Markets Fail To Hold Gains Once Again
There is a struggle in the markets quite evidently with large, mostly overseas investors coming into sell whenever domestic investments flow in
On Episode 359 of The Core Report, financial journalist Govindraj Ethiraj talks to Deven Choksey, veteran market analyst and managing director of DRChoksey FinServ as well as Vivek Kumar, economist at QuantEco Research.
Our Top Reports For Today
SHOW NOTES
(00:00) Stories Of The Day
(06:07) Markets fail to hold gains once again though three fourths of globally carry trade removed
(08:39) Will Indian markets get rerated to new levels?
(17:59) RBI holds interest rates again, which direction is it heading?
(28:45) How slowing demand for Chinese homes is hitting India’s steel industry
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 regards any feedback, you can drop us a message on [email protected].
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Good morning, it's the 9th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
Our top stories and themes for the day.
The Take
To its credit, the Government is throwing everything it has at the jobs problem hoping obviously that something will stick.
Let's go over some of them.
For starters, the Union Budget allocated Rs 148,000 crore or around $17 billion to education, employment and skilling.
The Government will provide a month’s salary on youngsters joining the formal workforce with a cap of course.
The Government also wants to reimburse employers upto Rs 3,000 per month for two years for each additional employee hired and who comes on the formal rolls, measured by their joining the employees provident fund organisation.
The specific numbers don’t matter because they are all in millions, suffice to say that the Government wants to incentivise employers and employees and also boost an internship programme.
In the case of internships, the focus is on spending a year working in a job environment rather than classroom instruction.
The scheme offers a monthly internship allowance of INR 5,000. Over 12 months, this totals INR 60,000, plus an additional INR 6,000 for incidentals.
The government will cover INR 54,000 of the monthly allowance and INR 6,000 for incidentals. Organisations will be responsible for INR 6,000 (10% of the internship allowance) and the training costs, which can be funded through their CSR budgets. CSR funds can also cover reasonable administrative expenses.
The idea of internship programmes is obviously that people will or should get hired or be in a better position to get hired after that.
Now, let me come to Reliance Industries.
Why, because it's the largest company by sales in the private sector.
And while it employs less than, lets say, TCS which is around 600,000, its staff strength is closer to Infosys which is around 315,000.
But here it gets interesting.
Reliance employed around 389,000 staff in the 2022-23 year, a number which dropped more than 10% to 347,362 in the 2023-24 year or last financial year.
Reliance itself says that most of the high turnover is in retail, especially store operations.
Reliance Retail by the way employs around 207,000 people but that number stood at 245,000 the year before.
The interesting thing is it's not that Reliance is not hiring at the same time.
It let go of some 143,000 people and hired 171,000 people in the same year.
So it would appear that almost half of Reliance’s employees were hired in the last one year. Remember, the current total is around 348,000.
It is true that in retail, as in banking, attrition levels are high at the front end, particularly in private banks where attrition levels can range between 34 to 40%.
Which means almost a third of the organisation is turning over, though again,at front end roles.
For companies battling such high attrition levels, growth itself becomes a challenge.
I can imagine every CEO or HR head pulling out their hair to find technology or other solutions which help them grow without having to deal with such massive attrition levels.
AI and ChatGPT is obviously one such solution. There may be more or may not.
And that brings me to the key point I want to highlight.
With The exception of some exceptions, there is considerable fragility in the job market.
This fragility also means that the job market will not grow as we desire even if companies themselves expand, add capacity and grow.
And these are the aspirational private sector jobs that one is talking about.
Of course the unorganised sector which is more than 90% of the job market will also grow but not all those jobs will be aspirational.
Now, IT services is a major employer in the organised sector. As we have seen, almost all major IT services companies have been shrinking. It's not that they are not hiring but they are letting go more people than they are hiring.
Equally, other segments of the IT services space, such as the captive global capability centres or GCCs of large multinationals are hiring and growing.
But industry voices tell me that the hiring among GCCs is not offsetting the losses in IT services. Also skill levels will differ so it is a nuanced discussion.
