The bank, which is currently in capital conservation mode, will be able to return to a focus on growth once the fundraising exercise is complete.

This growth, however, may be more modest than what was seen under the previous chief executive Rana Kapoor.

Yes Bank will be looking to grow its loan book at 20-25 percent for some time to come, bringing down its growth rate from the over 40 percent year-on-year growth seen until a few quarters ago.

Yes Bank is also in the process of adjusting its exposure to a few corporate groups, where the lender was in breach of the Reserve Bank of India’s large exposure framework, the person quoted above said.

The private sector bank will move from an asset-led growth strategy to a liabilities-led growth strategy as it aims at bringing in more retail and small business customers. It intends to do this by leveraging its 1,100 branches and mining customer data from its digital offerings such as the Unified Payments Interface (UPI). A liabilities-led growth could help the bank bring down its cost of funding by 100-150 basis points, the person quoted above said.

Yes Bank’s new CEO has stated they have already accounted for most of the bad loans on the balance sheet. With a central bank employee sitting on the board, if that information is factually inaccurate it represents a major problem for the credibility of the RBI. The earnings announcement tomorrow is going to help to at least answer that question.

Climate change activists have long argued that water will be the political flashpoint of the 21st century. Water-stressed India will likely be one of the first places to test that theory. The state of Tamil Nadu complains that it doesn’t receive its fair share of the waters of the Cauvery River; recently, the authority that nominally manages the river accused the government of neighboring Karnataka of holding onto water that it should have allowed to flow down to the Cauvery delta.

Things might get even testier up north, where more than a billion people depend upon rivers that rise in the Himalayas. Bangladesh and Pakistan feel that India is being stingy with river water.  Indian strategists constantly worry that China will divert water from the Himalayan rivers that rise in Tibet to feed the thirst cities in its own north.

The floods in Chennai are a warning. As the world warms, the rains on which India depends have become erratic: They frequently fail to arrive on time, and they fall in a more disparate and unpredictable pattern. The country can no longer afford to waste its dwindling resources.

A rapidly urbanizing and developing India needs to drought- proof its cities and rationalize its farming. Water-harvesting must be a priority, alongside mechanisms for groundwater replenishment. As it is, every summer is hotter and less bearable. If Indians run short of water as well, one of the world’s most populous nations could well become unlivable

India’s population is likely to exceed China’s sometime in the middle of the 2020s and peak around 1.6 billion sometime in the middle of the century. That’s a lot of people in a country that already seems crowded.

Generally speaking, water shortages are usually more about mismanagement of resources than an absolute lack of the precious commodity. There are exceptions of course but when rains fall every year the question is less about quantity and more about the quality of governance. In just the same way countries need clear national energy, commercial, military and political action plans, national water managements plans are also necessary for the long-term welfare of populations.

4. Is the crisis spreading?
Mortgage lender Dewan Housing Finance Corp Ltd. missed debt payments in June and Care Ratings Ltd. slashed its AAA credit rating to D this year. A news site alleged in January that the company diverted funds to shell companies, a claim Dewan Housing has denied. Other companies including Reliance Capital Ltd. and Piramal Capital & Housing Finance Ltd. have also had their credit ratings cut on liquidity concerns. Access to funding has gotten tougher for many non-bank financing lenders in credit markets, and they have a record 1.1 trillion rupees ($15.9 billion) of debt due in the third quarter of 2019.

5. Where is this heading?
The worst is probably still to come. Observers warn the credit crunch may hit the property sector next. It is heavily dependent on funds from shadow banks, and concerns are already being reflected in some realtor bonds. The nation’s conventional banks may also see more pain, as about 7% of their loans are extended to non-bank financing companies.

6. How are shadow lenders coping?
As access to funds in onshore debt markets has dwindled, shadow lenders are tapping overseas markets where they have to pay 25 to 50 basis points more than onshore rates to get cash.

7. What’s the economic impact?
India’s consumption engine is sputtering because the shadow-banking sector plays a key role in the nation’s financial system, particularly in delivering credit at the grassroots. A prolonged slowdown in lending from the sector poses a significant challenge to the Indian economy, where consumer spending growth has cooled on everything from toothpaste to air tickets. It expanded just 5.8% in the quarter ended March -- the slowest pace in five years and lagging behind China.

India’s shadow banks are experiencing a liquidity crisis which is throwing the wider market’s valuation premium into focus. We know how this process ends. First, a bad bank will need to be set up and filled with the nonperforming assets of the housing finance companies/shadow banks. If shadow banks are to be rationalised, the conventional banking sector will need to pick up the slack in terms of liquidity provision.  

There is some evidence of that happening, even with the previous, smaller tariffs. Since the third round of U.S. tariffs on China went into effect in late September, U.S. imports from China have faltered. An 8% growth rate in October turned to an 18% decline on the year in March. Yet import growth from Taiwan has risen from 12% to 21% over the same period. Imports from Vietnam grew 34% in March, up from a 15% rate in October. And imports from South Korea also surged in the first quarter: They were up 18% on the year, against just 9% in the fourth quarter of 2018.

Some of those shifts might represent manufacturers in China rerouting goods through neighboring countries. Chinese export growth to Southeast Asia and Taiwan accelerated in the first quarter of 2019, even as its overall export growth slowed. Regardless, the result is probably more expensive goods in the U.S. and lower employment in China, as Chinese companies shift elements of supply chains across borders or lose market share to pricier but tariff-free Asian competitors.

Many U.S. policy makers would argue that some pain for U.S. households is worthwhile if it achieves broader strategic goals. In the meantime, however, the big winners from the Sino-U.S. trade conflict are still across the Pacific.

In the cryptocurrency world, “trust” is the buzzword. It occurs to me it is also the primary asset which has been lost in the pursuit of the trade war. The USA and other countries were willing to tolerate China’s misdeeds for years until the populist revolution highlighted just how much damage had already been sustained by the middle classes. Now the unfair trade practices and theft China has engaged in are no longer being tolerated and normal trade practices are being demanded. China is not in a position to accept those terms and that is setting up the conditions for a protracted disagreement which is likely to ebb and flow for years.

The cloud over Yes Bank is the result of the Reserve Bank of India (RBI) announcing last Fall that the bank’s co-founder and former CEO, Rana Kapoor, had not provided adequate reserves for bad loans in 2017. The RBI asked Kapoor to step down and find a replacement, which is a fairly radical move.

When Gill took over this spring, he immediately took large write offs to clear the decks, but has since changed his tone and become much more optimistic (I am referring to his interview on 5/17/19 on CNBC India). He is adamant that there are no more skeletons in the closet.

