Markets' Worst Week In Over 2 Years
Brace for the turbulence in the markets, as the next few days will be tricky
On Episode 403 of The Core Report, financial journalist Govindraj Ethiraj talks to Bhushan Kedar, Director, Funds & Fixed Income Research at Crisil Market Intelligence and Analytics.
SHOW NOTES
(00:00) The Take
(04:21) Markets' worst week in over 2 years
(07:09) Oil is now inching back to $80 as middle east tensions stretch further
(08:25) Forex reserves hit record high, crossing $700 billion
(10:01) Both services and manufacturing PMIs are at lows
(10:38) How Indian banks are borrowing from institutional lenders to stay in the game
(18:47) Port strike in US ends, relief for Indian exporters
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 Monday, the 7th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
For decades, the standing joke was that you could buy a Made in India watch by HMT, once Hindustan Machine Tools, at a cheaper price in Dubai.
What made the joke sadder was the fact that these watches were effectively made by and still are by the Government of India as HMT belongs fully to the Government.
How does that make sense you might ask ? Well, that of course is the beauty of India’s taxation structure, since time immemorial where local taxes have been so high that once exported to countries like Dubai where local taxes were low, it became cheaper.
HMT watches are very much around by the way in case you want to check it out on their website and even buy them.
What is also around is India’s totally inverted duty structure where goods made here become cheaper overseas.
The latest example is iPhone16s.
The Government and Apple have announced with much pride that iPhone 16 and iPHone 16 Pros are being made in India now for obvious exports.
What they have not mentioned is that the duty structure is such that it is still cheaper to import or better still smuggle.
So the phone, assuming it's the same set of units, is going around the world and coming back and being sold in the grey market at a cheaper price.
Why else would they be smuggled ?
In the last week, Indian customs officials said they seized 12 newly launched iPhone 16 Pro Max devices from four passengers allegedly attempting to smuggle them into India.
The passengers came on a Indigo flight from Dubai, the customs department has been helpfully informed.
In the same week, another 26 iPhone 16 Pro Max were seized from a woman passenger and the phones were in her vanity bag.
She came from Hong Kong.
And over the weekend, Apple announced it will roll out its first ever made in India iPhone 16 Pro and Pro Max series of devices this month.
So maybe the enterprising smugglers could have waited for a few more weeks.
But then, time and tide wait for no Apple fans.
Though even if the phones were made in India, the price would be higher.
Media reports have computed the price difference between an iPhone bought in Dubai or Hong Kong versus one bought officially in India at around Rs 30,000.
So a smuggler could make let's say Rs 10,000 per phone and still offer a Rs 20,000 discount on buying from the Apple Store in India.
In India, many would jump for a value proposition like that.
The larger question is why is this happening even today ?
Well to come back to the HMT example, India’s duty structure is still convoluted and high and protectionist and in many ways no different from the glory days pre liberalisation.
Because among other things, our tariffs and duties have been going up.
Ten years ago, average tariffs were 13%, today they are 18%, amongst the highest in the world and double of countries like China and Vietnam.
Companies like Foxconn who make Apple products in India have obviously protested the high duties on components and managed to bring them down from 20% to 15% because it was obviously uncompetitive.
This has been happening with gold too.
Our tariff setting seems to be governed by the moral of taxing gold imports versus the practicality of understanding how flows work in a high tariff environment and what we can and cannot do.
We hiked customs duties on gold in the last decade only to see smuggling rise and then finally dropped duties this June in an apparent recognition that high duties don’t help.
But that lesson was learnt earlier as well.
If we truly want to become a globally competitive manufacturer and thus create more jobs, we have to reduce tariffs for final products and components.
Else, people will continue to buy products that are made in India but in Dubai and Hong Kong or after the same product is smuggled back from these countries.
And that brings us to the top stories and themes of the day
Markets worst week in over 2 years
Oil is now itching back to $80 as middle east tensions stretch further.
How Indian banks are borrowing from institutional lenders to stay in the game
Forex reserves hit record high, crossing $700 billion.
Both services and manufacturing PMIs are at lows.
Port strike in US ends, relief for Indian exporters
Markets Fall
If you haven't already braced for the turbulence you should because the next few days will be tricky.