The massive attrition and churn in some industries also suggests the problem with talent and fitment, whether with Reliance Industries or Infosys.
And of course the overall numbers also suggest that a major employment spike seems unlikely, even if incentivised by the Government.
As in, the overall linear growth figure may not really shift, or it may shrink in some industries and grow in others.
While businesses will expand and grow as the economy does and new manufacturing and services opportunities come up, there is nothing to suggest that we can solve our jobs crisis with a few brush strokes.
I am not suggesting anyone is saying that but this is a reminder it cannot.
We need more fresh ideas on what are the most ideal ingredients for sustainable new job creating enterprises but we also need a patient approach, both in policy as well in practice.
I use the word sustainable with some care because tens of thousands of jobs created by casino-grade venture capital in the last decade have gone because they were never sustainable in the first place.
And no one wants to stay a delivery boy or girl for life.
And our top stories and themes:
Markets fail to hold gains once again though three fourths of globally carry trade removed.
Will Indian markets get rerated to new levels ?
RBI holds interest rates again, which direction is it heading ?
How slowing demand for Chinese homes is hitting India’s steel industry
Markets Fail To Hold
There is a struggle in the markets quite evidently with large, mostly overseas investors coming into sell whenever domestic investments flow in.
In the last few days, the sellers have gained ground.
And that has been the case globally as well as Indian markets are unusually tracking global cues more closely then we have seen in a few years. Like they did in Thursday’s trade.
The residual impact of the yen carry trade continues though Bloomberg is reporting JP Morgan Chase saying three-quarters of the global carry trade has now been removed.
“The spot component of the global carry basket would suggest that 75% of carry trades have been removed,” the JPMorgan team wrote.”
Back home, The BSE Sensex and NSE Nifty50 were down again today.
The BSE Sensex was down 582 points to close at 78,886, while the NSE Nifty50 fell 180 points, to close at 24,117.
The day was marked with fairly broad swings as buyers and sellers faced off..
The larger question of course is what is the direction the market is headed in and where we stand and I posed that question yesterday as well as I will again today very shortly.
Meanwhile, the Indian rupee has ended at its lowest closing level on record, and dollar sales by state-run banks, likely on behalf of the central bank, curbed further losses, Reuters reported
The rupee settled at 83.96 against the U.S. dollar, against 83.9550 at previous close.
These are very small shifts but it is inching closer to Rs 84 to the dollar which is worrying some segments of the market it appears.
On the other hand, India's foreign exchange reserves hit a record high of $675 billion as of Aug. 2, Shaktikanta Das, the governor of the central bank, said on Thursday.
The reserves rose by $7.6 billion in the reporting week, as per Reuters' calculations. They had fallen by $3.5 billion in the prior week, the biggest in over three months.
Elsewhere, consumer products' sales slowed sharply to a more-than-one-year low from April to June due to softening demand for personal care products and packaged wheat flour, especially in urban areas, market researcher NielsenIQ said on Thursday.
The overall sales volume growth slowed to 3.8% in the second quarter, compared with growth rates of 6.4% to 8.6% in the past four quarters, "largely due to macroeconomic headwinds," NielsenIQ said, without detailing the factors.
Rural growth outpaced urban areas for the first time in five quarters in the January-March period as consumer product majors like Hindustan Unilever reduced prices to win back consumers, said Reuters.
Where Is The Market Headed?
So this is the macro backdrop which brings us to an opportune moment to pose the question.
Where is the market directionally headed and what are the factors that are or will influence its movements here ?
I put this question to Deven Choksey, veteran market analyst and MD of DRChoksey FinServ Pvt. Ltd and began by asking him why the markets were struggling to recover from the drubbing that started over the weekend.
