This week, we talk about inflation at home and another possible rate hike by the US Federal Reserve. We also talk about a slowdown in FDI and FII inflows into India and the revival in primary market activity.
Welcome to Kuvera’s weekly digest on the most critical developments related to business, finance, and the markets.
tl;dr Hear the article in brief instead?
What’s common between wheat and tomato? Both are food items, of course. Duh, no points for guessing that. So, why are we talking about a staple grain and a humble fruit (yes, tomato is a fruit, get over it!)?’
Well, we are talking about wheat and tomato as these two have garnered a lot of attention in recent months because of the rapid rise in their prices, giving policymakers sleepless nights.
Tomato prices crossed Rs 200 a kg in June and July, prompting even big food chains like Burger King and McDonald’s to keep tomato out of their menus and leaving common folk like us with many a tasteless brunch. Not to be left behind, wholesale wheat prices jumped 10% within two months to touch a seven-month high.
No wonder, then, that retail inflation accelerated to a 15-month high of 7.44% in July from 4.8% in June, data released by the government this week showed.
The July print was a big surprise as it came well above analysts’ forecast of 6.5-6.6%. It also was far above the RBI’s inflation forecast that it revised higher just last week, to 5.4% for the full financial year from 5.1% before and to 6.2% for the October-March period from 5.2% earlier.
All this may sound worrisome, we know. But a deeper look at the data shows there is a definite glimmer of hope.
Core inflation, which excludes the volatile food and energy prices, eased to 4.9% in July from 5.1% in June. And even food prices are likely to moderate as the monsoon season progresses and the government takes steps to boost supplies. For instance, India is importing tomatoes from Nepal and is looking at buying wheat from Russia after banning exports last year. The results are already showing, with tomato prices falling below Rs 60 a kg this week.
So, what does it mean for the monetary policy? Does the RBI have any room to start cutting rates? That decision is two months away and we would not want to second guess the thought process of the mandarins at the central bank.
But if news reports are to be believed, the RBI has signalled to the powers that be in New Delhi that it may not be able to cut interest rates before the 2024 general elections.
Inflation and polls at home aren’t the only factors that the RBI would have to keep in mind. And the RBI may be forced to even hike the rates if the central bankers managing the world’s biggest economy—the US—do so.
The Fed’s fight
Will they, or won’t they? That could, quite literally, be the proverbial trillion-dollar question. The US Federal Reserve—or the Fed, as it is popularly known—is divided down the middle on whether to raise interest rates or not.
Minutes of the Fed’s July 25-26 meeting released this week showed that officials at the US central bank were divided over the need for more interest rate hikes, with “some participants” citing the risks to the economy of pushing rates too far even as “most” policymakers continued to prioritise the battle against inflation.
“Participants remained resolute in their commitment to bring inflation down to the … 2% objective,” the minutes said of a meeting in which policymakers on the Federal Open Market Committee unanimously agreed to raise the benchmark overnight interest rate to the 5.25%-5.50% range. “Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”
In plainspeak, this means the Fed may not be done with its cycle of rate hikes even though opinion within the Fed is divided as policymakers weigh evidence that inflation is falling and judge the potential damage to jobs and economic growth if rates are raised higher than necessary.
The fears of another Fed rate hike, coupled with a rise in bond yields, pulled global markets down. The 10-year treasury yield rose at 4.28% after touching its highest level since October.
All three major US indices—the Dow Jones, S&P 500 and the Nasdaq—were in the red, as were India’s Sensex and Nifty. Markets across Europe and East Asia, too, were in the red.
All said, retail investors may be in for some volatility in the markets. So, as always, we say, tread with caution.
FDI vs FII vs NRI
Is a global slowdown already upon us? We don’t know that for sure, but there are indications that it might hit us sooner than we think.
One such indicator is the net foreign direct investment (FDI) in India, which declined sharply to $4.99 billion in the April-June quarter from $13.92 billion a year earlier.
The RBI said in its monthly bulletin this week that the moderation in gross inward FDI, coupled with a rise in repatriation of investments from India, resulted in a decline in net FDI. Repatriation from India surged to $10.43 billion in Q1 from $6.21 billion a year earlier.
