Wall Street Jumps And Could Drive Up Indian Stocks
Stock markets in India hit fresh record highs on Thursday, thanks to expectations of increased foreign portfolio flows after the US Fed interest rate cut
On Episode 392 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Kedia, Founder and Director of Kedia Advisory as well as Rohini Pande the Henry J. Heinz II Professor of Economics and Director of the Economic Growth Center at Yale University.
SHOW NOTES
(00:00) The Take
(04:02) Wall Street jumps and could drive up Indian stocks further on Friday.
(06:06) Rupee recovers to a 2-month high.
(07:19) Gold prices hit all time highs, where could they go next?
(13:10) Can a grace period for microfinance loans improve the chance of repayments?
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 Friday, the 20th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
While many around the country were rightly upset and angry over the death of a 26-year-old chartered accountant who passed away complaining of exhaustion and overwork at her firm SR Batliboi, based out of Pune, there was another story that caught my eye.
This was of a 19-year-old delivery boy working for a food delivery company in Chennai who died by suicide in his residence on Tuesday.
The Indian Express said the death was due to consequences he faced following an altercation with a customer over a delayed grocery delivery in turn caused by difficulty in locating the house.
This 19-year old boy was a BCom student balancing his studies and part-time work.
Maybe he would have wanted to study on and become a chartered accountant like the Pune girl as many BCom students aspire to.
The story turns sadder as you read on.
Because the lady was so upset or matters went so out of hand that she not only berated him for being late but then filed a complaint with the delivery platform.
Who in turn are believed to have taken some action against the delivery boy, according to the police quoted by Indian Express.
There is much commentary right now on the nature of work or overwork.
Be that as it may, the challenges faced by knowledge workers often get more attention than those faced by delivery executives or delivery boys.
Remember, it is not just about being on time for these youngsters but also battling extreme weather conditions from record temperatures to incessant rainfall. And rarely do they even get an additional tip.
A study by Bank of Baroda Research last month said the employment scene in India’s corporate sector as represented by a sample of 1,196 companies was not too encouraging.
Based on data reported in balance sheets, they said job growth for the sample was just 1.5% in FY24 compared with 5.7% in FY23.
Moreover, says BOB Research, the top five companies with the highest headcount employed less people last year than they did the year before. So employment levels fell for these largest companies over the last two years.
It is very likely that the delivery boy does not even figure in these statistics because these only cover the organised sector whereas the Pune girl quite likely did.
And yet their challenges were somewhat similar.
For both the Pune and Chennai youngsters, the stress of holding onto the job and working hard would have surely strained their physical and mental faculties as it clearly did.
They are obviously not alone.
Jobs are fragile in India, except for a few talented and perhaps lucky youngsters.
No wonder millions line up for thousands of Government jobs because they provide a sense of security for themselves and their families.
It is also evident that even for those within jobs, particularly in the private sector, there has to be a better and conscious understanding of workplace pressure and what it can do.
There will surely be much discussion of working conditions in consulting firms but will there be workers in the gig economy? Or construction workers, who form the largest chunk of employees.
Because the cumulative effect of the macro environment which is the economy and the micro environment which includes the working conditions has never been so profound.
As we rightly debate what led to the tragedy in Pune, we should equally think about the millions who toil away in extreme weather conditions, including those who almost kill themselves.
Just so we can eat our pizza when it's hot.
And our top stories and themes of the day
Wall Street jumps and could drive up Indian stocks further on Friday.
Rupee recovers to a 2-month high.
Gold prices hit all time highs, where could they go next?
Can a grace period for microfinance loans improve the chance of repayments?
The Markets Are Up
Stock Markets in India hit fresh record highs on Thursday, thanks this time to expectations of increased foreign portfolio flows after the U.S. Federal Reserve cut interest rates by half-percentage points.
Interestingly, the broader indices in the mid cap and small cap space were down with analysts saying there could be fresh shifts back to large cap stocks.
Foreign institutional investors usually seek wider horizons when US interest rates go down and the lower the rate the further they go into emerging markets, or at least that’s the belief.
Government-owned power producer NTPC rose 2.4% after its green energy arm filed for a $1.2 billion initial public offer, Reuters reported, adding that telecom companies such as Vodafone Idea fell 20%, while Indus Towers dropped about 9% after the Supreme Court rejected their plea to correct alleged errors in calculating the licence fee they owe the government.
The BSE Sensex added 236.57 points to close at 83,184.80, after having hit a record high of 83,773.61 during intraday trade.
The Nifty50 touched an all-time high of 25,611.95 before closing up 38.25 points at 25,415.80.
Wall Street was pumped up a day after the Federal Reserve’s interest rate cuts. Perhaps predictably so.