INTERVIEW TRANSCRIPT
Deven Choksey: I think the past few years have been extremely, extremely rewarding years for the global market as a whole. It was in the backdrop of the easy liquidity which was created post covid in which I think the market survived, not only survived, but I think grew extremely well. I think in this particular period, because majority of the risk money came into the system, and that got invested into the equity, including emerging market equity like ours. So undoubtedly, I think we are at the blessings of the significant amount of liquidity which came into the global system, and that created, I think, the kind of confidence, covid, euphoria, growth, everything. As far as India market is concerned. India market is distinctly driven by couple of other narratives. The most important of being them was the government's commitment to spend a significantly large amount of money on infrastructure over 10 year period, and every successive years, I think they would increase the budget for spending on infrastructure like the one which we have in the current year of around 11 or 11, lakh crore, which was earlier, I think about 10 lakh crore. So obviously, I think the government wants to keep spending money on infrastructure, which is a good sign, because not only that creates the ecosystem, the economy for growth, but at the same time, it also proves it significantly large amount of money from the global investors at the same time, and that's where probably, I think our markets are typing, growing and reporting some significantly large number of growth numbers. Going forward, I believe that, I think this particular situation would get little moderated, because in past two years, the growth numbers look very smart and some that it was because of the lower base. Today, the base has come up, and as a result of which, I think the same level of growth in percentage will not be seen, knowing volume thing equip so to a to an extent, I think I would think that the market would probably take a cube and support in getting little bit more related because of the growth assumption, numbers on a higher base would look little tap it at this point of time, or maybe coming period as well
Govindraj Ethiraj: Right. So if you were to look at the phase, I mean, now let me define that phase. So for example, let's say before elections, the markets were racing because they were expecting political continuity, and the political continuity has mostly happened, and they continued to rise. So they seem to be a certain target. If I mean, nothing stated but maybe unstated. How would you relate this phase two? I mean, if you look back at previous cycles, is this a period of steady growth in the markets or flat line to steady, including and allowing for the fact, as you said, that we have one big, strong figure, which is public investment.
Deven Choksey: Yes, I think given the fact that economy is growing at 7% and above, which means, in a nominal terms, everything inflation, if it's around 11, half percent plus, so obviously, I think this growth program in the economy is going to continue, as can be seen from or it can be validated from the kind of spending program which the government has launched, both at the infrastructure level as well as the social infrastructure level and the industry level. So on that particular front, I would think that the corporate earning growth will probably be in line with the economic growth, or maybe in some cases, I think it would surpass the economic growth. As far as I think the ability of the companies are concerned to grow faster, it will probably help them even report faster than the normal growth compared to other peers in the same space. So I think the going forward the program looks very, very clear to me, that corporate sector earning growth looks, looks, I think, pretty stable going forward as well. Maybe, as I am, is making a point in some sectors where even a lower base, where we saw the larger group that may not be repeated in the the new era, and that is where I think the valuation probably would come to some kind of quadrature. And could you share a few examples there as sectors when you say this, yes, I think today, find that I think many of the public sector companies which have been driving the rally, many of the defense names which have been driving the many of the railway names, capital goods names, I think we have been driving the rally now they are Actually, I think, fundamentally not in question. Their fundamentals are even stronger than before. That is undoubtedly so. However, I think in each and every situation, if you find, say, for example, public sector undertaking, the stronger ready has been fueled by governments denied to sell PSL companies. That means the government created no liquidity situation on those counter which probably deserted into buying weak power by the money bag investors. Because on that side, I think, when they saw the liquidity is not coming in, the government side in the market, that means supply of people is not coming in. That is where probably, I think, they used that opportunity to buy into some of the public sector. Companies that created the valuation, which is far in excess of, I think the growth these companies have been producing. Similar situation has been witnessed in the defense segment, or even railway segment, capital segment, or even contract manufacturing segment. In electronics, I think where probably the companies are reporting larger the PLI schemes, etc. I feel that this growth is largely backed by the higher number of, I think, volumes, that we have on a smaller base. But at the same time, the supply side is being constrained, which I believe is changing. Equation is changing. Private Sector entrepreneurs have only started supplying new papers in the market, and as a result of which they are also collecting or taking the advantage of the higher valuation, collecting more money for public sector is still not doing it. But at the same time, I think the only equity driven Delhi probably may not work on said and done, insurance companies, mutual funds, provident funds and the retail investors, along with all of them, have been having higher amount of sharing the savings which they are bringing into the investment market. So I guess I think the narrative is basically all are going to be on the valuation. Best of the equation remains absolutely perfect, as I see it,
Govindraj Ethiraj: Just to come back to the point that you touched upon in the beginning as well. So if we look at global markets and their ability to, let's say, influence what happens in India, that seems to have suddenly increased in recent days. Do you see that continuing? Or do you see, once again, a de linking happening?
