RBI surplus to Centre likely to impact economy markets and banks
RBI’s decision to transfer ₹991 bn to the government, while higher than expected, is still within the realms of keeping the contingency risk buffer at 5.5% of the RBI’s Balance Sheet. RBI has ensured that the additional liquidity that it’s bringing into the system through the government’s balance sheet is coming at a time when inflation is low. This is a huge positive for the Economy, as it gives levers for the government to front-end spending especially towards infrastructure growth, post addressing the spending on Covid. The additional amount would help the government offset the impact of lower tax collection due to on-going restrictions, and support the divestment program which slowed down due to Covid.
How big has the fall in Investments been in FY21
The poor figure of investments can be primarily attached to the lockdown imposed early in the pandemic to curb the spread of cases. New project announcements in India for the financial year 2020-21 to the lowest in at least 17 years. India saw new projects worth ₹5.18 Lakh Crore, the lowest since FY05. CARE said that for a revival of investments to take pace, there would need to be a surge in demand as factories are still not running at full capacity. This year, too, a recovery in investments is unlikely as many states have imposed lockdowns as deadly second wave ravage the country.
Japan Exports Surge as Global Trades show signs of rebounds
Japanese exports jumped again, climbing in April by more than a third from last year’s levels. Surging car and auto parts shipments helped power a 38% rise in Japan’s exports from a year earlier. Although the data give an inflated view of the strength of exports because they are based on a comparison with 2020’s low figures, the report still shows trade bouncing back. Shipments climbed almost 8% compared with 2019.
- Last month’s trade increase showed a broad-based recovery in the world economy. Shipments to the U.S. and Asia rose the most since 2010, while those to the EU climbed the most since 1980.
- Demand itself is very strong led by the U.S. and Chinese exports.
- A drop in the yen’s value gives Japan’s exporters another tailwind. The currency has fallen roughly 6% versus the dollar so far this year, increasing the value of repatriated profits for companies from Toyota to Hitachi.
Banks Likely to transfer about 80 Large NPA accounts to NARCL
National Asset Reconstruction Company (NARCL) is the name coined for the bad bank announced in the Budget 2021-22. Banks are likely to transfer about 80 large NPA accounts for the resolution which is expected to be operational by next month. The size of each of these NPAs accounts is over ₹500 crore and the banks have identified about 70-80 such accounts to be transferred to the proposed bank. It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realization. NARCL will pay up to 15% of the agreed value for the loans in cash and the remaining 85% would be government-guaranteed security receipts.
Market Analysis on Banking Sector
India’s largest private sector lender HDFC Bank today reported an 18.2 percent year-on-year rise in net profit to Rs 8,186.51 crore for the quarter ended March. The lender reported a net interest income of Rs 17,120.2 crore, up 12.6 percent from a year-ago quarter.
Analysts had expected the bank to report a 23 percent year-on-year rise in net profit to Rs. 8,550.3 crore and a near 12 percent rise in net interest income to Rs 17,000 crore.
For the quarter, the lender’s gross non-performing loans ratio stood at 1.32 percent as against 1.38 percent on a proforma basis in the previous quarter.
Loan Book grew 14% YOY riding the domestic corporate book growth. While the Mid corporate and SME sector saw improved demand, large corporates showed deleveraging tendencies. Cash flows into SME accounts have been improving from December 2020.
Cheque bounce rates have deteriorated in April compared to March, however, there has been some pressure from Maharashtra, MP, Telangana and Punjab.
HDFC expects to build on its card portfolio from newly acquired liability relationships (2mn customers added during the quarter) once forbearance is lifted.
It has partnered with tech companies for faster migration, as well as the independent audit by RBI is in its final stages which looks like good news for the bank.
Uncertain times put a premium on resilience, a strong balance sheet and likely higher residual capital than most keeps HDFC in a good position and makes it one of the best bets in the current markets.
IDFC First Bank has raised Rs 3,000 crore through QIP in which global marquee investors like BNP Paribas and Baillie Gifford participated alongside domestic players such as Bajaj Allianz Life and HDFC Life.
The qualified institutional placement (QIP) closed on Tuesday and the lender issued 52.31 crore fresh equity shares at Rs 57.35 per share. Out of this, 68.33 percent of the allotment was made to foreign investors and 31.67 percent to domestic investors.
The private sector bank also witnessed over 10 per cent yearly growth in its total funded assets at Rs 1,17,803 crore as of March 31, 2021 from Rs 1,07,004 crore a year ago.