Meanwhile, foreign institutional investors have also slowed their investments in Indian capital markets this month after pumping in nearly $20 billion from April to July. Net inflows from foreign portfolio investors so far in August have been about $1.7 billion, compared with $5.8-6.8 billion in each of the previous three months.
But while foreign direct investors may be turning cautious, Indians living abroad seem to be still bullish on the country of their origin.
RBI data show that the flow of money into Non-Resident Indians (NRIs) deposits jumped to $2.14 billion in the first quarter of this financial year from $349 million a year earlier. The outstanding NRI deposits rose to $141.28 billion at the end of June 2023 from $138.77 billion in May 2023, according to the central bank’s latest report.
Non-Resident External (NRE) deposits, in which NRIs can deposit in any denomination and withdraw it in rupees, rose to $96.5 billion in June 2023 from $95.22 billion in May. However, this was lower than $98.98 billion in June 2022.
NRO deposits, where the money is kept in rupees and cannot be freely converted into foreign currency, touched $24.29 billion in June 2023 from $23.66 billion in May 2023. They were also up from $21.31 billion a year ago.
IPO rush
Investment bankers remained busy this week, too, with several companies either filing IPO documents, floating their share sales or getting listed on stock exchanges.
Early in the week, TVS Supply Chain’s Rs 880-crore IPO closed with subscription about of 2.8 times. Pyramid Technoplast is currently in the market for its Rs 153-crore IPO.
On Friday, Concord Biotech listed its shares at a premium of 21% over the IPO price. Earlier in the week, SBFC Finance listed at a 44% premium and ended with gains of 62% on its first day.
At least four companies filed draft documents with market regulator SEBI for IPOs this week. These are Happy Forgings, integrated marketing services group RK Swamy, Cello World and Epack Durable.
This is not all. According to primary market tracker Prime Database, at least 71 companies are looking to float IPOs that could raise as much as $10.7 billion. Of these companies, 41 have secured SEBI approval while another 30 companies are awaiting regulatory clearance, as per Prime Database. If some of these companies do go public, they will add to the 18 companies that have tapped the primary markets so far this year.
Market Wrap
As we pointed out earlier, markets across the world were roiled this week by the prospects of another rate hike by the US Fed in just over a month.
India’s two main indices—the Sensex and the Nifty—too were caught in the melee and mostly traded sideways. The 30-stock Sensex and the 50-stock Nifty closed the week down nearly 0.6% each. Over the past month, both the indices have lost nearly 3% and 2.5% respectively, and are now below their lifetime highs scaled just a few weeks ago.
Nifty stocks that bucked the trend included the likes of Titan, Mahindra & Mahindra, Adani Ports and HCL Tech. Others that gained this week were Dr. Reddy’s Labs, Ultratech Cement, Larsen & Toubro and Power Grid Corp.
Hindalco, UPL, Asian Paints, ITC and JSW Steel were among the prominent stocks that led the weekly selloff. Others that ended in the red were GAIL India, Tata Steel, Vedanta, Hero Motocorp, HDFC Bank and Kotak Mahindra Bank.
Other headlines
- Vedanta gets NCLT nod to acquire Meenakshi Energy for Rs 1,440 crore via insolvency process
- Adani Group moves to buy remaining stake in Quintillion Business Media
- Power Finance Corporation appoints Parminder Chopra as its first woman CMD
- Colliers appoints Badal Yagnik as India CEO
- Dr. Agarwal’s Eye Hospital raises $80 million from TPG, Temasek; to double network to 300 hospitals
- UAE’s TAQA looks to bet big on Adani’s power business with $2 billion investment
- ITC hits two-month low; stock down 12% from record high
- Hyundai inks agreement to acquire General Motors’ Talegaon plant
- ArcelorMittal weighs possible bid for US Steel
- Chinese real estate giant Evergrande files for bankruptcy
- Intel to walk away from $5.4 billion acquisition of Tower Semiconductor
That’s all for this week. Until next week, happy investing!
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