There are a host of factors that are weighing on Indian stocks which the domestic flows are not able to counter.
From middle east tensions to selling by foreign portfolio investors, the external signals are weak and are likely to remain so.
The China shift may start easing as markets reopen there after a holiday and more on that shortly but the middle east tensions are not going away soon. Oil is already inching back towards $80 a barrel.
Last week was a bad one.
Stocks fell for the fifth session on Friday recording their worst week in over two years
On Friday, the BSE Sensex fell 808.65 points to 81,688.45 while the Nifty50 fell 235.50 points to settle at 25,014.60.
But the indices lost around 4.5% each for the week, their worst since June 2022, with most of the decline due to a 2% slump on Thursday, Reuters computed.
Reliance Industries , the second-heaviest Nifty 50 stock, shed 9.2%, leading losses on the index this week.
On the day, Bajaj Finance fell about 3% and was among the top five losers on the Nifty 50.
Stockbroker Jefferies said the non-bank lender's pre-earnings update showed a moderation in assets under management, with a 12% sequential drop in new loan bookings.
China Factor, 25% Already
Will China stocks start moderating after their record run in the last few weeks?
Remember, it is not just about stock prices going up, but it is also about the capital that is being pulled out or reallocated from countries like India and invested there.
China’s stimulus packages have already taken the CSI 300 blue-chip index to rally over 25% in a nine-day winning streak, CNBC reported adding on Monday, it popped over 8% to its best day in 16 years and the Shanghai Composite Index surged 8.06%, before the markets closed for a week-long holiday.
Then, Hong Kong stocks dropped on Thursday, ending a 6-day winning streak and sparking fears that China’s stimulus rally could have started to fizzle out.
But analysts also told CNBC that China stocks will keep rising after markets in the mainland reopen following the Golden Week break.
China has moved on several fronts making borrowing cheaper as well as a string of other steps.
There is still scepticism on the follow through.
The key focus will be on the effectiveness of further stimulus measures, said Billy Leung, investment strategist at Global X. “If policy follow-through is strong, we could see further gains, backed by a broader base of investor participation.”
Speaking on CNBC’s “Street Signs Asia,” Alexander Cousley, an APAC investment strategist at Russell Investments, said I think most at Russell do worry about, is that we are still in this period where Chinese authorities respond to weakening data, and the thing starts to improve a little bit, and we don’t see the actual follow through,” said Cousley.
Oil Prices
Oil prices have crossed $78 a barrel, up more than 8% last week, and this obviously now pushes further the prospect if there ever was of prices of petrol and diesel being reduced in India, which looked feasible just a few weeks ago.
In the latest move, Saudi Arabia raised its main oil prices for buyers in Asia.
State producer Saudi Aramco increased the official selling price of its main Arab Light crude grade by 90 cents to a premium of $2.20 a barrel against the regional benchmark for buyers in Asia, according to a price list seen by Bloomberg.
At the same time, Aramco cut the price of all grades to the US and Europe.
Oil has been rising this month after Iran launched missile strikes on Israel in retaliation for Israeli attacks on Lebanon.
Benchmark Brent crude gained about more than 8% this week.
The macro drivers for oil markets still stay demand or how weak it is in China and the US.
Also, that the middle east tensions would not really affect oil production or supply.
That could change if Iran’s oil infrastructure is attacked and the supply routes through the Straits of Hormuz are choked.
Forex Reserves At Record
While portfolio investors have been selling, dollars are still flowing into India.
India's foreign exchange reserves crossed $700 billion for the first time on record, after climbing for seven straight weeks, on valuation gains and the central bank's dollar purchases, Reuters reported.
Forex reserves were at $704.89 billion, having risen by $12.6 billion in the week through Sept. 27 in their biggest weekly increase since mid-July 2023.
Interestingly, India is the fourth economy in the world to cross $700 billion in reserves after China, Japan, and Switzerland, reports Reuters adding foreign inflows hit $30 billion so far this year, led mainly by investments in local debt after they were included in a key J.P. Morgan index.
Forex reserves have ballooned by $87.6 billion so far in 2024, already more than the near-$62 billion increase over the whole of last year.
The valuation gains were due to the decline in U.S. Treasury yields, a weaker dollar and the rise in gold prices, Reuters quoted analysts saying.