I am inclined to take him at his word, since the RBI has been closely scrutinizing Yes Bank for the past 6 months and knows the full extent of any problems. Also, the RBI found no issues in its most recent review of Yes Bank’s reserves, released just after Gill took the helm (but before his first earnings announcement in which he wrote off everything). The RBI also just appointed a representative to the board, so Gill is being held accountable in real time.

Local investors remain nervous that there is more bad news coming in the next quarters, but I hold the view that the bank has adequate collateral for its important exposures (ADAG and Essel group), will get through this phase, and that perceptions will change – I think the shares will return to their historic valuation range in the next two to three years, providing excellent returns from the current price.

The capital raise in the next 6 weeks could also be a catalyst in this process. That could be when the bank announces a capital raise, possibly with the participation of a Private Equity firm or other marquee investor. Tier 1 capital is now 8.3%, and the bank needs the capital to continue to grow.

Long term shareholder returns from private sector banks in India have been excellent (HDFC Bank, Axis Bank, or Kotak Bank compare very well to the S&P 500 over 5, 10, or 15+ yrs. In USD). Yes Bank is trading at a severely distressed level compared to its historic valuation range, and I believe there is a strong possibility of making a 2x return in 3 years, and more over a 5-7 year time horizon.

I am set up to invest in India (which is no small feat, 4-6 months of paperwork)

The market capitalization in USD is $4.7bn, book value is $3.88bn, price/book is 1.21x. This is the lowest p/b ratio since the financial crisis (See chart below). In Aug 2013 the p/b ratio got down to 1.5x and recovered to 4.37x book by Jan of 2015. The mean p/b during the bank’s history appears to be around 2.7x, which is normal for private sector banks in India due to their continuing high growth and high ROE.

Here is a chart of Yes Bank’s p/b range since 2009. It is important to note that when the shares reached 1.5x book in 2013 they were INR 49/share, compared to today’s price of 137/share, owing to the bank’s very fast rate of growth in book value.

Veteran subscribers will be familiar with the fact that India is our favourite market for the long-term. The challenge for many investors has always been in how best to express that view since it is difficult to transact in Indian shares and the number of Global Depository Receipts is limited. That leaves funds which may or may not perform.

Allen Benello is fund manager, a long-time subscriber and dear friend who has gone through the 4-6-month process of being set up as a Foreign Portfolio Investor (FPI) by the Securities and Exchange Board of India (SEBI). He has offered to answer any questions subscribers might have about opening a brokerage account in India and can be reached at ABenello@WRPartners.com.

On our latest grassroots research trip to India, we visited three lower-tier cities — Ahmedabad, Pune, and Lucknow — to meet with middle-class consumers between the ages of 20 and 30. We also conducted an online survey of 1,200 millennials across the country. This paper outlines our observations and offers potential investment implications driven by a rapidly changing “Young India.”

High-level observations
• India is home to more millennials than any country in the world, with nearly 473 million people born between 1985 and 2000.1
• Digital democratization is driving lifestyle convergence between metro and lower-tier cities.
• Expanding internet access and a wave of national pride have begun to shift consumption trends.
• The desires to bridge tradition with modernity and gain independence without losing family ties have boosted markets for inventive products and aspirational experiences.

Trend: Digital democratization is reshaping consumption patterns Internet and mobile penetration in smaller cities like Pune and Lucknow are beginning to match that of large, metro cities like Delhi and Mumbai. Data prices in India have plummeted 95% to approximately 18 rupees (US$0.26) per Gigabyte (GB) since 2016 (Figure 1), contributing to an eightfold increase in usage with the average user consuming nine GB of data per month as of the end of 2018 (Figure 2).

 A link ro the full report is posted in the Subscriber's Area.

The evolving populist, followed by nationalist trends first root in India. There is increasing evidence that this two-fold pattern is evolving elsewhere. The success of populist candidates in a large number of countries and the increasingly nationalistic rebasing of political dialogue that has occurred subsequently suggests there is a clear trend underway in the global market which is supportive of regionalisation rather than globalisation.

As you say, the US has many alternative sources of cheap goods but there are limited sources of US technology. China also has no alternative buyers of its products. Round One of the international confrontation will be won by the US.

Buyers can always look elsewhere because there is always someone who is willing to provides services at a lower cost or who can manufacture a copycat item which is “good enough” Sellers have to focus on retaining that competitive edge but often have a hard time replacing lost customers, particularly when they are have already maxed out their growth.

Match, which is owned by billionaire Barry Diller’s IAC/InterActiveCorp, runs dozens of dating sites like Tinder, OKCupid, Plenty of Fish and Hinge. But the bulk of the company’s earnings gains were fueled by Tinder, which lured in more than 384,000 new subscribers in the quarter, boosting direct revenue 38 percent from the year earlier period.

The online dating app, where users swipe right to indicate interest in a potential date, now boasts 4.7 million global subscribers. Overall, Match’s average subscribers increased 16 percent with most of the new users flowing in from outside North America.

“The world is changing," said Mandy Ginsberg, chief executive officer of Match. “I’ve been here a long time and 100 percent of the revenue used to be in the U.S. and now the growth and more revenue is outside of the U.S."

With arranged marriages on the decline in India and the stigma towards online dating eroding in Japan, Ginsberg is concentrating on international expansion. There are more than 400 million single people living outside North America and Europe, two-thirds of whom have not yet tried a dating product, according to Match. Ginsberg recently revamped the company’s leadership team in Asia -- appointing general managers in Tokyo, Seoul and Delhi -- to try and grow Match’s footprint across the continent.

Economic growth in India and the subtle shift towards female empowerment represent major growth opportunities for social media and online dating companies. Narendra Modi’s election five years ago as the first low caste Prime Minister represented a signal that social striation enshrined by the caste system and sustained by the system of arranged marriages may be changing. A more open society would represent a significant change for India which has historically been socially conservative.

Narayana has made Shetty one of India’s best-known doctors and the proprietor of a lucrative business, with about $8 million in profit in 2017. But he now faces a problem that might be even more complex than heart surgery: how to make his hospitals cheaper still. The reason is Modicare, the national health insurance program that’s one of Prime Minister Narendra Modi’s signature initiatives. Under way since September, it’s perhaps the most ambitious public-health effort in history, intended to give basic coverage for the first time to 500 million of India’s poorest. At first it seemed no one was in a better position to gain from this flood of new patients than Shetty. But his enthusiasm gave way to anxiety last year after the government published its list of reimbursement rates, which are lower even than Narayana’s prices. Those rock-bottom payments mean that to thrive under Modicare, Narayana needs to find ways to cut costs further—and then keep cutting.

