In this edition, we talk about what central banks around the world did this week and how it could impact the RBI’s monetary policy next month. We also talk about SEBI’s decisions that affect stock market traders and mutual fund investors as well as some key corporate developments.
Welcome to Kuvera’s weekly digest on the most critical developments related to business, finance, and the markets.
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If you do not change direction, you may end up where you are heading – Lao Tzu
When the future is uncertain, we often look to the past for guidance. And these words of wisdom from the ancient Chinese philosopher can be a good starting point for the world’s central bankers.
You see, the world’s major central banks as well as the Reserve Bank of India tightened monetary policy from late 2021 to mid-2023 to control inflation after pandemic-driven supply constraints and Russia-Ukraine war pushed prices higher. They lifted interest rates to record highs, so much so that it raised concerns of an economic slowdown and a recession.
But those concerns have largely been managed and almost all big economies have avoided any deep recession. And now, the central banks are changing direction.
The first moves in the reverse direction came this week. The US Federal Reserve kept interest rates unchanged in the range of 5.25%-5.5% but indicated it was on track to deliver three rate cuts this year.
“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated,” the Fed said, sticking to its commitment to bringing down the price level to 2% from 3.2% last month.
Across the pond, the Bank of England also held interest rates unchanged at the 16-year high of 5.25%. BoE Governor Andrew Bailey said Britain’s economy was “moving in the right direction” for it to start lowering rates.
To be sure, both the Fed and the BoE haven’t specified any exact timeline for a rate cut but have given hints that the first reduction could come as soon as this summer. The European Central Bank’s chief Christine Lagarde also hinted this week it could lower rates in June after standing pat at its last policy meeting earlier this month.
Meanwhile, the Swiss National Bank surprised markets this week and cut rates by 25 basis points. This makes it the first major central bank to change policy direction, although its peers in some emerging market economies such as Brazil, Mexico and Egypt have already lowered rates this year.
Next in turn will be the RBI, which will review monetary policy from April 3 to April 5. Governor Shaktikanta Das has kept the repo rate unchanged at 6.5% since February 2023 after raising the main lending rate by 250 basis points in less than a year. Will the RBI follow the Fed and Bank of England or take a cue from the Swiss central bank? Keep reading.
Ebb and Flow
While the RBI will keep an eye on global developments, a more important factor that will decide its rate action is inflation at home. And this week, the RBI indicated that it is not yet time to go soft in the fight against inflation.
In its March bulletin released this week, the RBI noted that price pressures were ebbing but temporary increases in food prices were curtailing a quicker fall in headline inflation towards its medium-term target of 4%.
“Inflation is on the ebb; the steady decline in core inflation would have taken down headline inflation towards the target of 4% even sooner and faster, but for the repetitive incidence of short amplitude food price pressures,” the RBI said.
The comments came after data showed India’s retail inflation eased just a tad to 5.09% in February from 5.1% in January. Food price inflation came in at 8.66% in February, compared with 8.3% the previous month and 9.53% in December 2023. This, the RBI noted, means that the easing of vegetable prices in December was “short-lived”.
The central bank also said that monetary policy should continue to move inflation towards the target while sustaining the growth momentum. This commentary, along with robust economic growth that’s trending towards 8% in the current fiscal year, all but makes it certain that the RBI is unlikely to cut interest rates in a hurry.
But why should this change matter at all?
Well, it will help traders and investors by reducing the risks related to settlement of transactions and providing immediate liquidity since they don’t have to wait for a day. They can react to news and market developments, trade quickly or even change their trading strategies. So, if you are an active trader or investor, the new system will be better.
The Countdown Begins
Come March 28 and the Securities and Exchange Board of India will begin T+0 settlement for 25 stocks with a few brokers. This, SEBI says, will be a “beta version” and will function along with the existing T+1 system. The move follows SEBI’s consultation paper in December when it proposed a phased rollout of optional same-day settlement.
For those who are new to the stock market jargon, T+0 and T+1 (and yes, there was a time when we had T+2 and T+3) are systems for clearing and settling transactions and making the payment of funds.
In T+1, which was introduced just about a year ago, stock market trades are settled within 24 hours of execution. In T+0, trades would be settled the same day. This basically means that sellers will get their payments the same day, instead of the next day.
To begin with, SEBI says, T+0 would be optional and only for trades executed between 09:15 a.m. and 1:30 p.m. Over time, trades that occur between 1:30 p.m. and 3:30 p.m. would also be covered.
Stock exchanges would disclose the list of the 25 stocks eligible for T+0 settlement on their websites. Exchanges must also submit a fortnightly report on the progress of the beta version.
But why should this change matter at all? Well, it will help traders and investors by reducing the risks related to settlement of transactions and providing immediate liquidity since they don’t have to wait for a day. They can react to news and market developments, trade quickly or even change their trading strategies. So, if you are an active trader or investor, the new system will be better.