The rupee has now strengthened past 83.50 to the dollar.
Elsewhere, gold prices are still soft, largely because of stronger-than-expected U.S. jobs report which in turn reduced expectations of an aggressive rate cut from the Federal Reserve next month, a move which has boosted the dollar.
Spot gold was down 0.2% at $2,649.69 per ounce by 01:57 p.m. EDT (1757 GMT), after touching a record high of $2,685.42 last week, Reuters reported
Services
Growth in India's dominant services sector remained robust but slackened to a 10-month low in September as demand slowed, a business survey showed on Friday.
The HSBC final India Services purchasing managers' index , compiled by S&P Global, fell to 57.7 in September from a five-month high of 60.9 in August and was below a preliminary estimate of 58.9.
A manufacturing PMI was down to an eight-month low of 56.5 in August, which along with the slip in services activity meant the overall Composite PMI was its weakest since November last year.
Banks Are Borrowing Aggressively
Banks can only lend to you if you or someone deposits money with them to start with.
Deposits have been slowing down as has been much discussed in recent months pushing banks to step up deposit mobilisation including by setting up more branches and other marketing efforts.
But all that takes time and the demand is here and now.
A report from Reuters says Indian banks are set to issue more certificates of deposit to meet year-end loan demand as deposit mobilisation remains challenging, six bankers said.
Certificates of deposit (CDs) are debt instruments with maturities of less than one year issued by banks.
Demand is likely to be higher this festive season as is usually the case.
The stock of outstanding CDs rose to a record high of 5.15 trillion rupees (about $61 billion) at the end of August. Since then, banks have issued more than 1 trillion rupees of these notes, clearing house data showed.
Consumer loans have grown in double digits in the last two years but not so deposits which grew 13.3% year-on-year in the fortnight to Sept. 6, while deposits rose by 11.1%.
Among others, mutual funds are big lenders in this space.
I reached out to Bhushan Kedar, Director, Funds & Fixed Income Research at Crisil Market Intelligence and Analytics and began by asking him to explain the phenomenon and assess its impact.
INTERVIEW TRANSCRIPT
Bhushan Kedar: Just to give you a quick overview of the trends that we're seeing in the certificate deposit market really is the borrowing typically by banks through CDs was flattish till you could say 2020-2021. However, when credit started picking up in 2022, the demand started going up significantly for CDs.
Just to give you some perspective, on a quarterly basis, banks used to typically borrow between about 20,000 crore to 30,000-35,000 crore through this route. Now they have grown five to seven times and touched about one, one and a half lakh crore. And now we are seeing on a quarterly basis about three lakh, two and a half, three lakh crore borrowing.
So that's really one key trend that we are seeing on CDs. And obviously that has also pushed yields, saw the trading volume picking up on the CD market. So that's really a quick take on trends, high-level trends that I could see.
Govindraj Ethiraj: Got it. What is the key driver in the sense that why are banks borrowing at such high levels? And because you said 300,000 crores compared to 20 to 30, that means it's almost 10 times now per quarter.
Bhushan Kedar: Yes, as I was mentioning three lakh crore compared to 30,000 crore, maybe five years back, sort of started picking up. So clearly credit is a credit pickup or advances growth that we are seeing in banks demand for it is one factor to obviously the financial savings. And if you look at the Reserve Bank data on the gross savings, the allocation of household is going more towards such as mutual funds or further back to even life insurance policies, et cetera.
And for bank deposits, the amount has dipped over the last few years. And that is one factor that has created a gap in that sense between the deposit and credit rate. And that's really one factor where to meet the ongoing demand for credit or CD market is something which is a preferred one.
And just to add, it is CDs is one piece, but you would see banks through bond route have also been borrowing significantly from 2022 onward. So that is the other piece that just would have been important for the market.
Govindraj Ethiraj: That's interesting. And what are the figures like there, Bhushan, when you say bonds versus, let's say, CDs or all, if you were to look at the entire basket of borrowings, how is it broken up now?
Bhushan Kedar: So banks, if you look at the borrowing around 2019, 2020 was ranging between about 40 to 60, 70,000 crore. From 22, that number has actually touched 2 lakh crore. So it has doubled in 22.