Total consumer deposits grew by 43.15 per cent year-on-year to Rs 82,628 crore from Rs 57,719 crore for the period.
Bank’s CASA deposits (current account and savings account) jumped by 122.74 percent to Rs 46,022 crore from Rs 20,661 crore by March 2020. The CASA ratio stood at 51.95 percent by the end of March 2021, up from 31.87 percent by a year ago.
However, the top 20 depositors’ concentration witnessed a decline at 7.76 per cent against 20.26 per cent.
1.Rise in bond yields caused by short selling by traders
As the recent rise in bond yields both in the domestic and the US markets has caused a frenzy in the stocks markets, short selling by market players may be a major reason for the rise in yields.
The strategy of short selling involves the sale of a security which the seller has not yet purchased but borrows from others in the market.
The report noted that the banks and the primary dealers resort to short selling when their view is bearish, that is, the prices of the bond will fall and the yield will rise.
They make money if the bond prices drop and yields rise, and over a point of time, this could become a self-fulfilling prophecy as such short sellers keep on rolling over their borrowed security from the repo market till the time they believe that yields will continue to rise.
According to the SBI report, the only way to break such self-fulfilling expectations is for the Reserve Bank of India (RBI) to conduct large scale open market operations (OMO) to provide necessary steam to the bond market to rally and with an increase in price, many short sold position will trigger stop losses and market players will scramble to cover open positions.
Commodity prices traded higher on Tuesday continuing the buying trend from the previous session. Bullion prices made a strong comeback after the previous week’s decline while base metals prices continued upside with China’s demand. The dollar index ended down by 0.39 percent for the day.
Bullion prices traded higher with spot gold price at COMEX was trading near $1,812 per ounce while spot silver price at COMEX was trading up at $28.12 per ounce in the morning trade. Bullion prices witnessed recovery on weaker dollar and pandemic worries.
Crude oil traded higher with benchmark NYMEX WTI crude oil prices were trading 1.50 per cent up at $62.60 per barrel in the morning trade. Crude oil prices rose to 13 month high on expectations of slower restart of oil output form cold weather impacted Texas area. The resume of refinery operations will bring oil demand back on track.
Base metals complex continued to soar with Copper and Nickel prices traded with more than 1 percent gains. Copper prices traded to the highest levels since 2011 at LME while Nickel prices rallied to the most since 2014 as China resumes trading on Monday. The US stimulus hopes, demand from China, and weaker dollar combined have boosted base metals to trade higher.
MCX Gold April’s future witnessed a good recovery as the price breached the initial resistance of Rs 46,640 (5 Day EMA). Meanwhile, the price is still hovering in the downward sloping channel with immediate resistance near Rs 47,280, followed by Rs 7,560 (21 Day EMA). On the other hand, key support holds around Rs 46,640, followed by Rs 46,200. On the momentum front, RSI has reversed from the oversold zone and now it is moving towards the mid-zone of 50(42) indicating a rebound in the price.
MCX Silver March future has extended its rebound as price breached the initial resistance of Rs 69,680 (5 Day EMA). Meanwhile, the price is trading above the bullish crossover of 5 and 21 days EMA which has strengthened the recovery in Silver prices. On the upside Rs 70,760 holds key resistance, the price needs to sustain above to extend its rally towards the next resistance of Rs 71,800, followed by Rs 72,700.
3.RBI & Bonds
The supply of bonds is huge, and simple economics will tell us that when supply exceeds demand, prices fall. In the case of bonds, yields go up as they move inversely to prices. Simply put, the bigger the bond supply, the higher the yields will climb. The RBI is hoping to bend this logic a bit by participating as a buyer. So far in FY21, the central bank has bought Rs3 trillion worth of bonds, either through auctions or secondary market purchases. Indirectly, it has absorbed a quarter of the government’s borrowing program of Rs 12.8 trillion.
But unlike in the past, the borrowing itself is huge this year and the next year as well. Ergo, it is futile for the RBI to stand in as a big bond buyer for long especially when it has begun normalization of liquidity. Other indirect signals on yields through auction cutoffs and operations twists are effective but only for a short while.
The odds of bond yields rising from here on are piling up. India’s banks are readying to lend more to the private sector and credit growth is expected to pick up. They will have less incentive to keep buying government bonds. The retail inflation outlook looks unfriendly with sticky core inflation and rising fuel prices. Bond traders cannot ignore this. Moreover, globally bond yields are rising and Indian papers cannot be an outlier.