Shetty thinks he can do it and, in the process, create a model for ultralow-cost health care that can be applied anywhere. “We are trying to produce a pilot for the rest of the world to follow,” he said over a lunch of curries and fried fish after scrubbing out from the heart operation. He was still
wearing his surgical cap. “In 10 years, India will become the first country in the world to dissociate health from affluence. India will prove that the wealth of the nation has nothing to do with the quality of health care its citizens can enjoy.” It’s a noble vision, and Narayana is as well-positioned as any provider to help make it a reality. But it’s hard to overstate the scale of the challenge Shetty faces. For a surgery like the one he’d just performed, Modicare would provide only $1,300.

These kinds of good news stories were a rarity five years ago but there is no doubt momentum is building around the narrative that India is capable of fixing its most intransigent problems. That’s a complete about face from the perception before the Modi era when the only story people were talking about was the raping of women in the street and the dire conditions for athletes at the Commonwealth Games.

Sustained increase in manufacturing will depend on, among other factors, the continuation of a favourable incentive regime into the next government, the official said. Mails sent to Foxconn and Apple seeking comment remained unanswered.

The company began its India manufacturing journey through another Taiwanese company Wistron, which had started with the iPhone SE from its factory near Bengaluru two years ago and later advanced to iPhone 6S model. Wistron now makes iPhone 7, a sign analysts foresee as a bump-up in local manufacture of multinational technology companies keen on the Indian market. Around 290 million smartphones were assembled in India in 2018 up from 58 million in 2014, according to data from the Indian Cellular and Electronics Association.

"In the short-term, the Differential Duty and the Phased Manufacturing Programme worked as far as import substitution is concerned. Now the challenge is to move from 290 million to 500 million phones and then to one billion by 2025," Pankaj Mohindroo, National president for ICEA, said.

"The National Policy on Electronics, 2019, gives a broad framework, but we will have to put a robust action plan behind it, which will enable exports..."

The ICEA has as its members brands such as Apple, Xiaomi, Vivo, Oppo, and manufacturers such as Flex and Foxconn.

India has the twin advantages of a massive young population and low costs. If we think about how manufacturing generally evolves, it is usually attracted by the presence of a low cost base and regulatory change which incentivises growth. Infrastructure usually comes later but it does need to be built. That is potentially where India is today. It is successfully attracting manufacturers but will need to do what is necessary to ensure they stay.

One in five of the world’s consumers will live in Africa by the end of the next decade, and more and more of these people will fall under the category of affluent or middle-class. Growing discretionary incomes will lead to higher demand for high-quality, niche, and foreign-produced goods. Urbanization, such as in Nigeria where eight cities already host populations over 1 million people, promises to increase competition for formal retail centers and the development of efficient production and distribution chains. Rebounding oil prices in Algeria, Angola, Nigeria, and Egypt may contribute to an increased market share for luxury goods. Though, ultra-high net worth individuals(whose net assets exceed $30 million) reside throughout the continent—in South Africa, Egypt, Nigeria, Kenya, Tanzania, Ethiopia, and Morocco. Growth in GDP per capita will lead to greater purchasing power among these classes of the population, and luxury goods retailers should look to the continent for entry points.

Fast moving consumer goods companies need to be where the people are. The countries with the most favourable demographics in the world today are all either in Africa or Asia with India, Indonesia, Nigeria and Ethiopia notable for their high populations. The global birth rate has already peaked which means companies have at best the next thirty years to capitalise on the demographic dividend before the global population starts to contract.

BJP has promised a new scheme to provide collateral-free credit of up to Rs 50 lakh for entrepreneurs in its manifesto for 2019 elections. It said that 50% of the loan amount will be guaranteed towards female entrepreneurs, while 25% will be for male entrepreneurs. 

BJP has also promised to create a seed startup fund of Rs 20,000 crore to back early-stage companies. It's worth noting that Prime Minister Narendra Modi had earlier announced a credit guarantee fund with a corpus of Rs 2,000 crore to provide funding facilities to startups in the country, as part of the Startup India action plan in January 2016. 

The BJP-led government had also announced a Rs 10,000-crore fund of funds managed by the Small Industries Development Bank of India (SIDBI) in 2016. However, according to the Startup India status report, less than 20% of the corpus has been allocated to alternative investment funds as of November 2018, with the total commitment standing at Rs 1,611 crore. The report also noted that around 170 startups have received funding from these investments funds. 

In its manifesto, BJP has envisioned facilitating setting up of at least 50,000 new startups and 500 new incubators and accelerators by 2024. It has also promised to create 100 innovation zones in urban local bodies. 

In every Indian election for the next twenty years there will be tens of millions of people voting for the first time. The one thing young voters need more than anything is support to help secure an income to support their family formation aspirations. Easy access to credit and entrepreneurship in a growth economy are the clearest routes to securing a stable future and they contribute to growth in the wider economy through the multiplier effect of job creation. In addition to these measure India needs infrastructure, particularly ports, roads and better railways.

Anti-satellite weapons aren't new. Systems capable of destroying orbital spacecraft have been around since the 1960s and include everything from specialized anti-satellite satellites packed with explosives, to repurposed shipborne anti-missile missile systems that can take out space targets without any special modifications.

However, for various technological and diplomatic reasons, very few spacefaring nations have actually developed anti-satellite weapons. Today's test makes India the fourth to do so after the United States, Russia, and China.

The Indian government says that the test was conducted by India's Defence Research and Development Organisation (DRDO) and was fully successful, demonstrating the country's ability to knock out a satellite with a high degree of precision using indigenous technology. The missile was a DRDO Ballistic Missile Defence interceptor developed as part of India's general missile defence program. It operated as expected, but carried no explosive warhead. Instead, it was what is known as a "kinetic kill," where the hypersonic velocity of the interceptor is enough to destroy the target.

The proximity of an Indian general election is a good explanation for the timing of this demonstration as well as the sorties over the Pakistani border. By pandering to the Hindu nationalist wing of the BJP, Modi needs to appear strong and is eager to demonstrate India’s technological prowess as a way of doing that.

It’s potentially a really big deal,” said Brendan Saloner, an assistant professor at the Johns Hopkins Bloomberg School of Public Health, who has studied the opioid addiction crisis. Suboxone Film has “a really important role in the overall strategy of combating the overdose crisis,” he said, adding that placing patients on the drug cuts their risk of overdose in half.

