Markets Slip Again, Wait For Bottom Up Santa Rally
The markets are right now taking some deep breaths but are otherwise standing by
On Episode 457 of The Core Report, financial journalist Govindraj Ethiraj talks to Hemindra Hazari, veteran banking analyst.
(00:00) Stories of the Day
(01:19) Markets slip again, wait for bottom up Santa rally
(03:36) OPEC has once again cut oil demand forecasts for next year
(06:11) Gold, silver futures rise on speculation, US may put tariffs on their imports too
(07:50) Inflation drops from 14 month high to 5.48%
(10:39) Is India’s bank credit growth hitting a wall?
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].
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Good morning, it's Friday, the 13th of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
Well, it's Friday the 13th, a date considered unlucky by some, mostly I think because there is a Hollywood-made horror movie by that name.
Meanwhile, we are almost half way through the last month of 2024 and I think this might be a good time to tell you that we will be taking a news break in the last 10 days of 2024.
We will take a news break and not a break though but presenting a wide ranging of interviews and conversations around what the world of business and economy hold for us in 2025. So stay tuned for that.
The top stories and themes for the day.
Markets slip again, wait for the bottom up Santa rally.
Inflation drops from 14 month high to 5.48%
OPEC has once again cut oil demand forecasts for next year
Gold, silver futures rise on speculation the US may put tariffs on their imports too.
Is India’s bank credit growth hitting a wall ?
Markets
Back to yesterday, the markets are right now taking some deep breaths but are otherwise standing by.
On Thursday, the BSE Sensex and NSE Nifty50, were down, with the 30-share Sensex shed 236.18 points close at 81,289.96 after swinging a fair bit during the day.
The NSE Nifty50 closed at 24,548.70, down 93.10 points from its previous close.
The broader markets were down too, with the Nifty Midcap100 and Nifty Smallcap100 indices ending lower by 0.46 per cent and 0.9 per cent, respectively.
The markets are anticipating a Santa rally which is mostly going to be bottom up rather than top down.
One reason that Santa Rally could materialise and before Christmas is of course Wall street which continues to rally strongly.
On Wednesday, investors poured into technology giants and sent stocks higher Wednesday, snapping a two-day slide thanks to a benign inflation report that strengthened expectations that the Federal Reserve will keep cutting interest rates.
The Nasdaq 100 climbed 1.9% to a record while the S&P 500 rose 0.8%, nearing a recent peak. Broadcom Inc. led the advance following a report that the chipmaker was working on an AI deal with Apple Inc, Bloomberg reported adding that .the so-called Magnificent Seven were once again in the pole position, with shares of Tesla Inc., Amazon.com Inc. and Facebook-parent Meta Platforms Inc., setting all-time highs.
Rupee Flails
The rupee fell to an all-time low on Thursday, pushed down by expectations of depreciation bias and strong demand for the U.S. dollar in the non-deliverable forwards (NDF) market, Reuters reported.
The rupee hit a low of 84.88 against the dollar before closing at 84.8575, down slightly on the day.
The dollar index was little changed at 106.5.
The RBI has been routinely selling dollars in the spot market, like on Thursday, to support the local currency as it has consistently hit new all-time lows. Bearish bets on the rupee have climbed to a two-year high, according to a Reuters poll.
OPEC Cuts
OPEC has cut oil demand growth forecasts for this year and next for a fifth straight month, marking its deepest reduction to the 2024 outlook so far after agreeing to extend its supply curbs, Bloomberg is reporting.
The overall commentary that follows is important not because it is oil prices we are talking of because it represents where the global economy is perceived to be going and of course the sharp differences in expectations.
The Organization of Petroleum Exporting Countries cut projections for consumption growth in 2024 by 210,000 barrels a day to 1.6 million barrels a day, according to its monthly report. The cartel has slashed projections by 27% since July.
Last week, the OPEC+ alliance led by Saudi Arabia and Russia agreed for a third time to delay plans to restart halted crude production, while also slowing the pace of increases once they do begin next year, Bloomberg reported.
The first in a scheduled series of hikes was postponed to April from January.
Oil prices have declined 17% since early July as demand from China has slipped even as supply from OPEC’s rivals in the Americas has boomed.
Brent futures are trading near $73 a barrel, too low for the Saudis and many others in the coalition to cover government spending.
OPEC’s Vienna-based secretariat said the revision takes “into account recently received bearish data” for the third quarter,” including “downward revisions to OECD Americas and OECD Asia Pacific.”
