Stock Markets Stay Near Highs
Foreign inflows into Indian bonds will hit a decade-high of $2 billion around June 28, when they will be included in a widely-tracked JPMorgan index
On Episode 320 of The Core Report, financial journalist Govindraj Ethiraj talks to Paras Jasrai, senior analyst at India Ratings & Research (A Fitch Group Company), Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA as well as G Haribabu, president of the National Real Estate Development Council (NAREDCO).
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SHOW NOTES
(00:00) The Take
(02:21) Stories Of The Day
(03:05) Stock markets stay near highs, why the action is shifting to debt flows
(06:28) Heatwaves are on, understanding the impact on inflation
(11:13) India’s dream run with discounted Russian oil is ending and what that means
(18:00) Why tenants across India are refusing to let out some 10 million homes, leading to supply distortions
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 Thursday, the 20th of June and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital
The Take
There is a disconnect in the economy and we should take note. Inflation is reaching unbearable levels for many people in the country, notably food inflation. Vegetable inflation is running at 27% and heatwaves are making it worse. And then there is Russian oil
The stock markets are of course hovering around their all time highs.
This is not to say that there is something inherently wrong in the stock markets doing well but to point out the disconnect between some aspects of the economy and investors would be advised to be alert.
By the way, the way derivatives markets are booming, it's surely a cause of concern.
RBI governor Shaktikanta Das on Tuesday said the volumes in the F&O market are very large, perhaps larger than the nominal GDP. We have discussed the matter with Sebi, and they are dealing with it," he said at an ET Now event.
Back to the real world, one thing that will increase the pressure on the overall macros is oil prices. Oil prices are high now, just under $86 a barrel.
But that is not the problem. The problem is that we have been able to buy Russian crude at discounts as high as $16 a barrel since the middle of 2022 or thereabouts.
This happened after Russia invaded Ukraine in February 2022 and western nations imposed sanctions on Russian oil exports.
India moved tactically and out of self interest to buy oil cheaper which worked well.
But that dream run is now over and discounts are now down to $3 a barrel or so. We import around 36% of oil from Russia now which will come down. And of course overall prices will rise and the Government will have a tight rope walk.
So the point is that there are more pressure points ahead in the economy and while the stock markets are riding on strong sentiment and flows, the companies that make up the indices cannot forever fight rising input prices, nor can savers or investors continue to pump the same amount of money into the markets if their household bills keep rising in the manner they are.
Our top stories and themes for the day
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Markets Hit Fresh Highs
The stock markets lost traction and fell during the end of trading on Wednesday, 19 June though, of course, the Sensex, and Nifty50 clocked fresh record highs on Wednesday.
The Sensex hit an all-time high of 77,852 in intraday trade, ended 36 points higher at 77,337 levels while the Nifty50 was down 42 points at 23,516 after hitting a record high of 23,664 during the day.
In general, banks were the big gainers and the major ones like Axis, HDFC, Kotak and ICICI rose between 1 and 3% as per reports.
Supply of funds continues to be strong.
Foreign institutional investors are back in the market, as The Core Report had predicted and projected in the somewhat nervous phase of elections and have been net positive buyers in the last few trading days.
The action is shifting to bonds.
Foreign inflows into Indian bonds will hit a decade-high of $2 billion around June 28, when they will be included in a widely-tracked JPMorgan index, although the central bank will lap up most of the dollars to avoid a knee-jerk rise in the rupee, bankers told Bloomberg.
The $2 billion, single-day inflow estimate by four bankers trails only the record-high $2.7 billion poured into Indian bonds on Aug. 20, 2014, as prospects of a credit rating upgrade gained traction.
"It's just a case of inflows, this time in debt instead of equities," the source said. "It might be positive for the rupee and might be positive for FX reserves as well."
"However, based on how portfolio flows related to (equity) rebalancing happen, the money will come in on (June) 27 or 28."
Back on Wall Street, the S&P 500 rose to a fresh record on Tuesday as artificial intelligence darling Nvidia continued its march to new highs, topping Microsoft as the most valuable public company, CNBC reported.
