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Foreign Investors Are Buying Indian Debt, Selling Equity

Indian debt is appearing more attractive to foreign Portfolio Investors (FPIs) who sold Indian equities worth Rs 24,700 crore so far this month but bought debt worth Rs 17,120 crore during the period under review, the PTI reported quoting depository data

By Govindraj Ethiraj
New Update
Foreign Investors Indian Debt Equity
On today’s episode, financial journalist Govindraj Ethiraj talks to Ajay Rotti, Founder and CEO of Bangalore-based tax consulting firm Tax Compass as well as Veteran business journalist and columnist Shankkar Aiyar.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (02:15) Foreign investors are buying Indian debt, selling equity.
  • (03:47) Rupee is best performing Asian currency again, in January
  • (06:42) HDFC Bank needs a series of injections, including of energy and some brave moves.
  • (13:59) What does the interim budget hold in store in tax?
  • (21:03) The Government announces an ambitious rooftop solar scheme. How far can it go?


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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Markets Wait For More Q3 Results

This is the week for the interim budget to be presented on Thursday, February 1, since the final or real budget will come after a new Government is elected and comes into power.

Last week’s truncated trading, there were two holidays of which one was sudden and and three trading days, seemed to have contributed to a general mood of nervousness which was not quite the case a few weeks earlier. But then, such are markets..

Last week, the BSE benchmark fell by 982.56 points or 1.37 per cent, and the Nifty declined 269.8 points or 1.24 per cent.

The interim budget at this point does not seem to be affecting the fortunes of the stock markets here, more likely it will be the US Federal policy’s moves  and quarterly earnings.

The Federal Open Market Committee meeting will be held on January 30 and 31.

No interest rate cut is expected right now but the markets are, as always, watching keenly for signals or a timeline for rate cuts. Though with the US elections in November, it is very likely that rate cuts would kick in much earlier, according to some observers. 

There are several large companies like Bajaj Finance and Maruti Suzuki and Titan who are yet to announce their results. The markets will only hope that there are no further surprises like HDFC Bank.

Foreign Portfolio Investors Are Selling & Buying

Indian debt is appearing more attractive to foreign Portfolio Investors (FPIs) who sold Indian equities worth Rs 24,700 crore so far this month but bought debt worth Rs 17,120 crore during the period under review, the PTI reported quoting depository data.

Foreign Portfolio Investors (FPIs) made a net investment of Rs 24,734 crore in Indian equities this month (till January 25).

Bond yields are rising in the US and this is one reason attributed by analysts for the selling in equities in markets like India. 

The 10-year bond yield in the US had fallen from 5 per cent to around 3.8 percent and is now back at 4.18 per cent suggesting a Fed rate cut will come only in the second half of the year.

Foreign and domestic investors, including in mutual funds or via mutual funds are booking profits.

JP Morgan Chase & Co. in September last year said it will add Indian government bonds to its benchmark emerging market index from June 2024.

Where Will The Rupee Go in 2024

2023 was a good time to predict the rupee’s movement.

Because it did not really move except between Rs 82.50 and Rs 84.

Actually, that is obviously in perfect hindsight.

But it does look like 2024 is starting on the same note. 

It’s already the best-performing Asian currency in January so far by appreciating by 0.1 per cent, despite a 2 per cent rise in the dollar index.

All other Asian currencies depreciated by around 1.4 percent- 4 percent during the month but the INR was strong. 

As we’ve reported earlier, the last year saw the least volatility witnessed in nearly three decades, thanks, mostly to the Reserve Bank of India’s timely intervention in the foreign exchange market, both in terms of selling and buying dollars. 

The rupee was quoting at Rs. 83.11 per US dollar on Friday.

Oil Rises Sharply As Risks Spike

Friday saw a missile attack on a tanker taking Russian fuel through the Gulf of Aden.

This attack has changed the threat perceptions in the Red Sea and jacked up oil prices by almost $2 to around $83.55 currently.