For now, the U.S. opioid epidemic shows few signs of abating: annual opioid overdose deaths in the U.S. are expected to climb to 81,700 in 2025, a 147 percent increase from 2015, according to a study last month by the Massachusetts General Hospital Institute of Technology Assessment. The human and financial costs have led states, counties and cities to sue drugmakers and distributors, seeking billions of dollars.

Opioid Crisis
Suboxone Film allows the opioid-based drug buprenorphine to be absorbed through the mouth to help control cravings and stave off withdrawal. When combined with counseling and support services, that type of medically assisted therapy is considered one of the most effective ways to treat opioid addiction. It’s also expensive, especially for uninsured patients.
 

The trend of opioid use remains a worrying development in the USA, where heroin, prescription drugs and fentanyl all represent avenues through which addiction is expanding. The availability of these drugs is an obvious problem which has been exacerbated by over prescribing medications, the war against the Taliban which has boosted heroin production and cheap fentanyl exports via regular mail from China.

This story started with the loans made by DHFL to four developers. When the developers bought a stake in Darshan Developers, the money moved to Kyta. Kyta used most of the proceeds, Rs 1,324 crore, on a joint venture, details on which are not available in the company’s filings.

The remaining Rs 100 crore was used to repay unsecured loans it had received from unknown sources.

In February, BloombergQuint asked DHFL about the use of its loan funds by these developers and the connection with Wadhawan entities. The company said it was awaiting the outcome of an internal investigation into the Cobrapost allegations.

"You are aware that over the last two weeks, we have issued various media statements as also clarifications. The clarifications issued by us clearly sets out the motivation of the complainant, and also states that statements, allegations and accusations contained in the complaint are utterly false and baseless.

As happens with all major collapses, the details of the wrongdoing and the untangling of the web of deceit that led to the collapse happens well after the decline. Dewan Housing Finance collapsed abruptly from its September peak, falling from INR700 to its recent low of INR100 as the full extent of the misallocation of capital started to become clear. That was helped along by the RBI stepping in to instil discipline in the banking sector which resulted in a number of privately held banks pulling back sharply.

A record 65.3 percent of India’s 260 million women voters cast a ballot in the 2014 polls that swept Modi to the biggest parliamentary majority in three decades. In most states, female turnout has surpassed males in recent ballots. And that is now starting to produce real change: Modi’s government has raised expenditure on sanitation and education for girls, provided safer cooking fuels and instituted the death penalty for rapists.

“In 2019, Modi sees women as an important demographic that can help power the party’s reelection,” said Milan Vaishnav, South Asia director at the Carnegie Endowment for International Peace. “The BJP believes that women will reward the party for their welfare delivery schemes.”

The loan program is called Aajeevika (it translates to livelihood), and it was started in the 1990s as a local poverty alleviation program for women’s groups in the southern state of Andhra Pradesh. It was adopted country-wide in 2011 under the Congress-led government that Modi ousted three years later.

Once in power, Modi expanded Aajeevika to 622 of India’s 640 districts and increased annual outlays by about three times. The federal government makes funds available and local governments oversee implementation—a task made relatively easier with Modi’s Bharatiya Janata Party and allies ruling 16 of India’s 28 states.

Narendra Modi was the first of the world’s populist upstarts to gain power. His appeal to Hindu nationalism in the election campaign is a testament to his continued support for populist causes but also to the electoral math that helped him get elected in the first place. The one thing we can say with certainty is Modi has an understanding that access to credit forms the bedrock of economic development, most particularly in emerging markets. Together with his support for markets and economic development, that makes him the darling of investors.

There was a brief moment after the Indian Air Force’s strike in Pakistani territory in the early hours of Tuesday when it appeared that a way to thread that needle had been discovered. Rather than restricting itself to attacking terrorist training camps just across the Line of Control that divides Kashmir, India for the first time in decades struck areas that were undisputedly part of Pakistan itself. Strategists in New Delhi seemed confident that they’d fundamentally shifted the red lines in Kashmir and expanded India’s arsenal of possible retaliatory measures against Pakistan-backed militant attacks.

For that to be true, however, both Indian and Pakistani politicians would need to retain control of their (mutually incompatible) domestic narratives. The Indian government -- facing a tough re-election campaign in just a few weeks – had to be able to tell its electorate that it had made Pakistan pay, claiming unofficially to have killed as many as 300 terrorist recruits. Pakistan had to be able to assert the opposite – that the Indians had hit nothing but a forested hilltop before being chased off by Pakistani fighter jets.

That’s why the Indian government was initially very careful to have its chief diplomat brief the press, rather than anyone connected with the military. India’s foreign secretary also stressed that this was a “non-military” action, meaning that it wasn’t directed at the Pakistani military, and that a central aim of the planning was to ensure there were no civilian casualties. Meanwhile, Pakistan’s ruling party was busy mocking the Indian media’s claims on Twitter, accusing journalists of watching too many Bollywood movies.

In general, as long as both sides focus on reassuring their domestic constituencies rather than contradicting each other’s version of events, the chances of conflict are paradoxically lower. The problem is that in this crisis like any other, facts inevitably intrude.

The escalation in tit for tat attacks is not great for sentiment but both Pakistan and India have been very clear not to call these examples of aggression acts of war. That suggests there is a clear aim to contain the situation and they despite the requirement to placate domestic firebrands, the respective administrations are interested in de-escalating the situation.

Yes Bank Ltd. rose the most in fourteen years after an audit by India’s banking regulator found no undisclosed bad debt for the last financial year.

The lender’s shares surged as much as 30 percent, the most since July 2005, before trading 20 percent higher at 203.65 rupees as of 9:43 a.m. in Mumbai. The gains pared the past year’s losses to 36 percent.

The green-light on its asset quality assessment for the 12 months that ended March 2018 comes as a relief for Yes Bank as it emerges from a leadership crisis that had helped halve its share price. India’s central bank twice rejected the lender’s request to extend founder and former CEO Rana Kapoor’s tenure after saying the bank repeatedly under-reported bad loans. Kapoor’s successor Ravneet Singh Gill, who has been heading Deutsche Bank’s India franchise, will take over from March 1.

Yes Bank collapsed in September because the RBI intervened to oust Kapoor following concerns about weak governance and issues with asset qualification. I’ve also heard that one of the reasons Kapoor has been singled out is because of the way in which his personal holding in the company was structured through trusts against which he had been borrowing money. That represented an additional governance risk to the bank.

India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year.

In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth back into the Monetary Policy Committee’s focus. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4 percent inflation mandate.

