Markets Gain Steam Again
The stock markets are still holding on a firm wicket though with marginal gains
On Episode 321 of The Core Report, financial journalist Govindraj Ethiraj talks to Anindya Banerjee, Head of Research for FX and Interest Rates at Kotak Securities as well as Kapil Kaul, CEO of CAPA India.
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SHOW NOTES
(00:00) The Take
(04:00) Stories Of The Day
(04:41) Markets gain steam again
(06:46) Rupee hits an all time low, why that is happening despite inflows
(12:14) Risk at acceptable levels, says RBI Gov
(15:19) Why India’s aviation sector will remain one of the hottest in the world
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning, its Friday, the 21st of June and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital
The Take: Indians
Like Amitabh Bhachan in the 1979 film The Great Gambler, Indians now increasingly seem to believe they can take big risks and continue to make money.
Before I start, this is not to parcel out blame because it is evident that the regulators whether the Reserve Bank of India or the Securities & Exchange Board of India are struggling as well, across markets.
In March, the Sebi asked mutual funds to run stress tests on liquidity and various risk ratio parameters on mid cap and small cap mutual funds because quite evidently there was considerable froth building up in that space.
Subsequent to that, mid cap and small cap stocks as a category started shrinking in value and then they turned around and came charging back to hit the same new highs that the benchmark indices are.
So Sebi presumably is figuring what to do next. Because the problem if it were one has not gone away.
Moneycontrol now reports that the National Stock Exchange (NSE) and BSE are now the world’s top two exchanges in terms of F&O volume.
Moreover, the combined turnover of the two Indian stock exchanges accounted for more than 80% of the global equity derivatives turnover in the month of April.
This is amazing. Indians’ are the biggest gamblers effectively within the stock market system in the world now.
Data from the Futures Industry Association shows that a total of 8,484 million contracts were traded on NSE in April, which was the highest among all global bourses. NSE was followed by BSE that saw a little over 2,224 million contracts changing hands in April.
Moreover, year-on-year, the NSE registered a 92 percent rise.
And it's not that futures trading is very lucrative. Repeated studies, including by the SEBI have
In January 2023, capital markets regulator Securities and Exchange Board of India (SEBI) released a study that showed that nine out of 10 individual traders in the equity derivatives segment incurred net losses despite which the number of traders went up 5 times in two years.
Elsewhere, in the banking system, the RBI has tried to and continues to try and control the growth of small loans or essentially where people are taking loans to maybe invest in stock markets or to meet their monthly expenses and then rolling over.
And then are the prices of stocks, gold, silver and even real estate all at all time highs.
Some of these mirror international markets so we are not alone.
A report in the Financial Express, speculative at this point, says the Government is thinking of taxing F&O income like cryptocurrencies and lotteries in the upcoming Union Budget.
How interesting indeed.
Obviously this means that currently income from F&O is treated as income from stocks and shares and taxed as business income and taxed according to income slabs of 5%, 20%, and 30%. The existing classification also allows gains from F&O to be offset against losses from other business activities.
Like any other form of buying and selling of shares.
We are not alone in the fact that investors are buying assets and gambling in derivatives because inflation is eating away their savings and the possible growth of them.
If salaries don’t rise much or the household bill keeps rising, you would want to take bigger bets for bigger returns.
It's very much like a lottery. Except that the stakes are much bigger.
Savers and investors have to find ways to put their money to work in a way that gives good returns and the economy benefits from more capital stock. This is of course easier said than done.
But the problem has to be fixed at source. Changing tax treatments will only go that far.
Our top stories and themes for the da
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The Markets Rise Again
The stock markets are still holding on a firm wicket though with marginal gains.
The Sensex posted its best winning streak in four months to close at its highest levels. While the Nifty recorded its highest close of 23,567, up 51 points while the Sensex closed at its highest level of 77,478.93, up by 141.34 points.
While the indices did rise on Thursday trade, they were volatile all day, going up and down.
The BSE MidCap, and SmallCap indices did better than the benchmark indices with 0.55 percent and 1 percent gains.
While there are no clear domestic triggers on the horizon except of course rumours of various tax cuts or increases, the global triggers are firm.
Global stocks rose on Thursday, after an interest rate cut in Switzerland lifted hopes for policy easing across the developed world, Bloomberg reported.
Wall Street was poised strongly overnight.
Switzerland’s rate cut “implies they feel confident that the inflation dynamic is manageable, and that bodes reasonably well for other central banks,” said Guy Miller, chief market strategist at Zurich Insurance Company Ltd to Bloomberg.
The Bank of England kept its main interest rate unchanged at a 16-year high of 5.25% on Thursday ahead of a July 4 election, but some policymakers said their decision not to cut rates was now "finely balanced", Bloomberg reported.
Meanwhile, Gold prices hit a two-week high on Thursday after recent weak U.S. economic data raised market expectations of interest rate cuts from the Federal Reserve later this year, Reuters reported.
Spot gold was up 0.5% at $2,340.12 per ounce, after hitting its highest since June 7 earlier in the session.
Let's see.
Rupee Hits All Time Low
The Indian rupee has hit an all-time low largely triggered by a strong dollar which in turn depressed most emerging Asian currencies.
The Indian rupee fell to a record low on Thursday, pressured by likely outflows and strong dollar demand from local importers, Reuters reported.
