Low Liquidity Hits Major Markets In Holiday Shortened Week

• (00:00) Stories Of The Day
• (01:09) Low Liquidity Hits Major Markets In Holiday Shortened Week
• (08:04) India Forced To Switch To US Crude Oil As Sanctions On Russia Tighten
• (09:44) What Goes Down Must Go Up To, The China Factor At Work
• (12:34) Why Indian Banks’ Cost Of Capital Will Go Up
• (15:06) Mumbai Is Fastest Growing Billionaire Capital In The World
• (17:08) Adani Group Acquires Yet Another Port, This Time In Orissa
• (17:55) Can India Choose Between Subsidies For Manufacturing Semiconductors And Spending On Higher Education?
• (19:54) Why Chocolate Prices Will Rise, Global Coca Prices Hit New Records

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 Gripped By Low Liquidity 

The stock markets are on a slippery footing, as was quite evident going into trade on Tuesday.

One reason is liquidity. While in theory markets are open right now, in practice, many investors are on holiday, including institutional ones. This means that there is less buying and selling overall and in some stocks there may be very little activity.

This is one of those unusual weeks with two trading holidays, Monday and Friday in India.

On Wall Street, which in turn defines a fair bit of trading patterns and trends elsewhere in the world, it has been projected to be a low liquidity week thanks to one trading holiday and long weekend which is Good Friday onwards.

So basically, don’t expect too much. Equally, don’t also read too much into price movements this week.

On Dalal Street, stocks closed lower though.

The BSE Sensex closed  362 points lower at 72,470, breaking a 3-day positive run, having gained 821 points.

The Nifty 50 closed down 92 points at 22,005.

The BSE MidCap index was up 0.7 per cent. The SmallCap index ended marginally in red, down 0.1 per cent.

Interestingly, some brokerages are already calling a bottom of the mid and small caps and asking investors to buy.

Logically, it makes sense. I looked at a list of buys from one institutional brokerage. They included energy, finance (including BSE itself by the way) and technology and they seemed like good companies

The point is that all small caps and mid caps were not bad though they may have been overvalued. 

On the other hand, there were complete duds as well which are unlikely to rise again, unless of course pushed by mischievous investors, which is the most kind way to put it of course.

So be careful.

The rupee rose on Tuesday but then i may have forgotten to inform you that it hit a record low of 83.43 on Friday.

The rupee was at 83.33 against the U.S. dollar as of 10:45 a.m. IST, up 0.1% compared with its close at 83.42 in the previous session.

When the rupee seems to be losing ground, the Reserve Bank usually steps in to sell US Dollars to rein in further losses.

In general, the rupee has been moving in a band though it has also been slipping to lows or a weaker trading range.

Overall India’s foreign exchange reserves are strong, having increased by $6.4 billion to $642 billion for the week ended March 15, according to the latest RBI data. 

In the previous reporting week, the overall reserves had risen by $10.47 billion to $636.095 billion.

I reached out to Anindya Banerjee, Head of Research for Forex and Interest Rates at Kotak Securities and began by asking him what were the current forces of demand and supply on the rupee right now. 

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India Forced To Switch From Russia To US For Oil

India has been buying large amounts of Russian crude in the last year, also at lower rates because western sanctions prevented Russia from visiting many countries in Europe and elsewhere.

Analysts The Core Report have been speaking to have however questioned whether there was really a substantial price difference between Russian crude and international Brent crude prices because of transport costs and the like.

Nevertheless, with sanctions being tightened further, the flow of Russian crude into India is slowing down further even as we switch to other sources, including American.

Reuters is reporting that more than 250,000 barrels per day of U.S. crude is set to arrive in India next month, the highest in more than a year.

Reliance Industries is bringing in some 6 crude oil tankers with 

some 7.6 million barrels of oil, Reuters quoted ship tracking firm Kpler saying.

India was the top buyer of Russian oil last year after other groups retreated from purchases following Western sanctions on Moscow for its invasion of Ukraine in February 2022.

Last month, the US added sanctions on Russia’s state-owned shipping firm Sovcomflot and 14 crude oil tankers involved in oil transportation.

So Reliance will not buy Russian oil loaded on these tankers operated by Sovcomflot, Reuters reported, adding other Indian refiners which include Government ones may also not bring in oil through these tankers, which reduces the options Russia has to send out oil.

Meanwhile, Brent crude prices were quoting under $87 a barrel, still high but steady in recent days.