Narendra Modi was the first in what has become a long line of upstart political populists which have achieved some outstanding electoral results over the last five years. Buying elections is about the most effective strategy used by politicians everywhere and India is no different. In fact, one of the primary reasons for appointing a new central banker was to ensure compliance with the wishes of the ruling party to ease heading into the election.

Modi’s Bharatiya Janata Party is still licking its wounds after being trounced in three key recent state polls and a year ago fighting an unexpectedly close contest in Gujarat -- Modi’s home state. Among small businesses, which are a traditional support base, the government’s popularity has been eroded by 2016’s surprise cash ban and the subsequent chaotic roll out of a new sales tax.

The rules now bar Amazon and Flipkart Online Services Pvt. Ltd. from owning inventory, and require them to treat all vendors equally, throttling discounts and exclusives -- a huge advantage to homegrown companies including Ambani’s new venture. His Reliance Industries Ltd., which owns India’s largest retail chain and third-biggest telecom network, has the potential to evolve into a local version of Amazon or Alibaba Group Holding Ltd., UBS AG said last month.

“Whether serendipitous or not, India’s tightened regulatory regime for online retailers is a huge win for Reliance with its new retail ambitions,” said Sanchit Vir Gogia, chief executive officer of consultancy Greyhound Research. “This could be a field leveler for them.”
 

Under Mukesh Ambani, Reliance industries has morphed from a focus on oil refining to become India’s primary provider of broadband, a major retail force and is now embarking on becoming the online retailer of choice for India’s burgeoning young community.

The failure of his brother, Anil Ambani’s Reliance Communications to gain traction following a bad bet on fibre optics looks likely to further concentrate control of the broadband network in Reliance Industries’ hands.

The government will allocate 750 billion-rupee ($10.6 billion) a year for the cash plan for about 120 million farmers and give taxpayers 185 billion rupees of relief in the year to March 2020, Finance Minister Piyush Goyal said in his budget speech in New Delhi on Friday.

In the process, the government will widen its fiscal deficit targets for the current financial year and next to 3.4 percent of gross domestic product and borrow more. Bonds and the rupee fell on news of the debt plans, while the tax cuts helped to buoy stocks.

“Ongoing slippage from the government’s budgeted fiscal deficit targets over the past two years, and our expectation that the government will face challenges meeting its target again this coming fiscal year does not bode well for medium term fiscal consolidation,” said Gene Fang, an associate managing director at Moody’s Investors Service. “We view this continued slippage as credit negative for the sovereign.”

Narendra Modi made history by getting an outright majority for the BJP at the last election and was the first person from a low caste to become Prime Minister. The big challenge heading into the election this year will how to hold onto those gains. The answer so far has been to emphasise Hindu nationalism and to boost spending. It was inevitable Modi would try to buy the election and the budget is the clearest signal how much he is willing to spend.

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There are two particularly pervasive views among institutional investors right now. The first is that emerging markets are due a period of outperformance and are cheap on relative value measures, particularly versus the USA. The second is the Dollar is going down in a big way from here, which of course would boost the prospects for emerging market currencies

I’ve been discussing the rise of populism, for two years, as a revolt against the status quo which is leading to a lurch to the fringes of political opinion. The clarion call for people everywhere demanding change is “What about me?” The only way governments know how to placate disaffected people is to give them more money. That is why we have seen so many countries pursuing fiscal stimulus/deficit spending measures.

In India, GSM/EDGE-only has remained the dominant technology during 2018, accounting for around 56 percent of total mobile subscriptions at the end of this year. However, the country has experienced strong growth in the number of LTE subscriptions over the last couple of years, and at the end of 2018 LTE will account for close to 30 percent of all mobile subscriptions. As the transformation toward more advanced technologies continues in India, LTE is forecast to represent 81 percent of all mobile subscriptions at the end of 2024. 5G subscriptions are expected to become available in 2022. The Middle East and Africa comprises over 70 countries and is a diverse region.  It varies from advanced markets which have mobile broadband subscription penetration of 100 percent, and emerging markets where around 40 percent of mobile subscriptions are for mobile broadband. At the end of 2018, more than 20 percent of all mobile subscriptions will be for LTE in the Middle East and North Africa, while in Sub-Saharan Africa, LTE will account for just over 7 percent of subscriptions. The region is anticipated to evolve over the forecast period and, by 2024, 90 percent of subscriptions are expected to be for mobile broadband. Driving factors behind this shift include a young and growing population with increasing digital skills, as well as more affordable smartphones. In the Middle East and North Africa, we anticipate commercial 5G deployments with leading communications service providers by 2019, and significant volumes in 2021. In Sub-Saharan Africa, 5G subscriptions in discernible volumes are expected from 2022.

A link to the full report is posted in the Subscriber's Area.

India and Africa are the only regions in the world with less than 100% mobile phone penetration. The rollout of 4G in India two years ago is a major evolution for the economy but also represents a major opportunity for international companies seeking a direct route to the nation’s consumers. 4G is the gateway to mobile banking, internet access, online shopping, education and entertainment.

A link to the full report and a section from it are posted in the Subscriber's Area. 

India’s ascent on the global stage has claimed another victory after its stock market overtook Germany to become the seventh largest in the world.

The Asian giant edged past the equity market of Europe’s largest economy for the first time in seven years, according to data compiled by Bloomberg. That means, after the U.K. leaves the European Union in March, the bloc would have only one country -- France -- among the seven biggest markets.

The move reflects India’s positive returns this year as companies’ reliance on domestic demand enabled them to avoid the meltdown in other emerging markets spurred by Federal Reserve tightening and a trade war between the U.S. and China. It also highlights the challenges facing the EU, including its future relationship with the U.K., a standoff with Italy over budget allocations and separatist clashes in Spain.
 

India is benefitting right now from the decline in oil and other commodity prices as well as the fact its absence of a big export-oriented manufacturing sector insulates the economy from strife abroad.

India named a former bureaucrat who oversaw Prime Minister Narendra Modi’s controversial cash ban program as its new central bank chief, a day after Urjit Patel abruptly quit following disagreements with the government.

Shaktikanta Das, 63, who often sought a cut in interest rates during his time at the Finance Ministry, was appointed for a three-year tenure, according to a statement on Tuesday from the Personnel Ministry. He will be the 25th governor of the 83-year-old monetary authority.

And

Das will take charge of the six-member monetary policy committee, which left interest rates unchanged last week after two hikes earlier this year. With inflation undershooting the central bank’s forecasts, there are growing expectations that the RBI will shift to a neutral policy stance from its current tightening bias, which could set the stage for a rate cut.