The Dow Jones Industrial Average jumped 485 points, or 1.2%. The S&P 500
climbed 1.6%, and the Nasdaq Composite surged 2.4%.
Traders got some validation that the Fed was engineering a soft landing for the economy on Thursday as weekly jobless claims fell by 12,000 to 219,000, which was far below estimates, CNBC reported, adding .
So the interesting part is this.
Tech stocks rallied too because the rate cut spurred investors to return to a risk-on mood, CNBC said.
Rupee Rises
The rupee hit a two-month high on Thursday, thanks to likely portfolio inflows and a rally in the Chinese yuan after the Federal Reserve’s 50 basis points interest rate cut, Reuters reported.
The rupee ended at 83.68 against the U.S. dollar, up 0.1% from its previous close of 83.75.
The rupee hit a high of 83.57 in the session, its strongest since July 18.
The offshore Chinese yuan was up as well, rising 0.4% to 7.06, its strongest level since May 2023.
Oil Prices Rise Again
Oil prices are up again as overall risk levels rose tracking increased tensions in the middle east and the steep interest-rate cut by the Federal Reserve.
Brent futures climbed toward $75 a barrel after closing little changed on Wednesday, while West Texas Intermediate was above $71, Bloomberg reported, adding that European stock futures gained alongside Asian equities as the Fed’s move reinforced expectations that the US economy will avoid a downturn.
Gold Prices
More on Fed Rate impact.
Gold prices climbed further on Thursday, after hitting record highs on Wednesday.
Spot gold rose 1.1% to $2,586.37 per ounce Thursday morning after hitting an all-time high of $2,599.92 on Wednesday, Reuters reported.
So the bet of course is that there will be more interest rate cuts.
Which makes gold more attractive for its capital appreciation as opposed to holding a low interest rate instrument.
I spoke to Ajay Kedia of Kedia Advisory, a trading firm which specialises in commodities and metals.
I began by asking him how gold prices were looking from the India vantage point.
INTERVIEW TRANSCRIPT
Ajay Kedia: 2024 is going to be a remarkable year because already up till now we have seen gold prices have gained very sharply. The perfect blend or we can say perfect environment has been there as of now. We have seen inflation is slowly and steadily coming down in the last 6-7 months. We have seen crude prices came down, big spatial prices came down. So, I think Fed was just looking that if the inflation comes down that they can take steps. Secondly, central banks are continuing to be from last couple of years. Even ETF buying or we can say investment buying was with that. But I think the data point what we have seen in last couple of months, industries are not going very well. To boost them, to boost economy, we have already seen ECB, Bank of England, every central bank started taking the action. I think 0.25 rate cut was in line of expectation but 0.5 rate cut was very surprising to the market and I think that is a perfect blend for gold to rally from here.
Govindraj Ethiraj: At this point of time, considering that we are already at record highs, how far can it go and how long?
Ajay Kedia: Let's say 2007, 2019, 2020, whenever this type of rate cut comes, we have seen on an average in next one year period, the rally in gold prices to the tune of let's say 10-20% has already been seen. I think no doubt the rally has been quite impressive in last 6-8 months. We are at 2600 mark. But I think the fundamentals still remain bullish with the geopolitical tensions still prevailing. So I think the scope for this year-end, we can see a level like 2700-2750 but next year that we are expecting 3000 would be the level one can see in international market.
Govindraj Ethiraj: How does this link to or is it linking to silver prices as well?
Ajay Kedia: Silver is made also known for a poor man's gold. Whoever left rally in gold tried to get back with a silver and silver is having a dual property of bullion also but base metal also. No doubt, up till now, silver was underperforming because of industrial consumption of green energy consumption was slightly challenging. But with the rate cut, we expect the demand, industrial demand would be definitely improving. We have already seen Indian import is quite high. Looking to the gold-silver ratio, we expect silver should outperform more. Even in last one month period, silver has outperformed. I am more bullish on silver. Maybe we can see level like 38-40 in next period for silver in international.
Govindraj Ethiraj: The buying that you see in silver, I mean, what denomination does it usually happen? I mean, what is the retail part and what's the institutional part?
Ajay Kedia: See, in last few decades, in India, definitely there is a charm of buying silver as a slight investment on a ritual day. But as an investment, we have never seen silver as a more attractive bet. But in last couple of years, with the introduction of ETF, people are now looking silver as an investment. Prior to this investment, we can say industrial demand was quite high as compared to investment demand. But in last couple of years, with the introduction of major product, we have seen investment demand has increased.
Govindraj Ethiraj: Recent union budget reduced import duties from 15% to 6% on gold. Obviously, that has triggered a demand rise. So, do you see that sustaining? I mean, in general, apart from all the other factors that you pointed out?