China’s $1.75 trillion Rebound

For several months, we have been reporting how foreign portfolio investors had soured on China and were pulling out funds and moving them to markets like India and Japan, among others.

The capital exodus had several knock on effects, including a fall in the overall market capitalisation of Hong Kong and an increase in India’s.

Hong Kong had seen a four year fall until 2023 and then lost another 10% at the start of 2024.

India then had overtaken Hong Kong to become the 4th largest market in the world by capitalisation. 

Hong Kong is a small country but its stock market and Hang Seng index mirror and host several mainland China stocks.

The tide is turning again.

For one, Hong Kong has regained its spot as the world’s fourth largest market. And India’s overall market value has fallen,  by some $180 billion from the March 4 peak of $4.75 trillion, according to Business Standard.

The fall is largely due to the beating that small and mid caps have been taking, which the benchmark indices like the Sensex and Nifty do not fully capture.

So right now, the Chinese territory’s market capitalisation stands at $4.9 trillion versus India’s $4.75 trillion, as per data compiled by Bloomberg.

The Nifty Smallcap 100 index slumped more than 14 per cent from its record high this year, while the Nifty Midcap 100 declines as much as 7.1 per cent.

Meanwhile, the SCMP is reporting that foreign investors invested some US$8.4 billion into onshore-listed stocks in February, ending six months of outflows, according to HSBC. 

Offshore China hedge funds and buy-and-hold investors led the charge.

Moreover, some research firms are saying that the US$1.75 trillion rebound in Chinese equities listed in mainland China, Hong Kong and New York since late January is only the beginning and will get even better.

The MSCI China Index, which tracks more than 700 Chinese stocks listed at home and abroad, has risen as much as 14.5 percent from its low this year, making it the best performer among major world indices in that period. 

The question of course is what could this mean for India ?

Well, nothing much because there is no change in the India story and investors will likely move back to China with fresh funds or move from elsewhere.

The same foreign portfolio investors who are calling China’s bottom remain bullish on India’s medium to long term prospects. Even if they find valuations stretched for now.

The moral of the story is more to do with the assumption that China was not going to bounce back in a hurry or would be in the doldrums for a long time.

Am talking of the markets of course, discussing the underlying economy will take much more research to unravel.

Or to sum up in one line. What goes down must go up too.

Why Indian Banks’ Cost of Capital Will Go Up

The Reserve Bank of India’s increased scrutiny of banks and non bank finance lenders will improve governance and curtail exuberant lending or for that matter borrowing but may raise their cost of capital as well as slow loan growth, S&P Global Ratings said on Tuesday.

In November, the RBI tightened its norms on unsecured loans and warned lenders against "all forms of exuberance,"

Reuters reported last week that the RBI is diving deeper, targeting new areas of retail lending  including mortgage-linked "top-up" loans.

And of course it has been hauling up non bank finance companies, one of whom has evidently been playing fast and loose with its gold loans portfolio.

Banks give loans on the basis of gold deposited with them as collateral. Banks give loans of upto 75% of the assessed value of the gold that is given to them. The gold has to be in the form of jewellery and must be valued properly.

The problem, it turns out, is that the valuations were wrong, the due diligence bad and the gold was not the gold it was promised to be. For example, 24K gold could turn out to be 22K or 18K or with higher impurities and thus lower value. All of this came to light when the loan takers defaulted and the banks tried to sell the gold.

The increased focus on compliance, combined with tight liquidity in the banking system, will slow down credit growth to 14% in 2024-25 from 16% this financial year, S&P estimated.

However, Fitch Ratings said in a separate note that Indian banks' profitability is likely to stay "resilient" despite the pressure on margins.

Fitch expects banks' net interest margins (NIM) to narrow by 10-20 basis points over the next two years amid rising funding costs given the competition for deposits, reported the Business Standard.

All of which does not really seem to be a problem in the medium to long term and it is likely the regulator would ease up if it felt the tightening was working and restoring some sanity.

The Land of Billionaires

Mumbai has become the fastest-growing billionaire capital in the world,  adding 26 such persons and taking it to third rank in the world. 

Mumbai has now overtaken Beijing as Asia’s billionaire capital for the first time with 93 members in the exclusive rich club, according to Global Rich List 2024 published by Hurun Research Institute.

According to the Shanghai-based institute, New York and London lead the cities with 119 and 97 billionaires, respectively.

Meanwhile, New Delhi also made it to the coveted list for the first time ever.