The broad market index closed at 5,487.03, while the Nasdaq Composite inched up 0.03% to end at 17,862.23, also a record.
The Dow Jones Industrial Average rose 56.76 points, or 0.15%, to settle at 38,834.86.
Nvidia jumped 3.5% to surpass Microsoft as the most valuable public company, and continue its milestone run after topping a $3 trillion market cap.
Nvidia has surged 174% since the start of the year as enthusiasm for AI shows no signs of dwindling.
There are also increasing noises of a bubble and similarities with the dot com boom of the 2000s but we will talk about that tomorrow.
Heatwaves And Impact
India is battling extreme weather ranging from severe heat waves, landslides and floods, killing at least 11 people this week, Reuters is reporting adding that New Delhi, the capital, suffered its hottest night in six years on Tuesday.
Hospitals in New Delhi reported at least five deaths from heatstroke this week, the Times of India said.
More than twice the number of heatwaves have been recorded in India’s northwest and east this year already.
Heatwaves will also put pressure on food prices in the coming months, with pulses inflation remaining in double digits, according to economists.
All forms of food inflation, from vegetables to pulses is rising now.
Vegetable inflation is running at a whopping 27% now and shows no sign of relenting nor are they signs of any policy measures that can address it.
Pulses inflation inched up to 17.1 percent in May compared with 16.8 percent in the previous month.
I reached out to Paras Jasrai, senior analyst at India Ratings & Research and began by asking him how he was seeing the impact of heatwaves and shifting weather patterns on food inflation right now and his outlook.
India’s Dream Run With Discounted Russia’s Crude Oil Is Ending And What That Means
India's goods trade deficit reached a seven-month high of $23.78 billion in May, largely thanks to a substantial increase in the oil import bill.
Oil imports rose 28% on-year to $19.9 billion in May.
And, one of the reasons for this spike in the oil import bill is expensive Russian oil purchases which were obviously cheaper earlier.
India imported 36 percent of total crude oil from Russia (in volume terms), at an imputed cost of $76 per barrel; Iraq and Saudi Arabia which are the second and third largest source of crude oil imports, accounting for 36 percent of the share, had an imputed cost of $79 per barrel and $90 per barrel respectively," an IDFC First Bank economist told MoneyControl.
But the Russian component has been rising.
Discounts on Russian crude oil are now only around $2-$3 barrel, versus $8-$10 per barrel last year, as per certain estimates.
So where do stand now that the dream run so to speak is ending and what does it mean for India’s oil basket and bill and beyond?
I reached out to Prashant Vasisht, Senior Vice President and Co-Head, Corporate Ratings, Icra and began by asking him to take us through the composition of the current oil basket.
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Meanwhile, India’s petroleum exports are the top export item when it comes to merchandise trade, $6.8 billion in May this year compared to $5.8 billion last year.
Overall, exports in areas like engineering goods, electronics, drugs and pharmaceuticals are growing steadily between 7 and 10%.
Textiles and within that ready made garments has been growing, at around 9.8% on-year in May, following a 1% contraction in the previous month.
Exports of gems and jewellery and leather products contracted in May.
Why Homes Are Lying Empty Across India
Millions of homes, 11 million to be precise, are lying empty. These are homes that have been purchased by individuals mostly for investment purposes.
These are distinct from homes that are not sold or lying unsold which is an interesting figure in itself and we will come to that.
It also turns out that it is almost cheaper in a manner of speaking to not give out a house on rent or lease.
There are several reasons for this but the fact is that this is also artificially boosting housing demand, particularly in the rental space.
For example, there are 10 empty apartments in my corner of Mumbai of which only 2 are available for rent.
While some of these homes may never come into the market, better tenancy laws can surely offer greater comfort to some of the home owners.
The larger challenge if you want to call it that of course is the bull market in real estate. Prices are rising so much that owners feel they are better off with the capital appreciation, even if notional, than trying to earn a rental income with the attendant problems they perceive.
I reached out to G Hari Babu, National Real Estate Development Council president and Hyderabad-based realtor and began by asking him the nagging question, why were homes lying empty?