It remains similar. And maybe when we close this year as well, we would be close to 2 lakh crore. Certainly the number has doubled over the last three years.
Govindraj Ethiraj: My question is more on the gap between bonds or rather the quantum of the bond market versus the quantum of the certificate of deposit market.
Bhushan Kedar: Just to look at the overall data perspectives, when I was quoting the bond market, obviously it's a yearly number, which is 2 lakh crore. But CD data is obviously, they are of short-term maturities. And if you will look at the overall borrowing last year through CDs was about 8 lakh crore.
So in that sense, it's significantly higher, but yes, we have short-term maturities and it's basically a roll over that banks tend to do.
Govindraj Ethiraj: And what's the average maturity of a certificate of deposit?
Bhushan Kedar: It would put the large maturity bucket would be between 3 to 6, 7 months. That's where most of the CD maturities will typically fall.
Govindraj Ethiraj: And who are the lenders in this market mostly, at least at this point of time?
Bhushan Kedar: So investors, mostly on the buy side. So mutual funds are the largest. Their proportion to this would be anything between 60 to 70%, followed by insurance companies and maybe a few corporate.
And lastly, interestingly, banks also invest in CDs over the banks. And one of the requirements for which they do is typically more for the LCR perspective. There's an LGBT instrument.
I think that is probably another reason that we hear that does happen.
Govindraj Ethiraj: What is the kind of rates of interest, Bhushan? So for example, what rate is a bank typically borrowing and what rate is it lending and how is that adding up?
Bhushan Kedar: So in terms of maybe, of course, lending rate, I better have the data sort of handy with me.
Govindraj Ethiraj: Very roughly. This is like a very rough sense.
Bhushan Kedar: Sure. Typically, MCLR becomes a reference rate for them and that on top of that, they typically would be lending, which thing would be north of 7, 80 or 8% around north of that. If you look at the CD rates that are prevalent today, so that would range from three month CD would be about 7.25 and the one year will be about 7.60. So that's really a bank in which they are operating when it comes to borrowing profile. So if we look at a broad level, there is about 50 basis, 50, 60 basis spread that I see between this to MCLR. And yeah, the borrowing will then obviously on top of that and the lending will be on top of that.
Govindraj Ethiraj: So it's a fairly tight market. I mean, between the borrowing and the lending.
Bhushan Kedar: So especially for this phase that we see, the yields from July onwards, the spread to what projectables have sort of risen by about 40 to 50 basis point. And in fact, they are very close to this commercial paper level. So in BFCCPs and bank CDs, the spread is about 20, 25 basis today, which generally used to be north of 50 basis point.
So that is the other trend. And what does that signify? So that really means that the supply of CDs is certainly inching these spreads and the risk premia between the two is minimal because maybe if NBFC supply is not that high and we see the supply demand factors are warranting more minimal spread or less spread between the two assets, I think that's really one key takeaway.
Govindraj Ethiraj: So what's the outcome of this all? I mean, what happens when let's say we see such high levels of activity in the institutional borrowing by banks or what we call certificates of deposit instruments?
Bhushan Kedar: So I think fundamentally, this also is an alarm for, I mean, banks the way they are, I'm sure they're seeing it because it's a short term borrowing and they're rolling it over. And obviously, from a credit perspective, they are leaning at the higher side. So from an ALM perspective, banks are also looking at this.
So maybe some of the decision they might be looking at is how do they sort of expand credit? How do they grow on that part? Certainly is one piece to really look at.
And obviously, from a cost of borrowing perspective as well, it is significantly higher. So I think both from margin and ALM, I think those are two things I'm sure banks are really looking at, you know, this activity right now.
Govindraj Ethiraj: Got it. Bhushan, thank you so much for joining me.
Bhushan Kedar: Yeah, thanks, Govind.
Port Strike Is Off
Some logistics news.
US East Coast and Gulf Coast ports reopened on Friday after dockworkers and port operators reached a wage deal to settle the industry's biggest work stoppage in nearly half a century, but clearing the cargo backlog will take time, Reuters reported, adding that the strike ended sooner than investors had expected, weakening shipping stocks as freight rates were no longer expected to surge.
This is surely welcome news for India’s exporters who are already grappling with longer shipping times via the tip of Africa as opposed to going through the Suez Canal.