Hurun Global Rich List’s wealth calculations are a snapshot for the year ending January 15, 2024. It is the thirteenth edition of the ranking.

India added 94 new billionaires in 2023, taking the country’s total to 271 and forming a cohort that has a combined wealth of $1 trillion, said a report on Tuesday.

Reliance Industries chairman Mukesh Ambani is the only Indian to rank in the top 10 names in the ‘2024 Hurun Global Rich List’, a ranking of US dollar billionaires. 

Ambani, 66, is placed 10th and he was worth $$115 billion in the period the report tracked. He is Asia’s richest person.

Adani Group chairman Gautam Adani ranks 15th and he is the next Indian after Ambani. Adani, 61, has a net worth of $86 billion, recording a $33 billion surge in wealth attributed to a rally in his companies' shares.

Apart from New Delhi which broke into the top 10 cities for the first time. Palm Beach, Istanbul, Mexico City, and Melbourne also broke into the Hurun Top 30 cities.

Pharmaceuticals, automobile, automobile components and chemicals industry were some of the country’s sectors that dominated the UHNWI’s list.

China tops the list with 814 billionaires but its list has shrunk by 155 from 2022 after turmoil in the stock markets, real estate and renewable energy sectors. 

The US came second in the list with 800 total billionaires, adding 109 new members. 

Adani Expands Further and East

Adani Port has bought another port in Gopalpur in Orissa, this time from the Shapoorji Pallonji Group.

The Pallonji Group itself sold another port earlier, Dharamtar Port in Maharashtra to JSW Infrastructure Ltd. for an enterprise value of Rs 710 crore, the company said in a statement.

The Pallonji Group had acquired both ports between 8 and 9 years ago and sold it again now.

Adani has grown from one port in Mundra in Gujarat to become the country’s largest operator with over 14 ports and terminals handling a quarter of all cargo passing India’s ports.

Most of these ports have been acquired and Adani now has a presence every 500 km on an average on India’s 5,400 km coastline, an investigation in Indian Express in October last year had pointed out.

Should We Spend on Chip Making Or Higher Education?

Yesterday, we deep dived into the global race for semiconductor investments and how countries like the United States were quite literally showering tens of billions of dollars of tax breaks and subsidies for semiconductor plants.

Intel is investing almost $100 billion right now of which close to half will come in the form from federal and local governments as tax breaks and subsidies.

India is in the race too offering similar incentives though smaller. The question of course is can it afford it ?

Former RBI Governor Raghuram Rajan said yesterday that the policy choices made by the government to spend more on subsidies for chip manufacturing than the annual budget for higher education were misguided. 

The subsidies to semiconductor businesses to set up operations in India was an estimated 760 billion rupees ($9.1 billion), compared with 476 billion rupees allocated for higher education, he said, in an interview quoted by Bloomberg.

Rajan’s point is that the Government should fix the education system so it can produce well-trained engineers needed for those industries, he said.

The problem of course is that chip manufacturing is now akin to defence preparedness, being precisely the reason why countries are racing to set up capacity and also derisk from China or for that matter a Taiwan.

India is in the same race and has little choice to be in it, from all accounts.

Tax breaks and subsidies are however both federal and state-led. And India has to decide which states can bear the burden of big ticket incentives and which can’t. It is quite clear that states like western states like Gujarat and Maharashtra and southern states like Tamil Nadu and Karnataka can bear more than other states in the country.

India’s moves on this front must be more carefully calibrated because the chip race is like an arms race from which you cannot run.

Cocoa Prices Hit Record Highs, Chocolate Could Follow

If prices of almost everything are rising, how far could chocolates be ?

Cocoa futures surged above an unprecedented $10,000 a ton, extending a historic rally that’s already seen prices double this year and which is raising the cost of chocolate, Bloomberg is reporting.

The reason is poor crops in key West African growers that have put the world on course for a third straight annual supply deficit. 

The industry is grappling with the legacy of poor returns paid to cocoa farmers and fears are mounting about being able to source enough beans, Bloomberg said, adding high cocoa prices is bad news for consumers if chocolatiers keep passing on costs or sell bars that are smaller or have less chocolate in them. 

Focus is now turning to West Africa’s upcoming mid-crop, the smaller of two annual harvests. 

Countries like Brazil and Ecuador, are meanwhile trying to ramp up production, but it takes a few years before newly-planted cocoa trees bear beans.