According to a Bloomberg News report, because much of the oil flowing through the Red Sea and Suez Canal came from Russia and — so the theory went — it might be safe. 

The Houthis themselves signalled Russian ships had nothing to fear, and Moscow is an ally of their sponsor Iran. Oil tankers generally had been largely spared.

But Friday’s attack made one thing clear, suggesting that the assurances don’t extend to a ship’s cargo if the vessel itself has even a tenuous link to the US, UK or Israel. 

The Houthis had said they were targeting Israeli assets because of the war in Gaza, and then went on to attack US and UK vessels after those countries launched airstrikes in Yemen.

Bloomberg also says that the attack means that a greater slice of the 3 million barrels a day of Russian crude oil and fuel that has been flowing through the Red Sea to reach customers in Asia could be at risk. And Russian volumes matter to the global market — despite sanctions imposed because of Moscow’s own war in Ukraine.

It is not clear of course how long the war will last and India itself has been responding with armed naval support quite regularly to attacks in the Red Sea.

Not surprisingly, there is more discussion on oil independence and independence from oil. More on that shortly.

HDFC Bank, Injecting Fresh Life

For many market veterans in Mumbai I have met, HDFC Bank is the gold standard of stocks. 

For the only reason that it has delivered strong growth over time and the stock market has kept pace.

Even now, the bet is that HDFC Bank will emerge from this crisis of performance confidence and deliver the goods, once again.

Which is of course possible but a few things to note.

But before that, it is not HDFC’s performance in the third quarter of the current year or the October to December quarter that was so bad that the bank is on a stretcher on the way to the ICU.

Far from it. HDFC Bank's net profit rose 33 per cent to ₹16,372 crore in the October-December quarter. The bank's net interest income came in at ₹28,470 crore in the December quarter, reporting a growth of 24 per cent year-on-year.

Let's park that for a moment.

HDFC did better in the past than many other banks because it focussed on smaller loans and individuals and not so much on companies, something founder CEO Aditya Puri would take pride in. 

Individuals are more remunerative because you can charge more and collect over time. 

Thanks to which, as M C Govardha Rangan of ET points out in an interesting piece titled HDFC Bank’s era of premium valuations is over, HDFC Bank for years reported a net interest margin (NIM) – the sole profitability metric for a lender - of more than 4 percent. 

That was the best in the industry by a country mile: Peers barely managed 2 percent – sometimes, even less.

Rangan also points out that the combination of retail lending and low-cost deposits, when the industry was chasing corporates and wholesale funding, aided HDFC Bank’s industry beating growth and profitability that led to its premium valuations of more than 4 times its book value.

Whereas today it is trading at about 2 times its price to book for the fiscal year ahead, the lowest in a decade, thanks to a 15 percent crash in stock price after the December quarter earnings.

The question of course is what changed so dramatically between the second and third quarter or September or December. Most of its book is in the same shape as it was.

What changed is obviously the realisation that HDFC needed much faster deposit growth to outpace loan growth so as to not rely on wholesale borrowings, as Avinash Gorakshaker, veteran analyst pointed out on The Core Report two weeks ago.

And of course people seem to have taken a fresh look at the numbers following the merger with HDFC and the cost of funds that HDFC had and what it all added upto now and the margins that the merged entity could earn. 

There is a lot more number crunching and many analysts by the way are still calling strong growth for HDFC, including in mortgages, the business that HDFC ran before merger.

I don’t want to go deeper into the numbers because the larger point is not about managing the balance sheet.

It’s about the new, new thing and that HDFC is not in a position to build linearly as it has for the last 25 years and more if you include the mortgage business. 

For one, all companies who reported stellar performances for 25  years may not necessarily do a repeat in the next 25. A key reason being the maturation of the market.

Let's look at companies with steady business and flows for similar periods.

It obviously includes Reliance Industries, many of the Tata group companies and Birla companies among others. And the IT majors like Infosys and Wipro. And then, the multinationals in consumer products and engineering.