Deven Choksey: It's a good point to talk about growing. I guess. I think the in the global market, the carry trade, is not a new phenomena. I think for last 35 years, I may have seen this particular character that's a continue this time around. I think Japanese yen, dollar kind of a trade which has been continuing. Many people would convert war in Japanese yen and convert it into the dollar by the dollar assets, simply within market, equity, etc. Now, all said and done, decent leverage position. And this leverage position is played very well by the traders, those traders who are index trainers, those who are more which who are ETF traders, as we call them, in the global market. As those traders are borrowing money on one account, and I think they are using that money completing positions in the other asset classes, other markets of the world may a part of it, I think, is becoming a situation where unwinding has to take place badly because of fact that, I think in Japanese, yeah, you had a zero cost attached to the war out funds, the borrowed funds are going to be costing more because of the diesels that they are increasing the rate of interest. In my viewpoint, I think this kind of phenomena will keep coming and going that does not affect the underlying the strength of the equity market, particularly market tracked India, because I think, as I make, made a point today, 21,000 crore worth of new investment comes just by view of SIP in the mutual fund On every month basis. So whenever even the foreign investors want to exit, the traders want to exit, the local investors, in form of the funds, are definitely having cash money. Another part is that their foreign investors, who are exiting, as I made a point, they are traders, not investors. Obviously, I think it's not going to dent the situation permanently. At times, I think it will probably create a situation or sell off, which we experience about couple of days back in our markets. But that doesn't last longer, because the underlying fundamental, as I explained, in the economy and as well as the corporate sector, remains absolutely strong, including the liquidity factor in our part, right?
Govindraj Ethiraj: Deven, thank you so much for joining me.
Deven Choksey: Thanks Govind. Thank you so much.
Reserve Bank Holds Rates
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 6.5 per cent for the ninth straight meeting, with a majority of 4-2.
The MPC decided to keep its stance of "withdrawal of accommodation" unchanged.
The RBI’s forecast for India's economic growth in FY25 remains unchanged at 7.2 per cent, said the statement.
The MPC projected the inflation at 4.5 per cent for FY25 same as the previous projection.
More on the inflation numbers and the overall interest rate figure in a moment.
The RBI Governor said food inflation, which has a weight of 46 per cent in the headline inflation, cannot be ignored.
High food prices likely continued in July, reflected in the revision in the inflation forecast for the second quarter of the current financial year.
There is continuous concern over household savings moving towards alternative investment avenues, RBI Governor Shaktikanta Das said, asking banks to mobilise deposits through innovative products and services by leveraging their vast branch network.
"Banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues," he said.
Observing that alternative investment avenues are becoming more attractive to retail customers, he said, as a result banks are facing challenges on the funding front with deposits trailing loan growth.
Banks, he said, need to focus more on mobilisation of household financial savings through innovative products and service offerings and by fully leveraging their vast branch network.
He also spoke of the high growth in 'top-up' housing loans and said the regulatory prescriptions relating to loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities in this regard.
Banks and NBFCs have also been offering top-up loans on other collateralized loans like gold loans.
He also flagged the issue of rising personal loans and urged banks to carefully monitor credit growth in the segment.
However, he said, certain segments of personal loans continue to witness high growth.
Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from a macro-prudential point of view, he said, rather reiterated.