Despite the slew of downgrades, OPEC’s forecasts remain significantly higher than most others in the oil industry, and at odds with actual data for consumption this year.
The alliance’s growth projections for 2024 are roughly double those of Morgan Stanley and Goldman Sachs Group Inc., and considerably above the International Energy Agency in Paris.
They’re even significantly higher than estimates from Saudi Arabia’s state oil company, Aramco.
OPEC predicts that oil consumption will average 103.82 million barrels a day this year. It lowered growth estimates for 2025 by 90,000 barrels a day to 1.4 million barrels a day.
The failure to accurately estimate oil demand this year casts further doubt on OPEC’s long-term expectation that oil consumption will keep growing to the middle of the century — a minority view even within the petroleum industry.
Gold & Silver
Could 10% tariffs that incoming US president Donald Trump has promised hit gold and silver too ?
Well, that’s what the markets are fearing, going by reactions.
Premiums for gold and silver futures in New York were up as traders weighed the possibility of precious metals being included in sweeping tariff measures proposed by US President-elect Donald Trump, Bloomberg reported.
Gold futures for delivery in February traded as much as $60 an ounce, or 2%, over spot prices in early London trading, while silver futures were more than $1 an ounce, or 3%, higher.
“If some market participants believe that there is a non-zero probability of tariffs affecting gold, silver and copper imports then it makes sense to cover any short EFP positions,” said John Reade, a strategist for the World Gold Council.
“It might cost a little money to do so, but the potential cost of not doing so is enormous,” Reade said, pointing out that traders would risk losing nearly $300 per ounce of gold if 10% tariffs were enacted, far in excess of the potential profits to be made if precious metals are exempted from the measures.
The last big spreads rose like this was apparently at the beginning of the coronavirus pandemic, when traders grew fearful about getting gold to New York in time to settle futures contracts, Bloomberg reported.
In a chaotic couple of days, the premium for New York futures over the London spot price rose above $70 — the highest in four decades.
This time around, there are no issues with transporting physical bullion between New York and London, which is usually done via planes.
Inflation Is Down, Somewhat
India’s Consumer Price Index (CPI)-based retail inflation was down to 5.48 per cent in November from a 14-month high of 6.21 per cent in October.
The data was released by the Ministry of Statistics and Programme Implementation (MoSPI) on Thursday.
The data shows higher inflation in rural areas at 5.95 per cent, compared to 4.83 per cent in urban regions.
The Reserve Bank of India (RBI) aims to keep inflation within a range of 2-6 per cent, with a medium-term target of 4 per cent, Business Standard reported.
Food inflation is still high, though lower at 9.04 per cent for November compared to 10.87 per cent in October, thanks in turn to high prices of vegetables, fruits, oils, and fats.
Rural areas experienced a CFPI inflation rate of 9.1 per cent, while urban regions saw a slightly lower rate of 8.74 per cent.
Inflation peaked at 7.79 per cent in April 2022 but eased after the RBI’s monetary policy committee raised rates and the government took measures to improve supplies.
However, rising food prices have reduced the purchasing power of lower-income households, particularly affecting festive season sales this year.
India’s industrial output meanwhile rose to 3.5 per cent in October from 3.1 per cent in September, thanks to a rebound in the manufacturing and electricity sectors.
Manufacturing output climbed to 4.1 per cent in October from 3.9 per cent year-on-year in September, while electricity generation grew 2 per cent and mining activity increased by 0.9 per cent, the data showed.
In the April-October period, industrial output rose by 4 per cent.
ECB Cuts Rates
Expectations are running high of a rate cut in India, even ahead of the next monetary policy meeting in February.
Meanwhile, the western world is continuing to cut rates.
The European Central Bank lowered interest rates for a third consecutive meeting, signaling more reductions next year as inflation nears 2% and the economy struggles.
The deposit rate was cut by a quarter-point to 3% — as predicted by all but one analyst in a Bloomberg survey.
That brings total easing since June to 100 basis points.
“The Governing Council is determined to ensure that inflation stabilizes sustainably at its 2% medium-term target,” the ECB said Thursday. “It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary-policy stance.”
The fear is that sub-par growth drags inflation — currently 2.3% — below target, recalling the pre-Covid era when the focus was more on perking up prices than restraining them.
Oil
Russia's state oil firm Rosneft has agreed to supply nearly 500,000 barrels per day (bpd) of crude to Indian private refiner Reliance in the biggest ever energy deal between the two countries, three sources familiar with the deal told Reuters.