Then there is a supply of bonds from state governments. States have already borrowed close to Rs 6 trillion from the market and may end up borrowing another Rs 1.59 trillion. There are simply not enough willing investors to match the deluge of bonds this year.
- A significant shortage of steel supplies and a higher price of the key raw material has led to a sharp revision in the production schedules for the fourth quarter at leading carmakers. The production schedules for the ongoing fiscal Q4 are being revised downward by 15-20%, which could potentially mean a loss of over 1.5 lakh units in the January to March quarter for the industry.
- India’s biggest online education startup Byju’s has signed a deal to acquire brick & mortar test prep leader Aakash Educational Services Ltd. for $1 billion, according to a person with knowledge of the talks. The deal for what will be one of the largest edtech acquisitions in the world should close in the next two or three months. Blackstone Group-backed Aakash Educational Services runs Aakash Institute, which has over 200 brick and mortar centers and tutors students to gain entry into the country’s elite engineering and medical schools. Its student count is over 250,000, according to its website.
- The revision of foreign portfolio investor (FPI) limit in Bharti Airtel should lead to around $600 million worth of inflow as MSCI is likely to revise its weight in the stock higher due to the FPI limit increase. Bharti Airtel on Tuesday said that it has received approvals for its relevant downstream investments, and it is initiating process to revise its FPI limit to 100%, as notified to its depositories, with immediate effect.
- The government could look at introducing a coronavirus cess or surcharge on individual tax payers – possibly only on the higher income groups. The government may also look at increasing the tax on long term capital gains from equity and property, to push up revenue. Another revenue raiser could be introduction of infrastructure bonds offering tax breaks. The government may also look at providing further tax incentives to people to enable them to buy adequate health insurance which has gained importance following the current pandemic. The limit on the premium amount that can be claimed varies from Rs 25,000 to Rs 1 lakh depending on whether the premium is being paid for self and family.
- Tesla, the world’s most valuable carmaker, has launched an Indian subsidiary as it prepares to create a much-awaited manufacturing plant and R&D unit in India. The unit named Tesla India Motors and Energy Private Ltd was incorporated in Bengaluru on January 8. Tesla is also in talks with five state governments to commence operations in India. The governments of Maharashtra, Gujarat, Andhra Pradesh, Karnataka, and Tamil Nadu have had talks with the company who are also considering local partnerships.
- The domestic hospitality industry, which has been severely affected by the COVID -19 related disruptions, is likely to witness a decline of over 65% in 2020-21, according to a report. However, there might be a recovery in demand in the later part of financial year 2021-22 as vaccine rollouts gains traction.
- The Reserve Bank on Tuesday imposed a penalty of Rs 2 crore on Deutsche Bank AG for non-compliance with certain provisions of directions concerning interest rate on deposits.
- The mass rollout of the COVID-19 vaccine in India will begin from January 16 onwards. The country, with the second-highest population in the world, is bracing for one of the largest vaccination drives. Registration for the same has to be done through CoWin app. However, the app is yet to be released in the public domain. The Government is not providing any choices in the vaccine selection as of now.
- Cabinet approves RBI’s proposal to merge Lakshmi Vilas Bank with DBS Bank. As part of the amalgamation, DBIL will infuse fresh capital of ₹2,500 crores into LVB. Analysts and Global Credit Rating Agencies have applauded RBI’s move and said that it will benefit both parties.
- Amazon Launches Amazon Pharmacy, a delivery service for prescription medications. While Amazon Pharmacy looks to be a U.S.-only launch now, it’s a Global Opportunity. Online pharmacy services are projected to hit revenues of $131 Billion by 2025 worldwide. Prescription drugs, meanwhile, have been estimated to be a $904 billion industry this year, growing to nearly $1.3 Trillion by 2025.
- Traders Body urges DPIIT to penalize Amazon, Flipkart for allegedly violating FDI, FEMA rules. India’s FDI policy for e-commerce, the latest version of which is Press Note 2 (2018), allows 100% FDI in the marketplace model but prevents marketplaces such as Amazon from exercising ownership over any inventory sold on their marketplace or influence the sale of goods directly or indirectly.