Ajay Kedia: Buying gold and silver in India is having an inverse relation. Whenever there is a drop, generally people avoid. Whenever there is a rally, people won't buy. So, I think that drop or duty adjustment was a very good opportunity to buy and still looking to the automaton and rituals and festival demand, upcoming festival demand. All these, I think, is an attractive bet to buy silver and gold both. And even I think as equities earnings have been quite high as of now. So, diversifying their portfolio in gold and silver would be a vital decision at this time.
Govindraj Ethiraj: Right, Ajay. Thank you so much for joining me.
India Third Largest Economy
India is on track to becoming the third-largest economy by 2030-31, driven by a projected annual growth rate of 6.7 per cent this fiscal, S&P Global said in a report on Thursday in Mumbai.
The report also said that with 8.2 percent growth rate in FY2024, continued reforms are crucial to improving business transactions and logistics, boosting private sector investment, and reducing reliance on public capital.
It said equity markets are expected to stay dynamic and competitive due to strong growth prospects and better regulation, and foreign inflows into Indian government bonds have surged since the country joined major emerging market indexes, with further growth anticipated.
ON the flip side, it pointed out that to maximise trade benefits, India must develop infrastructure and geopolitical strategies, particularly regarding its extensive coastline.
This is the interesting part and a figure you may not have known.
Nearly 90 per cent of India's trade is seaborne, necessitating robust port infrastructure to manage increasing exports and bulk commodity imports, S&P said
Can A Grace Repayment Period Drastically Reduce Micro Finance Loan Defaults
The larger problem is this. Women are at a disadvantage when it comes to taking loans or the terms are not the same as men.
The concept of microfinance was pioneered in the 1970s by Muhammad Yunus, founder of Bangladesh's Grameen Bank then and now Chief Advisor to the interim Government there.
The idea was to lend to groups of women, with the entire group responsible for repaying loans made to individual members.
There are many more interesting insights over the years on how these groups have evolved and the larger community benefits.
Microfinance of course has spread wider and became part of a larger approach to lend small ticket loans to poor people.
Many of these initiatives have however not worked, particularly for the lenders, including in India where there have been major problems with microfinance loan portfolios.
The Economic Times quoted an official last month from a microfinance association saying there was no foolproof way of measuring household income for borrowers in the microfinance sector. This is very subjective as of now, and largely depends on the feedback from the borrowers. And field officers are under pressure to expand business.
Thanks to which there is a possibility of over reporting of income which can result in over-lending.
This was in the context of renewed strain in microfinance portfolios.
While the sector is evolving constantly, one of the approaches was to have grace periods for the loan repayments to kick in.
Rohini Pande, the Henry J. Heinz II Professor of Economics and Director of the Economic Growth Center at Yale University says they ran randomised control trials in which some client groups received the standard loan and others received loans with a two-month grace period before repayments began.
This small change had outsized effects. After three years, households with more flexible grace-period loans reported higher business profits and household income.
This of course is a trial but the findings are useful in gauging borrower behaviour, for any kind of loan.
Potential innovations like these in the area of loans for women can of course have much greater multiplier effects.
I spoke with Rohini Pande on the larger theme of microfinance and how she saw the grace period experiment working out.
INTERVIEW TRANSCRIPT
Rohini Pande: When microfinance started, a key feature that people were concerned about organisationally was whether, you know, poor women who are making loans without collateral will actually return those loans. And so, as a result, the repayment schedules that came up were very conservative. So, the typical microfinance organisation asks for repayment starting one or two weeks after the loan is given out and continues on for usually less than a year.
And I think, in talking to loan officers and also to clients, it sounded like what ends up happening, therefore, is that the decision to make a loan is not given out on the basis of how profitable this particular loan would be, but actually whether the borrower already had capacity based on their activities to start repaying within a week. It also pushed borrowers to use this money much more for working capital than for making investments. And so, that got us thinking about what if actually microfinance took seriously the idea that some of what entrepreneurship needs is venture capital.
But how can you do it in a way that, you know, is going to be acceptable to microfinance lenders who, because of the requirements to raise money in the capital market, tend to be quite conservative and there's any modification that I think will reduce repayment rates. So, we worked with a microfinance lender in Kolkata and came up with this idea of just delaying repayments for the first two months. We called it giving it a grace period.
That's only one form of flexibility. And I should say, since our work, there have been several other papers which have evaluated different forms of flexibility. So, for instance, you could tell the borrower you have to repay 12 times, but you can decide how to stack it up, or you can take a repayment holiday halfway through.
What we found three years later was very significant increases in microfinance profits. So, this flexibility gave borrowers the chance to just invest in activities that had a longer term return and, you know, led to capital returns that were in the range of 12 to 20 percent. Since then, we've actually done an 11-year follow-up and we actually find that these income gains are also getting invested in the longer run in the children's human capital.