Look Within
SEBI also made a decision for mutual fund investors this week. And it isn’t a happy one. The regulator asked the fund houses to stop inflows into schemes that invest in overseas exchange-traded funds (ETFs) from April 1.
The decision comes as mutual funds are close to hitting the $1-billion limit on investing in overseas ETFs.
The latest SEBI move will hurt sentiments. For, many overseas ETFs and funds have generated spectacular returns in the recent past after a couple of years of below-par performance.
For instance, the fund-of-funds and ETF variants of US-focused Mirae Asset NYSE FANG have delivered around 75-80% returns over the past one year. The two schemes have been the top performers and manage assets worth more than Rs 3,400 crore. The Motilal Oswal NASDAQ 100 ETF, the largest overseas scheme with assets under management of around Rs 7,400 crore, delivered returns of almost 47% over the past one year, according to Value Research data.
Will SEBI lift the restrictions or increase the $1-billion cap? Don’t hold your breath, we say, and adjust your asset allocation. Why, you may ask?
In January 2022, the mutual fund industry reached its $7 billion limit to invest in overseas stocks and funds, prompting them to stop accepting money. That limit hasn’t been raised yet as authorities worry about a greater outflow of money from India, which could further weaken the rupee and hurt India’s trade balance.
Corporate Conundrum
Moving on to the corporate world, the week was mostly quiet and there were no big-bang announcements by top Indian companies. To be sure, many companies were indeed in the news for non-business activities as India enters the election season. Those who were in the news for business reasons included IT companies Tata Consultancy Services and Accenture as well as two new airlines that recently started flying and a third that was grounded last year.
TCS was in the news after its parent Tata Sons sold a 0.65% stake for around Rs 9,300 crore in India’s biggest IT exporter. The sale comes at a time when the IT sector has been under pressure due to weak demand. Those concerns mounted after Accenture cut its fiscal 2024 revenue forecast to 1-3% from its earlier projection of 2-5% as clients limit spending.
While IT companies are facing sluggish demand, India’s aviation sector has been flying higher and higher. Regional airline Fly91 made its debut flight this week, from Goa to Bangalore, while low-cost carrier Akasa Air will next week start its international operations with a flight from Mumbai to Doha. These airlines are venturing into a sector where several carriers have previously crashed—Jet Airways, Sahara, Kingfisher, Go First and so on.
Who are the bravehearts behind the new carriers? Fly91 was started by former Kingfisher Airlines executive Manoj Chacko while Akasa Air was founded by former IndiGo president Aditya Ghosh and former Jet executive Vinay Dube.
We hope luck favours the new airlines and their founders!
Market Wrap
Indian stock markets edged higher this week, following Wall Street’s cue after the US Fed stuck to its rate cut projections and didn’t spring a surprise.
The small-cap index climbed nearly 2% this week after last week’s 5.5% fall while the mid-cap index increased 1.5% after dropping 4.7% last week.
The 30-share Sensex and the 50-script Nifty rose almost 0.3% each, with gains in auto, metals and PSU stocks offset by weakness in IT stocks after Accenture cut its revenue forecast.
Five IT companies—TCS, Infosys, Wipro, HCL Tech and LTIMindtree—were the biggest losers this week and fell between 4% and 7%. FMCG companies Tata Consumer Products, Britannia and Hindustan Unilever were the other major losers.
Gains were led by steelmakers Tata Steel and JSW Steel, auto stocks Maruti Suzuki, Bajaj Auto, Eicher, Mahindra & Mahindra, and Tata Motors. State-run companies Power Grid, NTPC, Coal India and ONGC also edged higher. Financials rose, too, with Bajaj Finance, Kotak Mahindra Bank, State Bank of India and IndusInd Bank ending in the green.
Other headlines
- Business activity in India ends fiscal year on strong note in March, shows PMI data
- Defunct SVB Financial to sell Indian unit to First Citizens Bancshares
- SEBI exempts some offshore funds from disclosing investors
- JSW-MG Motor joint venture aims to sell 1 million electric vehicles in India by 2030
- Zomato courts controversy with Pure-Veg fleet, scraps green uniform idea for vegetarian deliveries
- Canadian pension funds CPPIB and Ontario Teachers’ invest Rs 3,640 crore in NHAI’s InvIT
- HDFC Bank closes Rs 9,553 crore stake sale in Credila to private equity firms EQT and ChrysCapital
- ATC Telecom seeks to convert Vodafone Idea debentures worth $174 million to shares
- GoodEnough Energy to start India’s first battery storage gigafactory in Jammu and Kashmir by October
- Adani Green says aware of US probe into third party, denies relationship
- SpiceJet MD Ajay Singh raises bid to acquire bankrupt carrier Go First
- Tata Steel to stop coke oven operations at UK’s Port Talbot plant
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