The 10-year agreement amounts to 0.5 per cent of global supply and is worth roughly $13 billion a year at today's prices. It would further cement energy relations between India and Russia, which is under heavy Western sanctions over its invasion of Ukraine.
Rosneft did not reply to requests for comments.
Reliance said it works with international suppliers, including from Russia, and deals are based on market conditions.
The company declined further comment on commercial matters, citing the confidentiality of supply agreements.
Is Credit Slowing Down?
A report by banking analyst Hemindra Hazari has argued that bank credit growth is hitting a wall.
Hazari says the critical drivers of growth of non food credit in the recent period have been retail and, to a lesser extent, services.
And not so much companies and business.
On the other hand, as we know, the Reserve Bank has been steadily ratcheting up the pressure on banks and non-banks on lending, particularly retail and unsecured
The retail driver has increasingly come under pressure as the regulator, the Reserve Bank of India (RBI), has been cautioning Non-bank Finance Companies (NBFCs), Micro Finance Institutions (MFIs) and Housing Finance Companies (HFCs) against aggressive lending.
On the other hand, companies are not borrowing as they used to.
RBI data on the sources of funds of companies, says Hazari, reveals that in 1HFY2025, companies reduced their long term borrowing while at the same increasing their short-term borrowing as compared with both 2HFY2024 and 1HFY2024.
The deployment of funds by the companies shows an increase in receivables and financial investments with no major increase in fixed assets.
That companies are willing to deploy more funds in financial investments rather than fixed assets indicates their view on future demand for their products.
A CMIE sample of 3,359 companies (as on December 8, 2024) also reveals a higher percentage growth in current assets as compared with fixed assets and income in non-financial companies in 2QFY2025.
Thus the data suggest that even the slight spurt in industrial credit may be being deployed to finance higher receivables, not a healthy sign when there is a demand problem, he says.
The questions of course are more to do with the larger economy than just banking but we will come to that.
I reached out to Hemindra Hazari and began by asking him why he was concluding a slowdown in bank credit, what it meant and what was the outlook ahead.
INTERVIEW TRANSCRIPT
Hemindra Hazari: Why is it worrying is that the retail credit only started picking up because the last 15 years there has been a substantial decline in the share of industrial credit as compared to non-food credit. That share has been steadily declining, which tells you about the dire state of industry in the economy in the last 15 years. Banks' deposits continue to flow in and therefore they need to deploy the funds in a profitable manner.
Hence, they decided that they will push retail credit and that has been the critical driver for overall bank credit in the last 10 years and therefore you have seen one is mortgages which constitutes about 45 to 50 percent of retail credit has been a driver but mortgages and housing loans are not very profitable for banks because the margins are low on that product and for banks it can only be profitable if they have a lower cost of funds or they take higher risk and go into affordable housing finance affordable housing so the cream in retail really comes from you know unsecured loans credit cards personal loans that is where banks get and loan against property which is more of a commercial type of product so we have been seeing that these have been the drivers as well as lending to non-bank financial institutions which gets categorised as services but non-bank finance companies as well as micro finance companies and housing finance companies their main source of funding is normally banks and they in turn lend to the retail sector so if you classify that also these sectors have been the main drivers of bank credit in these years now what has happened in the last one year is that rbi has been noticing that stress is building up especially in the unsecured personal loans microfinance loans and therefore have been cautioning banks not to lend and increasing the risk weights now typically when the risk weights are increased it lowers the growth rate in those sectors for those loans so now with the main driver being retail and non-housing that has been slowing down significantly the issue is what will drive bank credit in the future and that is where the predicament comes in today for the banking sector
Govindraj Ethiraj: On loans to businesses or companies the general sense is also that companies are not borrowing because many of them at least the better performing ones and the top 100 are cash rich and they've used the last few years to deleverage to the point that maybe they're not really looking and they may not be looking also because maybe they're not doing that much of investment in capital expenditure this does not necessarily mean it's a bad thing isn't it because at least from the company's point of view
Hemindra Hazari: No from the company's point of view it all depends even if you see the corporate sales or revenue data you will find that the growth there is decelerating if you look at the rbi survey on industrial capacity utilisation you would find it has you know kind of stagnated at the 65 to 70 percent range so there is essentially a problem of demand in the indian economy and earlier it may not have been so visible in the formal industrial sector which most of the stock market companies residing because the informal unorganised sector has got totally squeezed out by demonetisation and gst implementation and their share had been captured by the formal corporate sector therefore you did not see the impact of that impacting corporate sales but since the overall pie was not growing it was evident that this could only you know go on for a certain amount of time and now it has become visible even in the formal corporate sector that their sales growth is under pressure so in such a situation it is but obvious that there will be really no requirement for major external funds if capacity utilizations are going to be low and sales are also going to growth rate and sale is also dropping so hence obviously there will not be a requirement for external funds and since the banking sectors so you know the main driver the main contributor of funds you're not seeing that bank credit to industry has not been very significant in the last decade or so