And we find a significant increase in the fact that the children go to college. So, this not just increases household gains in the short run, but also leads to intergenerational benefits.
Govindraj Ethiraj: Do you feel that microfinance companies could start applying this more actively? I mean, you said that this was one firm that you worked with in Kolkata, but do you see this rolling out further or are people waiting for more evidence?
Rohini Pande: So, I think there's certainly quite a lot of evidence at this point. And so, I think it really is two parts. One is kind of the regulatory aspect of what you're allowed to do.
So, for instance, when we worked, a microfinance loan could not extend beyond a year in totality. So, even if you had a braced period, you had to keep it within a year. So, one would be to, and I don't know what the current situation is, so one would be to work with what is regulatory feasible.
But I certainly think the main lesson, which is that you can sandbox and try out product design innovations and evaluate them is very useful. As you know, there was a set of studies suggesting that the classic microfinance contract does not reduce household poverty on average. And I think findings like ours suggest that actually product design innovations may actually change this result.
And microfinance in India is booming. So, I think there's certainly value to thinking about how you can actually make it work better for the clients.
Govindraj Ethiraj: Are there, you know, from your own studies, any insights on the kind of borrowers and who is, let's say, more likely to be credit worthy as opposed to others?
Rohini Pande: So, I think, you know, our study didn't look so much at a selection margin. So, because we were trying to isolate this effect, what happens when you change flexibility, we actually went to great lengths to ensure that the randomization to the type of loan you get happens after the pool of microfinance clients was selected. I think we can possibly speak a little bit to the type of clients who are more likely to default under a flexible loan rather than a regular loan.
The main thing that matters is, which I think is no surprise, is shocks, is things like health shocks, income shocks, and so on. But since then, I think there's been more work trying to understand who selects into what type of loan. There's certainly a concern that when you allow for more flexibility, we did see some slight increases in default rates.
And so, you may be concerned that, you know, which is what I think loan officers talk about a lot is that, you know, you don't instill discipline or repayment very early on, and that has some long-term effects. But I think if you could think of a model of kind of cross-subsidization, it's certainly worth it because the change in the returns, income gains is large. So, you could imagine what I think a lot of microfinance institutions always pay a lot of attention to who they're graduating to even larger individual loans.
And I think that's where one can actually use these findings.
Govindraj Ethiraj: If I can take a step back and ask you a little more about the efficacy of microfinance or loans and credit as a tool for empowerment, for income creation, growth, acceleration, and so on.
Rohini Pande: I think, I mean, in general, I'm in favor of microfinance. I know after, as I said, the findings of the classic microfinance product didn't have returns. There was some amount of questioning of whether microfinance is the right way to go, or we should just move towards kind of grant model grants.
And, you know, BRAC in Bangladesh, for instance, has a very successful ultra-poor program that is a bundling commodity but gives grants. My own sense is that if you do the numbers at scale, you're never going to reach the numbers of poor people you want to reach. In that sense, loans is a much more equitable tool in that it's, you know, conditional, make it through a screening, it's available to everyone and it's available to the poor.
Microfinance has this great feature that doesn't ask for collateral. And suddenly those two features make me think that, you know, microfinance is a very valuable tool, but we need to continually be redesigning it. I think the Indian microfinance and Indian regulators have arguably been more conservative than several other countries.
And, you know, that can be a good thing at the time of, say, a financial crisis. But I think there's certainly value to be a little bit more, you know, I think more willing to try. Now, especially in the big new frontier is digital loans.
How are they going to work for poor households? Digital loans can be very flexible or you can really require repayments every day and freeze someone's phone if they don't make that repayment.
Govindraj Ethiraj: Are you working on anything in this space right now? And is there any newer sort of newer areas that you're diving deeper into following these studies that you've done, which may emerge in the future?
Rohini Pande: So I think I've been very interested, as I said, on kind of digital finance and how is that going to work? One of the things we see is very large gender gaps in digital finance. It could be, you know, even use of UPI or phone pay all the way through to any kind of trying to pay a digital wallet.
So I think thinking about the gender digital divide is something that we've been working actively on. And I think it's good to reflect on that relative to microfinance, which may have had a very specific model of loan officers turning up in the village and having group meetings. But those who all were important funds empowerment, you know, women left the house, they made friends, we have another paper showing that the frequency of repayment meetings not just affected women's trust and friendship network, but actually affected the ability to risk share.
As we move increasingly into a world of digital products, if women are already disadvantaged to start with, I think we need to be very careful to make sure they don't get left behind. There I think kind of the standard shouldn't be what microfinance achieved.
Govindraj Ethiraj: Rohini, thank you so much for joining me.
