzzing with excitement for new product launches and better margins, better volumes. I think agrochemicals could be a slightly contraband.
And I think looking at the fact that this time, this year, monsoon has been reasonably good. One could expect that this, you know, continuously flows even for the next financial year, apart from FY25. So this is a kind of a sector which is not in flavour as of now.
But I think, yes, reasonably good risk reward can come provided, you know, the data points are better.
Govindraj Ethiraj: Right. That's a good note to end on. Thank you so much, Abhinash, for joining me.
Coke is in Flavour
The Bhartia family, promoters of the Jubilant Bhartia Group are set to acquire a 40 per cent stake in Hindustan Coca-Cola Beverages (HCCB), the wholly owned bottling arm of Coca-Cola India, for Rs 12,500 crore, according to a report by The Economic Times.
The transaction will be funded through a mix of equity and debt. The Bhartia family, led by Shyam and Hari Bhartia of the Jubilant Group, is contributing Rs 5,000 crore, with the remaining amount being financed by Goldman Sachs, which has committed to fund the special purchase vehicle (SPV) created for the deal.
Jubilant is a conglomerate with interests in agriculture and food, including running India’s franchise of Dominoes Pizza since 1996 and Dunkin Donuts more recently.