The rupee hit a lifetime low of 83.66 against the U.S. dollar in the latter half of the trading session and ended at a record closing low of 83.65. It had closed at 83.45 in the previous session and its previous low was 83.57 in April, according to Bloomberg data.
The dollar strengthened as the Swiss National Bank delivered an interest-rate cut.
The rupee is still the best performing currency in Asia this year after the Hong Kong dollar, said Bloomberg adding that the US dollar strength is dominating the market at the moment and that is what is driving the rupee to a record low.
To get a sense on where the rupee was going and why it was weak despite inflows and which way the demand and supply forces were working, I reached out to Anindya Banerjee, Head of Research for FX and Interest Rates at Kotak Securities and began by asking him how he was seeing the recent movement.
Monsoon
India's monsoon is advancing after stalling for more than a week and rains are set to cover central parts of the country in the next few days, bringing relief from the heatwave in the grain-growing northern plains, two senior weather officials told Reuters.
Monsoons this year are forecast to be above normal but the sequence of it also matters, as is quite evident from dispersion data in recent years.
Summer rains, critical for economic growth, usually begin in the south around June 1 before spreading nationwide by July 8, allowing farmers to plant crops such as rice, cotton, soybeans, and sugarcane, Reuters added.
Do Not Take Unacceptable Risks
Sticking to the theme of risk I spoke of earlier, the RBI Governor has told banks and non-banking finance companies (NBFCs) should not take “unacceptable risks” in the pursuit of growth.
They must have robust risk mitigation frameworks, he said on Thursday.
Obviously that is somewhat stating the obvious but clearly recent events, including with some non bank finance companies or for that matter banks suggests they have played fast and loose with rules and got carried away by the sheer accelerated growth that internet powered reach could achieve.
“While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent,” he said in Mumbai.
Both regulated entities and supervisors need to be vigilant to risks, if any, in their business models.
“Pursuit of business growth is important, but it should never come at the expense of taking on unacceptable risks,” Das said while speaking at the Global Conference on Financial Resilience organised by the College of Supervisors, reported by BS.
The RBI emphasises on governance of regulated entities and has imposed business restrictions on some of them due to “material supervisory” concerns.
The RBI has been attacked mostly by tech brothers who have accused the regulator of overreaching, putting the central bank slightly on the defensive, at least in as much as it has attempted to explain its actions and path to them.
On Thursday, Das said when serious problems appear in a financial entity, an RBI officer of the rank of executive director addresses the full board of that organisation and shares the regulator’s concerns.
When material discrepancies are found between an auditor’s report and RBI’s supervisory findings, or when certain material issues are not properly addressed, RBI invites the auditors for a direct discussion.
“We now look at the sustainability of business models of banks and NBFCs. Root cause analysis of problems and vulnerabilities are undertaken,” he said, adding advance action is initiated wherever the regulator notices or smells a crisis.
Commenting on the RBI’s decision in November to increase risk weights for loans for the unsecured credit and bank loans to NBFCs, Das said it brought down credit growth to these segments.
“Our timely action has resulted in a situation where the growth of unsecured loans – it was in order of 30 per cent year on year growth for credit cards, now moderated to 23 per cent. Similarly, bank lending to NBFCs which were also 29-30 per cent have come down to 18 per cent,” he said.
“Please mark my word, we thought if left unattended, these vulnerabilities can become a bigger problem,” he said, adding it was better to act in advance and slow down the credit growth because RBI could see some evidence of dilution of underwriting standards, “some evidence of proper [credit] appraisal not been done”.
Of course all of this does not mean the problem of risk will go away, given the fact that there are macro factors weighing on savers and investors to take bigger risks in borrowing and then deploying their funds.
Aviation Goes Gung Ho
Domestic airlines will see traffic grow this year though losses are set to increase for the industry as a whole.
More specifically, domestic traffic is projected to grow at 6-8 percent in FY25 over the previous year and international traffic at 9-11 percent, aviation consulting agency CAPA India has said, adding that losses could touch $400 million-$600 million in FY25, aviation consulting agency CAPA India has said.
We will come to why airlines are losing money despite the boom shortly.
Of course there is one airline Indigo which is powering via record profits.
InterGlobe Aviation Ltd, which operates IndiGo, reported a profit of Rs 1,894.8 crore for the January- March period of FY24, the sixth straight quarter of gains.
India’s airlines are expected to add 84 aircraft this year, taking the fleet count to 812 by the end of FY25 from 728 in the previous year. The fleet size would double by 2030.
CAPA India expects 25 more airports to be privatised during the next financial year, coupled with an investment of $4 billion by the Airports Authority of India in the next two years to better the airport infrastructure.
But the big challenge will be shortage of pilots will continue to be a concern for Indian aviation in the near future.
More more on where the industry is headed, the boom times and the big challenges ahead, I reached out to Kapil Kaul, CEO of CAPA India and began by asking him what he took away from the CAPA India summit which saw the whos who of Indian aviation gathering earlier this month in Delhi.
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Meanwhile, Bloomberg is reporting that as the world begins to fly again, in the third quarter, 10.5 million flights are scheduled to crisscross the skies.
The International Air Transport Association is anticipating record passenger numbers this year, and planes that will be about as full as they were before the virus using record amounts of fuel.