Among the non MNCs, Reliance is turning its business upside down, Birlas too are diversifying furiously either by acquisitions or otherwise and the Tata Group companies are doing all of the above and injecting fresh ideas and blood at the very top.

Actually, the one thing that is common to all is the fresh injection of blood. Including Reliance with the next generation coming in as well as new managers and business heads in areas like retail, telecom and finance.

HDFC Bank ran under Aditya Puri from 1994 to 2020 for two and a half decades. You cannot discount his presence or leadership in the bank’s growth.

Remember, this was also the phase, private banks came into their own.

There is no doubt that the integrity and high governance standards of the HDFC companies has helped, as it has in the case of the IT companies.

ICICI Bank for example, cannot claim a similarly consistent record and the bank is only back on an even keel under the current leadership.

Even today, there is nothing to say from the numbers alone that a HDFC Bank cannot pull a rabbit out of the hat. It might.

But the point is that there could be bias at play, including in the commentary of many analysts who are putting a buy on HDFC.

For example,  not many are asking or saying the obvious question or point. 

What if companies like HDFC have run out of steam for now, which is to provide the kind of growth that we have seen.

Is there a case for a major rejig in businesses and business incomes. Which is entirely possible of course but the signs of which are not very apparent to outsiders.

Maybe those who are betting on HDFC feel they are trusting its implicit capability in fighting its way out of tough corners. And that banking is a simple business that does not need too much tinkering and experimentation. That is true as well. 

Though it could be argued that the markets are now clearly expecting more.

There is an important difference between banks and IT companies. Banking as a business, service and need will continue to grow, because the domestic market has a long way to go.

You cannot say the same in Indian IT because the current model of offshore services is driven by the fate of their clients in the form of companies like banks and retail giants in the US or Europe.

 Their growth (remember we are talking of growth and not survival, at least not yet) will come only if they do some major rejigs, like get into semiconductor manufacture or similar, something The Core Report has argued in the past as well.

So where do you stand on HDFC Bank? Do you feel it is injecting or preparing to inject the kind of energy and drive that got it off the ground in 1994. Is that what it requires or can it settle for less ?

Budget Is Here

The interim budget will be announced on February 1 by Union Finance Minister Nirmala Sitharaman.

Expectations from interim budgets are low because the Government of the day will fight elections in a few months time and the new Government is expected to come back with a proper budget with the mandate of the people in July.

Be that as it may, there are many aspects the industry is looking forward to, particularly in the area of taxes which are not revenue linked but more procedural.

There are big revenue asks as well but that can wait. Overall tax collections have been strong, tax to GDP ratio is the highest and thus expectations are high.

I reached out to Ajay Rotti, Founder and CEO of Bangalore-based tax consulting firm Tax Compass and began by asking him to first set our expectations in order on what to look out for from an interim budget. 

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Rooftop Solar

Last week, India’s prime minister Modi announced the Pradhan Mantri Suryodaya Yojana (PMSY), promising the installation of rooftop solar systems in 10 million homes.

Coincidentally, over the weekend, I saw how a 3.5 kWh solar power unit installed on the roof of an independent house helped a family member in Bangalore to run a refrigerator, washing machine, all lights and fans as well as geysers for water heating.

He pointed out that he couldn’t run the microwave and the geyser at the same time but that was fine. More than anything else, solar power was a good hedge against power cuts in his area.

And finally, he had opted for net metering, where the power generated by the solar rooftop plant is first allowed for self-consumption and the excess energy is pumped back into the grid for which he gets a credit.

Veteran business  journalist and columnist Shankkar Aiyar pointed out in an article on Sunday in the New Indian Express that most of India is blessed with 300 days of sunshine and the Government’s announcement will propel capacity in photovoltaic cells and a reduction in costs. 

More importantly, it is an opportunity to review policy design to expand it beyond the 10 million households.

I began by asking Shankkar Aiyar what India had achieved so far in this area of non conventional and decentralised energy production?

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