He also emphasised the availability of accurate credit information is vital for both lenders and borrowers, Das said, it is proposed to increase the frequency of reporting of banks to credit information companies (CICs) to a fortnightly basis or at shorter intervals, rather than monthly today.
"Consequently, borrowers will benefit from faster updation of their credit information, especially when they repay their loans. The lenders, on their part, will be able to make better risk assessments of borrowers," he said.
So let's return to the overall takeaways from the RBI’s credit policy.
I reached out to Vivek Kumar and began by asking him if he fell interest rates could have been reduced while it was largely not expected to and was thus on expected lines.
INTERVIEW TRANSCRIPT
Vivek Kumar: Well, yes, completely along expected line the interest rate announcement, which was unchanged, as well as the unchaste stance on the monetary policy, which continues to remain at withdrawal of accommodation. So as far as we are concerned, there was no need to dilute either or That. I do accept that a certain part of the market of participants, they were expecting a turn in the monetary policy stands words neutral, but what we believe at this time is that there are enough uncertainties on inflation, especially on account of food. Yes, there are possible mitigants At the same time. So we do acknowledge a strong recovery monsoon, the reservoir levels now look much better than what they were three months back. And there is an expectation of La Nina happening towards the end of August, which generally bodes well for good rainfall turnout in the city. So all these are possible mitigants, which are there, which have come up in the last one month. But the proof of the pudding is in the eating Govind. So until and unless you see food inflation start coming off. I guess it makes sense to stay cautious and take the final step, because the final step is something like, you know, but it's more like you would want to take that step when you don't want to meet a U turn. So you have to be 100% convinced that, yes, inflation is coming off, and even the food inflation pressures, which are notorious as far as forecasting is concerned, they are also much better until you have that confidence, it's better to stay cautious.
Govindraj Ethiraj: Got it. The other point is on inflation, which the governor or the Reserve Bank is clearly projecting lower. Now, what's your sense? Is this based on food inflation coming down, or, let's say maybe re jigging the very structure of measuring inflation or something else.
Vivek Kumar: Well, there are two aspects here. One is that inflation will be lower in q2 which is 4.4% so last first quarter of the financial year, we saw an average inflation of 4.9% the second quarter, inflation will probably moderate to 4.4% and the subsequent quarter, it will again move up to 4.7% the thing to note here is that in the next two quarters, which is q4 of the current financial year and q1 of the next financial year, inflation is expected to be lower than 4.5% that 4.3 and 4.4% respectively. So this is where I think the major comfort lies in terms of the moderating trend and inflation, as far as what's going to drive it, I think to a large extent it's the monsoon led cyclical support to food prices, and obviously the black impact of past monetary tightening is still playing out in the background. We still see bank rates, both on the lending side as well as on the deposit sites, continue to reflect that transmission which was undertaken in terms of actual monetary policy action. So these two are the major determinants, and last but not the least, the fiscal policy also within this being a construct rule here, because it's not just the headline deficit which is consolidating. In the last three years, the quality of spending has been pretty superior, so I would say, pretty healthy, and that both quantity of fiscal consolidation as well as the quality of fiscal consolidation is also leading to, or at least helping towards, lowering some of the inflation
Govindraj Ethiraj: Right, just to pick up on one or two other points that came up in the Reserve Bank of India statements. One was, of course, another alert that we need to step up deposits and bring in more household savings into bank deposits, as opposed to going elsewhere. What's your sense? Is it an early warning? Is it a you know? Is it a sign of concern?
