Our Top Reports For Today
- (00:00) Stories Of The Day
- (00:51) Indian stock markets track global cues, crack 1,600 points.
- (04:30) Sensex heavy HDFC Bank leads index and market fall.
- (10:29) India diversifies crude sources on uncertainty, buys from 37 countries from 29 earlier.
- (12:34) SBI backs clampdown on unhealthy loan growth.
- (15:44) 40-year study shows how monsoon intensity is increasing, rising in some places, falling in others
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.
Markets Take A Solid Knock
Occasionally, the markets land a punch in the solar plexus, or at least that is the feeling that people are left with, particularly if you are used to a mostly one way direction in stock prices, which is obviously up of late.
The global context is important as it always is but lets go over what happened in India on this somewhat fateful Wednesday.
This, roughly 2% fall, is the worst single-day fall in the Sensex in percentage terms in the last 18 months.
So the hero or villain of the day was HDFC Bank whose results sounded good from a sheer banking sector point of view but way below what the street was expecting or wanting.
HDFC fell 8.5% and dragged the Sensex down as well. But you could argue the other way too.
This was HDFC’s biggest fall in some 4 years so it gives you a sense of the intensity of the selling.
Now, I will come back to HDFC but let us look at what happened internationally.
Basically it is looking like the interest rate cuts that everyone was expecting in March may not happen in March.
Which means that the liquidity flows that one could anticipate or assume would get delayed further.
Reuters quoted a senior analyst saying that central bankers, whether from the Fed or the ECB, are saying it's premature to talk about rate cuts just yet.
European Central Bank President Christine Lagarde and Governing Council member Klaas Knot warned on Wednesday that aggressive bets on interest-rate cuts aren’t helping policymakers in the battle to subdue inflation.
That followed comments on Tuesday from Federal Reserve Governor Christopher Waller, who urged caution on the pace of easing, Bloomberg reported.
So the likelihood of a Fed rate cut in March is now down to 65% according to the CME FedWatch tool as compared to 81%...did you ask when, well, at the start of this week.
So this single action or in action is evidently causing turmoil in the global markets and India is not far behind.
It also tells you something about the importance of global capital flows and their ability to determine direction at times like this, despite the strong domestic flows that we have been seeing and talking about.
The other factor is China and the fact that it is not growing as anticipated.
China's economy grew 5.2% in 2023, slightly more than the official target, but the recovery was shaky and analysts feel that this will carry over to 2024.
And the dollar has strengthened as well, to a one year high, leaving it at Rs 83.14 for the day against the rupee. Essentially throwing out of the window at least for now all the discussions we were having a few days ago on how it would appreciate if only allowed to, after it crossed into the Rs 82 territory that is.
The other factor in Indian markets that is at play is valuations.
Of course, there are times the large banks may just whisper that valuations seem high, at other times they pretty much shout from the rooftops.
More on valuations in a moment
Interestingly, in the UK, price increases accelerated unexpectedly for the first time in 10-months, causing the markets to scale back expectations for rate cuts from the Bank of England this year.
Now, let's come to HDFC.
HDFC Bank accounted for nearly 60 percent of the benchmark S&P BSE Sensex's 1,628-point decline on Wednesday. The stock also dragged the BSE Bankex index 4 per cent lower.
The decline comes as retail deposits during the October to December quarter grew 2.9 per cent quarter-on-quarter (Q-o-Q) at Rs 53,000 crore, while total deposits rose just 1.9 per cent.
On its part, the management said that the deficit in system liquidity is the biggest constraint for the deposit growth. It, however, believes that the bank is gaining incremental market share.
I reached out to Avinash Gorakshakar Head of the Research Desk at Profitmart Securities and began by asking him what happened to the markets and was it too stretched and then of course HDFC Bank.
The Valuation Conundrum
All institutional investors concur that the Indian markets have considerable tailwind and attribute to larger factors like multi-decadal growth story, bottom up performance and so on.
All true. But usually there is a point at which things become expensive where every story gets re-evaluated. Something like why would you pay Rs 10 if all your models are telling you it is worth Rs 5 or Rs 6 at best.
And if you buy in at Rs 10, then what are the exit chances looking like.
Remember that the last year has been heady. The Nifty-50 is up 22%, the Nifty Midcap Index is up 53% and the Nifty Smallcap Index is up 61%.
Business Standards quotes Kotak Institutional Equities saying the market may find comfort in incremental developments and ignore rich valuations across sectors and stocks for the time being, but this may lead to bigger issues eventually.
Note the delicate acknowledgement of the term rich valuations.