“There was a disconnect between the government and the central bank and the market now expects a less hawkish stance under the new regime,” said Aashish Sommaiyaa, chief executive officer at Motilal Oswal Asset Management Co. in Mumbai.

The RBI has been rather aggressively targeting the bad loans in some of the India banks, most particularly those in private hands rather than the politically connected state-owned institutions. The decline in oil prices has been a meaningful event for India and that will be used as an argument for adopting a more dovish monetary policy.

Under the new plan, a company need not purchase land or equipment but could lease them on long-contract basis helping lower costs and cut down time on setting up operations, secretary to the Department of Industrial Policy and Promotion Ramesh Abhishek said in an interview. Units located in
industrial clusters may be able to share infrastructure.

“We have to be competitive,” said Abhishek, who’s ministry has been working on the plan for over a year. “For this we need to upgrade our technology, lower costs, improve logistics, skill our labor. The industrial policy will bring all things together and will come out with recommendations on what needs to be done.”

Prime Minister Modi’s administration has been struggling to fulfill one of his key campaign pledge -- creating 10 million jobs a year-- that propelled him to power in 2014 elections. As the country heads to poll due early 2019, the main opposition Congress party is moving to cash in on the disenchantment over unemployment and rising social tensions.

The reform measure, likely to be one of the last few before the Modi seeks re-election, attempts to attract over $100 billion in investments into the country and kick start the economy. Quarterly growth is expected to have slowed in the three months ended September even as a liquidity crunch at its banks hurts business sentiment before state elections.

I’ve often made the point that China has what India needs and vice versa. At a time when the rest of the world is facing demographic decline India stands out as the one remaining mega-population centre that has yet to industrialise. India has long had a vibrant domestic economy and its companies are already competing effectively internationally. It also has a solid-knowledge based economy focusing on the healthcare and outsourcing sectors. 

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities.

2018 has represented a loss of uptrend consistency for the S&P500 following a particularly impressive and persistent advance in 2016 and 2017. Many people are therefore asking whether this is a medium-term correction or a top. There is perhaps no more important question so let’s just focus on that for the moment.

Slow but steady improvement in Japan’s core inflation gauge has come to a halt as a host of forces gather that could see price gains begin to slow.

Consumer prices excluding fresh food rose 1 percent in October from a year earlier, as expected by economists. That’s just half way to the Bank of Japan’s 2 percent target with the prospect of falling energy costs and lower charges from mobile-phone carriers pointing to weaker price growth ahead.

The decline in oil prices is a significant benefit for consuming nations like Japan, India and China. In that regard it is disinflationary rather than an outright drag on the economy. Nevertheless, Japan needs inflation so companies can regain pricing power and promote more dynamism in the economy.

A link to the full report is posted in the Subscriber's Area.

It occurs to me that the rise of the global consumer is predicated on the rising standards of living of billions of people who have never experienced that condition before. Most people think about China when we talk about the rise of the global consumer but China’s consumers are already middle class; or most of them are. India is the world’s most populous nation and its drive towards improving sanitation, access to electricity, the introduction of the digital economy and growing the manufacturing base are tomorrow’s story and therefore should command our attention today.

India’s central bank signaled a compromise with the government by agreeing to study a demand for sharing a part of its capital -- an issue that had triggered a public spat between the monetary policy makers and their political bosses.

The Reserve Bank of India will form a panel to consider the funds transfer to the government, the central bank said in a statement after the board meeting that lasted a little over nine hours. It, however, did not immediately yield to demands for easing lending norms for weak banks while retaining capital buffers for banks at 9 percent.

“Both the RBI governor and the finance ministry walked the extra mile,” Sachin Chaturvedi, a member of the board said in an interview to Bloomberg. “They were flexible on several issues.”

The government and the RBI have been sparring over how much capital the central bank needs and how tough its lending rules should be. For a nation that relies on imported capital to fund investment, the reaching of a middle ground is key to retaining investor confidence in the world’s fastest-growing major economy.

The RBI has been attempting to rein in overly aggressive lending practices in the banking sector. While necessary to tackle the bad loans issue, it has set up conflict with the government who are keen to see credit growth to boost the economy particularly with an election next year.

Volvo Cars is shaking up production plans for much of its lineup in an effort to dodge tariffs the U.S. and China have slapped on auto imports.

The Swedish automaker owned by China’s Zhejiang Geely Holding Group Co.has canceled plans to export S60 sedans from its first U.S. plant to China, just months after starting production. Volvo also will stop importing XC60 sport utility vehicles and dramatically reduce shipments of S90 sedans from China to the U.S.

Volvo will pivot to mostly exporting S60s from its factory near Charleston, South Carolina, to focus mostly on supplying the American market, according to Anders Gustafsson, the president of the carmaker’s U.S. unit.

“We’ll go at this change not with a smile, but we know what we need to do,” Gustafsson said. “We have a global manufacturing structure that helps us maneuver in these tough waters.”

Volvo is a Chinese company so the next step will be to deprioritise investment in US based production and to make big decisions about which models to sell where. The automotive industry has long depended on the ease of access to a global supply chain and the ability to manufacture cars in one country and sell them somewhere else. The prospect of the trade war persisting is likely to shape corporate decisions well into the medium term.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities. 

India’s government will immediately seize control of a shadow lender whose defaults have caused widespread upheaval at mutual funds, a rebuke that’s only happened to one
other firm.

Government officials were granted approval to oust Infrastructure Leasing & Financial Services Ltd.’s board and a new six-member board will meet before Oct. 8, the National Company Law Tribunal said on Monday. India’s richest banker Uday Kotak and ICICI Bank Chairman G.C. Chaturvedi will be part of the proposed board, which will elect a chairperson themselves.

The nation’s corporate affairs ministry has sought to take control of a company on just two prior occasions, and only followed through once, with Satyam Computer Services Ltd. in
2009.

The dramatic move, which unfolded within the span of a hectic day in Mumbai, underscores the government’s concern about IL&FS’s defaults spreading to other lenders in the world’s fastest-growing major economy. Considered systemically important, the group has total debt of $12.6 billion, 61 percent in the form of loans from financial institutions. The ripple effects of its defaults have already seen mutual funds post mark-to-market losses, a slump in corporate bond issuance and a brief but sharp sell-off in equities.

Containing the rot from IL&SF’s default is national priority for India considering the extent to which banks, particularly Yes Bank, have pulled back. India has the world’s fastest growing economy right now but valuations are rather elevated, the currency remains weak and the continued uptrend in oil prices is a headwind. Against that background the question of nonperforming loans and how the banking sector can be cleaned up is the primary topic of conversation among international investors.