Vivek Kumar: Well, they've been saying it for some time now, with respect to the gap which has emerged with respect to credit and deposit. So essentially, we've been highlighting that the credit deposit gap, or the credit deposit ratio, is kind of running at the level which is somewhat unsustainable in the longer run. So either you bring down credit or you increase deposit. That is the only solution to get it stable in the current context, obviously, RBA would not want credit to come down because they would want the sectors, the corporate sector, the sector, to gain from whatever lending operation to the banking system does. So they are taking the banking participants or the regulated entities to double down on their effort to increase deposits. A deposit also is a function of not just banks putting in their efforts. It's also a macro variable. There are also other variables which impact deposit. And foremost is the income growth, the GDP, for that matter. So if India is able to maintain, let's say, a roughly close to 11% nominal growth in terms of GDP, then it should, by and large, be conducive for healthy deposit growth. Also, the RBI has, in its last bulletin, monthly bulletin, upgraded their estimates for the natural rate or the neutral rate for India. Earlier, they said that it was close to 0.81 percentage. Now they are saying it is somewhere close to 1.9 essentially, what they're trying to say here is that the real policy interest rate in the economy is now higher, and the MPC would now be much more comfortable in keeping real interest rates at a somewhat higher level than what it was assumed to be the case maybe a year or two ago.
Govindraj Ethiraj: Right. Last question. Vivek, so if you were to look at the last few credit policies. Of course, there's no change for some time now in the interest rates. But how have you seen the latest credit policy directionally, as in, you know, are we just building on what we were doing earlier and moving along? Is it looking like we are directionally changing something, or is it more sort of following a certain sequence which seems to have been maybe set much earlier, and therefore not much change.
Vivek Kumar: That's a difficult question to answer in your sense, in some sense, you know, there is emphasis at a policy level to maintain macroeconomic stability, and this is coming getting reinforced, both from the every type of regulator. Look at sebi. Look at what RBI is doing. Look at what the fiscal policy so every policy maker in their own realm, in their own sphere of activity, is emphasizing macroeconomic stability, and so is RBI. So RBI doesn't seem to be in a hurry to act in either direction, because they feel that at the current level of interest rate, at six and a half percent rate, and in facial forecast of four and a half percent, you're looking at a real interest rate of two percentage points that's broadly consistent with their own estimate of the long term neutral rate in the economy. They're also not convinced at this point in time that growth is feeling any scared. So look at the forecast. They are forecasting 7.2% GDP growth in fi 25 that, to me sounds like an outlier in the current environment, where most of the market participants, including the government's chief economic advisor, would be in the six and a half to 73 so they are above consensus in terms of their expectation of growth, which kind of gives them that that extra elbow room to sustain with whatever they are doing right now, in terms of both liquidity and industry policy, so they don't seem to be an hurry. They are not in any mood to blink and they would turn around, or they would pivot only when they are convinced that inflation is much more sustainable at four, four and a half, right, right?
Govindraj Ethiraj: Vivek, thank you so much for joining me and your time.
Vivek Kumar: Thanks, Govind, it's a pleasure.
China’s Housing Problem Affects India
China’s slowing housing market is affecting domestic steel demand causing steel producers who are shifting their output to global markets which in turn is causing consternation in many countries, including in India where steel producers like Tata Steel are up in arms over low cost Chinese imports.
Just another day in a globalised world you might say.
Bloomberg is reporting that steel demand from construction is poised to shrink by 10% this year which would lower the sector’s share of total consumption to around a quarter — a very low proportion by the standards of the past two decades.
ArcelorMittal SA, the biggest producer outside China, said “aggressive” exports from China are creating problems for the global steel industry, pushing prices in the US and Europe below cost.
China’s outbound shipments are running at the highest rate since 2016, said Bloomberg.
Maersk Lines
Shipping giant Maersk, considered a barometer for global trade, is not seeing signs of a U.S. recession as freight demand remains robust, the company’s CEO Vincent Clerc told CNBC on Wednesday.
“We’ve seen in the last couple of years, actually, [the shipping container] market remaining surprisingly resilient to all the fear of recessions that there has been,” he said, adding that container demand was generally a good indicator of underlying macroeconomic strength.
According to him, U.S. inventories — goods being stored before delivery or processing — “are higher than they were at the beginning of the year, but they are not at a level that is worrisome or that seems to indicate a significant slowdown right in the offing.
On the other hand, he said they look at purchase orders from a lot of retailers and consumer brands that need to import into the U.S. for the coming month of demand, and it still seems to be pretty robust..
This would also mean or should mean good news for Indian exporters, including in areas like garments and leather.