So Kotak is saying that they are not sure if an incremental strategy can generate ‘excess’ returns over long periods, given likely wrong timing (too late at most times) of both entry and exit from sectors and stocks.
So they suggest that more money can be made from a theme when it is still undiscovered (say, housing in 2020-21 versus currently, when a lot of positives regarding the housing cycle are largely priced in and performance being similar to the market’s.
Kotak believes most large-cap consumption stocks are trading at expensive valuations, with discretionary stocks at super-rich valuations. "Most mid-cap consumption stocks are trading at expensive valuations, while investment stocks are trading at extremely rich valuations," it said.
Of course others may disagree with Kotak though I don’t see that happening that easily. Or at least this would not be a public spat so to speak.
SBI Backs Clampdown on Unhealthy Growth
India’s recent clampdown on unsecured loans is the right move to curtail “unhealthy growth” in borrowing by individuals, according to the chairman of SBI, India’s biggest bank., referring specifically to a strong expansion of retail loans, at an annual rate of about 30%, was a “sign of heating up.”
State Bank of India’s Dinesh Khara was speaking to Bloomberg Television in an interview at Davos on Tuesday.
Indian banks have been reporting good numbers thanks to an increase in demand for credit and lower bad loans.
But this has increased the mostly cautious Reserve Bank’s concerns over a potential buildup of financial risk.
The Reserve Bank of India has already asked banks to increase buffers for some consumer loans in November.
Mr Khara said he was sure it will go a long way in terms of bringing orderliness and ensuring the growth will remain healthy,” Khara said. Retail credit expansion of about 14% to 15% would be “good growth,” he added.
While the banks are confident that their unsecured loan books are of high quality and low risk, they are now going slow, more so, after the RBI sounding the alarm bells.
And in our energy segment supported by India Energy Week.
India is diversifying its crude sources even as it accelerates its energy transition, Oil Minister Hardeep Singh Puri told Reuters in an interview in Davos.
India Is Now Buying From 37 Countries Up From 29 Earlier
The reasons for the diversifications include supply cuts by OPEC, costly shipments from some traditional Middle East suppliers and geopolitical tensions, including the attacks on merchant ships by Houthi rebels on the Red Sea en route to the Suez Canal.
India is the world's third biggest oil importer.
Puri said that while OPEC nations have a right to decide on their energy production, supply cuts against such uncertainty, and the resulting adverse impact on global prices, will dent long term demand.
Saudi Aramco, the national oil giant, this month cut the price of its flagship Arab Light crude to Asian customers to the lowest level in 27 months.
Iraq replaced Saudi Arabia as the top oil supplier to India a few years ago and now cheaper supply from Russia in the aftermath of Western sanctions for its invasion of Ukraine has pushed it to the top spot followed by Iraq and Saudi Arabia.
Puri said he had just signed a memorandum of understanding with Guyana to cooperate across the entire energy value chain of the South American country.
Puri said countries, including in the Middle East, had told him they want to acquire Indian oil companies outright, he said, but they are strategic and not for sale.
Elsewhere, crude oil was quoting a shade under $77 a barrel Overnight.
Monsoon Rainfall Is Rising In Some Places, Falling Elsewhere.
A study just out from the Centre for Energy, Environment and Water says that monsoon rainfall increased in 55% of Indian tehsils in last 10 years amid climate change:
Moreover, short-lived, heavy rainfall is on the rise.
Meanwhile, drier areas of Rajasthan, Gujarat, central Maharashtra saw a significant increase in rainfall over last 10 years while 11% tehsils saw a decrease, which are located in rain-fed Indo-Gangetic plain, NE India & upper Himalayan region.
The CREW study, Decoding India’s Changing Monsoon Patterns —which is a first-of-its-kind granular analysis of rainfall in more than 4,500 tehsils across India spanning 40 years (1982-2022)—finds fast-shifting and erratic monsoon patterns in the last decade.
This can be attributed to the accelerating rate of climate change, the study says.
Moreover, the CREW study finds that the increased rainfall in these tehsils is frequently coming from short-duration, heavy rainfall, which often leads to flash floods.
For instance, 31 per cent of Indian tehsils experienced an increase of four or more days of heavy rainfall per year in the last decade (in comparison to the previous 30 years) during the southwest monsoons.
As 2023 was declared the hottest year on record globally, and 2024 is expected to continue that trend, the impacts of the climate crisis will be seen in the form of increased extreme weather events.
I reached out to Dr Vishwas Chitale, Senior Programme Lead, CEEW, said and began by asking him how we should be interpreting this data