- The Telecom Regulatory Authority of India (TRAI) has slapped a collective penalty of Rs 35 crore on leading operators, including Reliance Jio, Bharti Airtel, Vodafone Idea, and Bharat Sanchar Nigam Ltd (BSNL), as they failed to respond properly to a show-cause notice on phishing activities on their networks.
- The regulator has also fined Videocon, Tata Teleservices, Quadrant Teleservices, and state-run Mahanagar Telephone Nigam Ltd. The penalty on these eight telecom operators was levied for failing to stop cybercriminals from sending fake text messages to dupe digital payment users.
- The highest fine of Rs 30.1 crore was imposed on state-owned entity BSNL as nearly 60-70 percent of phishing attempts have been on its network. Vodafone Idea has been fined Rs 1.82 crore, Quadrant Rs 1.41 crore, and Airtel Rs 1.33 crore.
- Uttar Pradesh Government to seek foreign investment for ₹36,000 crore Ganga Expressway. The Centre had allowed 100% FDI through the automatic route in road construction projects, and UP is planning to explore this option owing to the paucity of funds.
- Mahanagar Gas’s Volumes are back to pre-Covid levels in key-segments. Capex plans are on track and the outlook for the second half of the financial year looks positive.
- Analysts cite untapped opportunities, steady cash flow, healthy margins, and high return ratios among the reasons to go bullish on this stock, even though they believe possible fresh lockdown in the Mumbai region could pose a short-term risk to volume recovery.7.U.S. hits the highest death toll since May with Hospitals already full. Since the global pandemic began, the U.S. totals of nearly 2,60,000 deaths and 12.6 million infections.
- SBI raises $1 Billion from a group of Japanese Lenders led by Japan Bank for International Cooperation (JBIC). The Sovereign backed JBIC will extend $600 Million, the rest will be funded by MUFG Bank, SMBC, Mizuho Bank, Shizuoka Bank and Bank of Yokohama. Japan offers Loans at relatively cheaper rates averaging around 2.4% from 1972 until 2020. India is one of the favored nations for Japanese investments and this also is backed by good friendship among the nations.
- Jack Ma has made headlines today for raising more than $34 Billion in the World’s largest IPO in history for his company, Ant Group – Launched 6 years ago. Ant doesn’t work like a traditional bank. It’s an “Amazon for Money” that makes it easier for us to earn, exchange and invest our money at a fraction of the cost, in a fraction of time.
- Boeing reported its fourth straight quarterly loss on Wednesday as the corona-virus crisis and the 737 Max jet grounding hurt sales, while reaffirming its expectation that U.S. deliveries of the aircraft would resume before year end.
- Samsung pipped China’s Xiaomi to become the leading smartphone company after two years with 32% year-on-year growth in the July-September quarter of 2020. Samsung’s strong performance is supported by multiple strategies, effective supply chain and touching various price points through new launches.
- In the past 10 days, the prices of onions have seen a spike of ₹11.56/Kg taking the all-India retail price of the commodity to ₹51.95/Kg which was 12.12% higher than the last year’s price of ₹46.33/Kg. The government on Wednesday relaxed the import norms of onions to boost domestic supply and check the incessant prices that have been rising since late August due to COVID-infused lock-down, followed by rains.
- Under Construction residential project are back in demand. Sales of under-construction apartments in the top eight cities of the country rose 69% and that of ready properties also rose 42% sequentially compared to the last quarter.
- Mumbai-based Nazara Technologies is one of the leading mobile games companies operating in India, West Asia, Africa, Southeast Asia and Latin America. Its operations comprise subscription, freemium and Esports business. Rakesh Jhunjhunwala is backing this venture which is credited with some of the most popular games on Google Play store.
Quarterly Results Update
- Dr Reddy’s Laboratories Ltd: Q2FY21 Result – Revenue came at ₹4,910 crores vs an estimate of ₹4,812 crores, increased by 2.3% YoY. Net profit during the quarter came at ₹771.8 crores vs an estimate of ₹646 crores, declined by 29.3% YoY, however sequentially there has been a sharp improvement of 32%.
- Larsen & Toubro: The consolidated net profit fell 44.73% YoY to ₹1410.29 crores for the September quarter compared with ₹2551.67 crores in the same quarter last year. Revenue from operations for the quarter dropped to ₹31,304.74 Crore from ₹35,328.45 crores, a fall of 12.15% YoY. The Impact of the pandemic in terms of lower revenue, higher credit provisions in the financial service business disruption of the metro services, led to a decline in profits.