Infrastructure Leasing & Financial Services Ltd. is a sprawling nonbank institution that used its highly rated paper to chalk up $12.5 billion of debt, which it funneled into the financing of long-term assets like roads, townships and water-treatment plants. Most of these businesses are owned by IL&FS-linked operating companies.

The opacity masked growing liquidity problems, though only up to a point. Some of the group’s finance companies are now missing repayments on short-term paper, even as the unlisted parent’s owners, including state-run Life Insurance Corp. of India, dawdle over an emergency infusion of funds. 

The task of highlighting the systemic risks fell to equity markets. Dewan Housing Finance Corp. led the carnage on Friday when its shares fell more than 42 percent. (They were down almost 60 percent at one stage.) Most other shadow lenders, which make retail loans but don’t take deposits, also dropped between 12 percent and 17 percent.

The bloodbath was sparked by the money market, where a mutual fund sold Dewan’s notes at a yield of 10.75 percent, compared with 8.6 percent for other corporate debt locally rated as AAA.

Investors have been worried about India’s high valuations and highly leverage banking sector for more than a decade but the more robust attitude of the RBI coupled with the bankruptcy of IL&FS have been catalysts to bring these issues to the fore.

Some investors are speculating that the Reserve Bank of India may tighten rules for housing finance firms after a long legacy of shoddy lending that’s resulted in ballooning bad debts. This comes after the central bank said Yes Bank’s chief executive officer will have to step down at the end of January.

“Investors are speculating that more bad loans may come to light as RBI may take stricter action,” said Soumen Chatterjee, head of research at Guiness Securities. The RBI has also taken a tough line with other private-sector bank CEOs in recent months. The central bank refused to extend the tenure of Axis Bank Ltd. chief Shikha Sharma, who said she would step down at the end of 2018 despite support from
shareholders.

The IL&FS downgrade and default may have nudged investors to avoid potential collateral damage in other financial stocks. “Downgrades are a serious possibility” for non-bank financial companies, Aneesh Srivastava of IDBI Federal Life Insurance Co. said.

India’s bad loans have been a rumbling background issue for a long time and there have been announcements over the last year that the RBI was going to take a more robust approach to the problem. That issue may now be coming to the fore with the prospect of defaults rising.

India’s Gen Z, a key swing constituency in the 2019 general elections, has a simple message for politicians: more jobs, please.

As many as 130 million first-time voters -- more than the population of Japan -- will go to the polls due by May. A key issue for this electorate is Prime Minister Narendra Modi’s failure to deliver on his promise of creating 10 million jobs a year -- a pledge that won him the hearts of India’s youth in the 2014 election.

Yet with barely eight months to go to national polls, voters who believe job creation is Modi’s biggest failure have risen to 29 percent from 22 percent in January 2018, the Mood of the Nation survey by India Today found.

"The youth will certainly be a key demographic,” said Harsh Pant, professor of International Relations at King’s College in London. "While the issue of jobs may hurt Modi in the coming elections, it is also a reality he remains hugely popular with the youth compared to any other politician."

India has the potential for a massive demographic dividend considering half the population of over 1 billion is younger than 25 years old. However, in order to reap that benefit it needs to get busy with infrastructure development and manufacturing.

A link to the full report is posted in the Subsciber's Area. 

India is at the beginning of a digital revolution. While analogies between China and India often do not make sense, I believe in this case there are some clear parallels. In December 2013 China introduced 4G and that represented the gateway to the growth of online shopping, delivery systems, online banking, mobile payments, the cashless society, social media apps, gaming etc. Reliance Industries introduced a country wide cheap 4G network at the end of 2015 in India and it is gaining increasing traction with consumers.

About three-fourths of 50 Nifty members reported results that either beat or met earnings estimates in the June quarter, the highest proportion in at least three quarters, according to calculations by Bloomberg Quint. The “upcycle could be quite significant, a contrast to most parts of the world” as the share of corporate profits in India’s GDP is close to all-time lows, according to Morgan Stanley. For now, the rally has outpaced the outlook for profit growth, with UBS saying consensus earnings for Nifty are likely to be cut 7-8 percent.

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While Indian equities have traditionally traded at a premium to Asian peers because of the nation’s potential for faster economic growth, the valuation gap between MSCI India Index and MSCI Emerging Markets Index has widened to the highest in a decade, Citigroup Inc. said in an Aug. 20 note. Global uncertainties and rich valuations before a general election next year are “enough reasons to be cautious in equities,” the bank said.

India is a high growth market with a well-established domestic consumer market and is in the middle of a digital revolution following the rollout of 4G mobile internet. However, that does not mean it is immune from the occasional bout of volatility.

Surendrasingh Sucharia always has a few thousand rupees in his pocket, but can’t recall the last time he used cash. The 29-year-old product manager in Bangalore uses a string of smartphone apps including ones from Google and India’s Paytm to pay for everything from $40 bags of groceries to street food that costs pennies.

A bewildering array of digital payment businesses from global names like Facebook Inc.’s WhatsApp to Google are in a slugfest to win Indian users. Warren Buffett’s Berkshire Hathaway Inc. is acquiring a stake in the company behind payments leader Paytm.

Meanwhile, a string of other big-name players are also expanding in the country’s digital payments market including its banks, its postal service, and its richest man, Mukesh Ambani.

India saw a brief spurt in digital payments two years ago when Prime Minister Narendra Modi’s government banned most of the nation’s existing bank notes, although the spike petered out as new bills were printed. But over the past year, a string of new apps have made payments increasingly easy, and the discounts and cash bonuses they offer are proving irresistible to young, urban users like Sucharia.

Credit Suisse Group AG now estimates that the Indian digital payments market will touch $1 trillion by 2023 from about $200 billion currently. Cash still accounts for 70 percent of all Indian transactions by value, according to Credit Suisse, and neighboring China is far more advanced with a mobile payments market worth more than $5 trillion.

But local players have a stranglehold on China’s digital payments space. Modi’s administration, meanwhile, has welcomed foreign firms in order to expand financial services across India.

“This kind of a promising market exists nowhere else,” said Vivek Belgavi, a Mumbai-based partner at consultancy PwC India with an expertise in financial technology.

4G is the gateway to online payments, video streaming, mobile gaming, local ads, delivery services and it is a comparatively new development for India. While it would be rash to conclude India is completely open to foreign control of its nascent online payments network, it is also more willing to accept competition than China.

Meanwhile, Indian-managed companies like Ambani’s Reliance Retail Ltd. will be free to control and improve their supply chains while building a fearsome online presence in partnership with his mobile operator, Reliance Jio Infocomm Ltd.