Govindraj Ethiraj: Right and if i were to come back to retail assuming let's say some of this is because the reserve bank itself has you know increased risk weightages made it tougher to borrow or more expensive to borrow because it was seeing a froth in the system if that sort of evens out and let's say slightly more mature borrowers come into the market or stay present wouldn't that be good for the system overall in time
Hemindra Hazari: Yeah but i think you have to see this in the overall stress of the economy you're very clearly seeing that there is a demand problem we're very clearly seeing that there is a huge unemployment problem where all the data gets disguised because it gets classified under being self-employed which is very disguised unemployment so that is what are the reasons which is contributing to poor demand in the indian economy and added to this you are seeing you know rising food inflation you are seeing the wage rate in india has been stagnant or in real terms has been declining for rural wage for labourers so all these indicate that there is a huge demand issue in the indian economy so you may get certain pockets of the economy which will do well and that has normally been you know the more higher premium segments but those have never in any economy driven overall or demand or overall bank credit so therefore it tells you that even with the retail wise rbi saying be cautious is because that they are seeing that there are many individuals who are over leveraged and there is stress building up you're seeing that in definitely in microfinance where the npa seem to be rising and the provisioning being made by these players has you know sharply increased so there is no doubt that there is stress in the retail segment and this can only one can only come out of this if the government implements measures which can stimulate the economy to higher growth but we really don't see that there are only two drivers which can really stimulate the indian economy one of this global growth which global growth does not seem to be happening in a major way or to government expenditure and if you see the data and what the government has been saying is that they have been you know lowering the fiscal deficit as a percentage of gdp so even when you are having a lower government expenditure to gdp in an overall environment of suppressed demand it means it can on the situation can only get worse and not better so in such a situation my view is that bank credit growth as well as the economy growth is going to take a hit.
Govindraj Ethiraj: Between let's say share of credit between retail and institutional and its growth i mean we are obviously seeing some growth the question is how much and whether it's decided how would you compare this with where we were before covid and are you also seeing like some economists are saying some normalisation now in terms of overall growth
Hemindra Hazari: One must also recognise that prior to covid we were in an economic slowdown it was independent of covid that we were already in an economic slowdown pre-covid and that's why the overall non-food credit just before covid it was only a mere eight percent year on year so we were have been in an economic slowdown and that is very clearly what the industry data suggests right from 2008 onwards which is post-lehman you know there was some recovery because of a you know fiscal stimulus but once that stimulus was withdrawn globally as well as in india the industrial credit has been going nowhere in industry also has not been growing much they've only been taking over the share of the unorganised and informal sectors and that is why banks started pushing retail credit mind you retail credit can be very expensive for banks because there are huge overheads associated with retail credit you require branches on the ground you require people to contact them and banks have only done this because industry and corporate credit was not picking up so in this context when you see that you have seen a very sharp downtrend in corporate industry credit has a share of total credit coming down and it is retail credit which has really replaced it now in this present scenario with the rbi is saying that and plus stress is building up in retail it is very unlikely that industry credit can compensate for the eventual decline in retail
Govindraj Ethiraj: Hemindra, pleasure talking to you. Thank you so much for joining me.
Chess Win
Indian chess prodigy Gukesh D. emerged as the youngest world champion in history, dethroning reigning champion Ding Liren after a critical blunder in a dramatic finale at the 2024 World Chess Championship.
The game, which had already stretched into the fifth hour, appeared set to enter tiebreaks, but a costly mistake by Ding allowed Gukesh to seize victory and claim the crown, a report in Business standard said..
Throughout the match, Ding found himself consistently trailing on the clock, a situation that had become a recurring theme in the series. By the 23rd move, Ding had 23 minutes less on the clock than Gukesh.
The Indian challenger, who had shown resilience throughout the championship, used this advantage to push Ding to the edge. Gukesh had prepared well, pulling off novelties in the opening phase that forced Ding into uncomfortable positions.
The players had dueled for three weeks, each move building towards a tense conclusion.
Game 14, the final classical game of the series, was set to decide the world champion. As the game reached its climax, it seemed as though the match would be heading into tiebreakers, but Gukesh’s persistence and sharp play finally broke Ding’s defenses.
