In this edition, we talk about the surge in India’s gold imports and why the data raised suspicion. We also talk about how the US Fed’s latest policy move affects the rupee, the new rules and proposals floated by the Securities and Exchange Board of India, and the continued rush for IPOs.
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India’s fascination with gold goes back centuries. Gold symbolises status and wealth. We wear gold jewellery to celebrate births and weddings. We buy and gift gold coins and bars. We buy gold to feel financially secure and pledge it with lenders when we are actually not. Indeed, gold is an obsession in India and the crowds in Mumbai’s Zhaveri bazaar and in the jewellery shops of the glitzy malls in Gurgaon and Bangalore prove the point.
And even though India hardly produces any gold itself, this allure for all things shiny has made the country one of the world’s largest consumers and importers of the yellow metal.
Okay, but there is nothing new about this. So, why are we talking about gold?
Well, because India’s gold imports were in news this week. So much so that even the government—which launched sovereign gold bonds a few years ago in an attempt to wean Indians away from physical gold—seems to be concerned.
Government data released this week showed that India’s gold imports surged to an all-time high of $14.8 billion in November. This is more than double of October’s $7.13 billion and up four-fold from $3.44 billion in November 2023.
This surge pushed up India’s overall merchandise imports by 27% to $69.95 billion. With exports falling 4.9% to $32.11 billion, the country’s trade deficit widened to a new record of $37.84 billion in November from $27.14 billion in October.
The wider trade gap put pressure on the rupee, dragging it down to new record lows beyond 85 to the US dollar. This, in turn, raised concerns of an even wider deficit and inflationary pressures in coming months.
To be sure, gold imports have been rising since the government cut duties in the July budget to 6% from 15%. But the jump in November left analysts perplexed. While some observers felt that it could have been because of a moderation in prices, others said it indicated higher demand from rural areas after a healthy crop.
However, Nomura analysts Sonal Varma and Aurodeep Nandi said that the surge cannot be explained by festive demand alone and that they were unclear about the reasons for this increase.
What the Nomura analysts couldn’t explain became clearer later in the week when Bloomberg reported that the import surge could have been because of “an error in calculation”. Citing sources, the report said that officials double-counted gold shipments in warehouses after a change in methodology in July.
The report said that officials may have added up shipments in free trade zone warehouses with tallies reported by local banks that buy the precious metals from the custodians. Almost 30% of total imports, or about 50 tons, could have been over-estimated, the report said. Other media reports later said the government was re-examining the surge in imports.
A calculation error, if confirmed, could prompt the government to revise the trade data and even offer some relief to the rupee. But that certainly won’t do anything to satiate India’s hunger for the precious metal.
Caution Ahead
The surge in gold imports – whether due to actual demand or a calculation error – wasn’t the main reason for the rupee’s weakness. The bigger factor was the US Federal Reserve’s cautious outlook on interest rates.
The US central bank cut the federal funds target rate range by 25 basis points to between 4.25% and 4.5%, marking its third reduction this year. But it changed its tune and hinted at only two more cuts next year, down from four projected earlier, as it felt that inflation hadn’t fallen as much as it had hoped and the US economy was growing at a brisk pace.
“From here, it’s a new phase and we are going to be cautious about further cuts,” Fed chair Jerome Powell said after the rate decision.
The Fed’s hawkish tone not only roiled stock markets in the US and India but also pushed the dollar higher and emerging market currencies, including the rupee, sharply lower. Apart from the rupee, the Korean won, the Indonesian rupiah, the Malaysian ringgit and the Thai baht all slipped against the dollar.
The rupee has fallen 2% so far this year, despite the Reserve Bank of India actively intervening in the forex markets to control volatility. Slowing economic growth, widening trade deficit, tepid foreign investments and uncertainties related to incoming US President Donald Trump’s policies are already putting pressure on the rupee. The Fed’s new direction makes matters worse for the local currency.
What does all this essentially mean? Well, the RBI’s interventions had helped the rupee limit the downside against the dollar over the past couple of years. But this may not last long.
Analysts now project to rupee to fall below 86 to the dollar by March. A weaker rupee will create even more headache for policymakers, pushing up India’s import bill and raising more worries about inflation. The RBI, under new governor Sanjay Malhotra, and finance ministry mandarins now preparing the budget for next year have their task cut out.
Busy Week for SEBI
Moving on to the markets, India’s capital markets regulator has been rather busy over the past few days and week. As if checking and approving the dozens of IPO proposals wasn’t work enough, the Securities and Exchange Board of India (SEBI) has also been tightening or amending several rules and regulations.
Late last week, SEBI proposed to allow retail investors to take part in algorithmic trading via stock brokers in view of the rising demand for this facility by individuals. Algorithmic, or algo, trading provides facilities such as faster order execution and reduced transaction costs. SEBI introduced algo trading in 2008, though only for institutional investors.
The new proposal assume significance in the wake of the SEBI’s crackdown on futures and options trading for retail investors, especially after its own study in September showed that algorithmic trading accounted for 96% of proprietary traders’ profits and 97% of foreign investors’ gains in F&O during 2023-24.
This week, SEBI notified its amended mutual fund regulations to introduce a new asset class that it had initially proposed in July. Called the Specialised Investment Fund (SIF), the new product will sit between mutual funds and Portfolio Management Services and provide investment opportunities to those who have the appetite to take on greater risk.
While retail investors can start investing in MFs with as little as Rs 500, portfolio management services require at least Rs 50 lakh. The SIF will allow investments starting from Rs 10 lakh. But this cap will not apply to accredited investors.
While this move could provide more opportunities to high-risk investors, it’s better to wait before fund houses actually launch such products before deciding to invest.
Separately, after a board meeting this week, SEBI tightened its regulations for IPOs by small and medium enterprises.
SEBI said that an SME can launch an IPO only if it has earned a profit of at least Rs 1 crore in two of the three financial years before going public. It also said that the offer for sale by existing shareholders cannot exceed 20% of the total issue size. In addition, SMEs can’t use funds from these IPOs to repay loans from their promoters or other related parties.
These new rules seek to control the frenzy in the SME IPO market, where several issues have been subscribed hundreds of times the shares on offer. Stock-exchange data shows that more than 170 SMEs have floated IPOs in the current fiscal year so far, raising a total of over Rs 7,000 crore. This compares with Rs 6,000 crore in the entire last fiscal year.
In another move, SEBI asked merchant bankers to separate businesses not directly connected to merchant banking activities into separate entities under different brand names within two years.
This means that while merchant banks can continue to provide core merchant banking services such as managing public offerings and underwriting the issues, they will have to hive off stock broking, valuation, project advisory, and portfolio management services.
No Slowdown in IPOs
Talking about IPOs, SMEs aren’t the only ones listing their shares and a large number of bigger companies are also going public on the mainboard of the stock exchanges. The week gone by and the remaining few days of 2024 are no different.
Five companies listed their shares on the mainboard platform this week, with robust gains. Fintech company MobiKwik’s shares listed with an 86% gain on Wednesday and then climbed some more before falling on profit-taking.
The online payments company’s IPO was the smallest of the lot, raising just Rs 572 crore. But the IPO was heavily subscribed, getting bids for nearly 120 times the shares on offer. The company sold shares at Rs 279 in the IPO. The shares more than doubled to Rs 604 within two days before coming back to Rs 542 levels on Friday.
Retailer Vishal Mega Mart also made a strong debut, with its shares rising 41% to list at Rs 104 apiece versus the IPO price of Rs 78. The Rs 8,000-crore IPO, which included only a share sale by its promoters, was covered 27 times. Drugmaker Sai Life Sciences Ltd’s shares listed with a 20% premium at Rs 660 per share after its Rs 3,042-crore IPO was covered more than 10 times. The shares crossed Rs 800 apiece on Thursday before dropping on profit-taking.
Inventurus Knowledge Solutions Ltd, a healthcare-focused technology firm, listed with a 43% premium after its IPO of almost Rs 2,500 crore was subscribed 52.7 times while International Gemmological Institute (India) Ltd, one of the world’s biggest diamond certification companies, listed with a 21% gain.
With barely six more sessions remaining in 2024, nine more companies will list their shares before the end of the year. These are Unimech Aerospace, Carraro India Ltd, Senores Pharmaceuticals, Ventive Hospitality, Concord Enviro Systems, Sanathan Textiles, Mamata Machinery, DAM Capital Advisors, and Transrail Lighting.
And there will certainly be many more next year!
Market Wrap
India’s benchmark stock market indices ended a four -week winning spell this week and closed in the red as investor sentiment weakened because of a weakening rupee and the US Fed’s hawkish tone on interest rates.
Both the 30-stock Sensex and the 50-stock NSE Nifty slipped in all five sessions and ended with a loss of about 5% each for the week. The small-cap and the mid-cap indices performed better, falling about 3.5% each.
All but a handful of stocks managed to stay in the green. These were drugmakers Dr Reddy’s Labs and Cipla and hospital chain Apollo Hospitals.
Tata Consultancy Services led IT stocks lower, as investors fretted over software services exporters’ sensitivity to interest rates in the US. Both TCS and Tech Mahindra fell more than 5% each, followed by Infosys, HCL Tech and Wipro.
Tata Motors lost the most among automakers while non-bank lenders Shriram Finance and Bajaj Finserv led the decline in financials. Bharat Electronics, JSW Steel, Grasim, Adani Enterprises, Larsen & Toubro, NTPC and Coal India were among the other major laggards.
Other Headlines
- RBI lifts restrictions on Edelweiss Group companies ECL Finance and Edelweiss ARC
- Adani-owned Ambuja Cements to merge Penna Cement, Sanghi Industries with itself
- India’s net direct tax collections rise 16% to Rs 15.8 trillion in April-December
- India’s merchandise trade deficit jumps to $37.84 billion in November from $27.14 billion in October
- Wholesale inflation slows to 1.89% year on year in November from 2.36% in October
- Q2 growth slowdown a ‘blip’, higher growth coming: Finance minister Nirmala Sitharaman
- Starlink inactive in India, says Elon Musk after Indian authorities seize two devices
- Govt plans temporary tax of up to 25% to control Chinese steel imports, reports Reuters
- BPCL plans to expand annual refining capacity to 45 million tons by 2028 from 35.3 million currently
- JSW Energy in talks with LG Energy Solution for $1.5 billion battery venture, reports Reuters
- Blackstone-Panchshil Realty JV Ventive Hospitality sets price band of Rs 610-643 for IPO
- Italian auto parts maker Carraro’s India unit sets price band of Rs 668-704 for IPO
- British govt clears Bharti Enterprises unit’s purchase of 24.5% stake in BT
That’s all for this week. Until next week, happy investing!
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