That’s not the only onerous aspect of the policy. The draft speaks of a two-year period after which data generated in India – on social media (Facebook Inc.), via search engines (Alphabet Inc.’s Google), or e-commerce (Amazon) – will have to be stored on local servers. As the Wall Street Journal noted this week, the move is bound to push up costs for Western firms.

This new restriction will probably make it to the final law. The Indian central bank is already directing all payment firms like Visa Inc., Mastercard Inc. and PayPal Holdings Inc. to keep their Indian data exclusively in the country by October, so there’s little reason to expect that rules for e-commerce data will be much less stringent.

Besides, similar laws already exist in China. Amazon sold its Chinese servers and some other cloud assets to a local partner to comply with Beijing’s local storage rules. Alphabet, which has no data centers in China, is also looking for a local partner to bring its Google Drive and Google Docs to that country, Bloomberg News reported recently.

Other aspects of the policy may die without Bezos needing to move a muscle. Indian privacy activists will balk at the idea of a “social credit database,” to be set up — in a very Chinese fashion — by mixing state and non-state citizen data. While the goal of the database is to promote digital lending, there’s no guarantee it won’t be used to stifle dissent. 

A more problematic suggestion in the draft is that the Indian government would have access to the data stored in India, “subject to rules related to privacy, consent etc.” A proposed Indian data-privacy law is yet to be passed by parliament, and whatever makes it onto the books will in turn be shaped by the Indian apex court’s verdict in a case challenging the constitutional validity of a biometric identification system that the government has rolled out to 1.2 billion Indians.

India is on the cusp of digital revolution following the roll out of 4G at the beginning of 2016. It has been transformative for Reliance Industries’ shares but the broader impact of taking shopping, banking, music, books and just about everything else we take for granted online is likely to be a major catalyst for growth in the Indian economy. The clearest comparison is that India’s digital market is where China’s was approximately 5 years ago.

Is the worst over for India’s much-battered bond market? Standard Chartered Plc and Nomura Holdings Inc. seem to think so.

The lenders are among investors who are adding to their Indian debt holdings, betting that the central bank will stay on hold for the rest of the year after raising interest rates last week for the second time since June.

“Current Indian government bond valuations already reflect most of the negative factors the market has been worried about in 2018,” Nagaraj Kulkarni, an Asia rates strategist at Standard Chartered Bank in Singapore, wrote in a note.

Standard Chartered raised its three-month bond outlook to positive after the Reserve Bank of India kept its neutral policy stance last Wednesday and signaled that its rate increase isn’t the start of an extended tightening cycle. Nomura is bullish on five-year securities and has added to its holdings of debt due 2020, it said in note after the RBI decision.

“The market had become over-bearish on the quantum and the pace of hikes and is getting repriced,” said R. Sivakumar, head of fixed income in Mumbai at Axis Asset Management Co., which oversees around $11.5 billion in assets. “We advise investors to stay in short-to-medium term strategies.”

The gap between the RBI’s benchmark rate and the 10-year yield -- a key market metric -- has narrowed to 126 basis points from the year’s peak of 178. Even so, the spread is higher than the five-year average of 75 basis points, indicating further tightening is baked in, Standard Chartered says.

Investors demand higher yields when they are worried about inflation. It is reasonable to think that the run-up in India yields from 6.5% to 8% is at least in part attributable to rising inflation fears not least as populist measures to lock in voter approval ahead of next year’s election continue to be put in place.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

I realise this summary at 4600 words is getting rather lengthy which is why I decided to right another book to more fully explore the issues represented by the rise of populism and what that means for markets and the global economic order. I’ve agreed an August/September deadline so hopefully it will be available this year.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:

Hi Eoin Like most of your subscribers I avidly follow your video commentaries. In yesterday’s broadcast while discussing India I was a little surprised that you did not mention the effects of the Monsoon on the economy which is starting now. Latest predictions are for an above average monsoon which is of course highly significant for food prices and thus for inflation.

Thank you for this informative email which may also be of interest to the Collective. The RBI raised rates today for the first time since early 2015 signalling what appears to be the beginning of a new tightening cycle. It is to be hoped that the monsoon will in fact come in above par which would moderate inflation, but I believe the more pressing issue right now is the relative stability of the currency which as recently as mid-May was testing its all-time lows.

The Original Sin index ranges from zero (“sinless”) to one (“sin-full” or fully dependent on foreign currency debt). We focus on sovereign and corporate bond issuance in ASEAN and India, and track how the index behaved during the Quantitative Easing periods and after the taper tantrums. 

We detect increases in “original sin” in Indonesia and the Philippines in recent years, but find no visible increase in Thailand, Malaysia or India (see Figures 4 to 9). 

Indonesia’s original sin index has been steadily rising, with a peak of 0.41 as of May 2018 (see Fig 5). This suggests that Indonesia corporations and the sovereign are borrowing more in foreign currencies in recent years, as the Fed normalizes policy rates. For Philippines, the original sin index rebounded in 2018 to 2009 levels after declining for the past two years (see Fig 7). This suggests that the financial stress is a more recent phenomenon, as investors are more worried about the peso risks (on higher inflation and widening current account deficit). 

On the other hand, Malaysia and India have seen a decline in their original sin index, suggesting a gradual reduction in their foreign currency exposure in recent years (see Figures 6 & 9). Thailand’s index has been very low since the early 2000s, barely reaching 0.1, reflecting its low interest rates and abundant domestic liquidity, given the massive current account surplus (see Fig 8).

A link to the full report is posted in the Subscriber's Area.

The ASEAN sector has been under pressure of late but not nearly to the same extent as Turkey, Argentina and Brazil. The rising US Dollar has pressured many emerging markets because as interest rates appreciate and Wall Street remains in a reasonably stable bull market environment, the relative attraction of US assets improves. That has resulted in repatriation of carry trades.

WhatsApp has largely escaped that notice because it is used more heavily outside the United States, with people in countries like India, Brazil and Indonesia sending a total of 60 billion messages a day. And unlike Facebook and Instagram, where much of the activity is publicly visible online, WhatsApp’s messages are generally hidden because it began as a person-to-person communication tool.

Yet WhatsApp has several features that make it a potential tinderbox for misinformation and misuse. Users can remain anonymous, identified only by a phone number. Groups, which are capped at 256 members, are easy to set up by adding the phone numbers of contacts. People tend to belong to multiple groups, so they often get exposed to the same messages repeatedly. When messages are forwarded, there is no hint of where they originated. And everything is encrypted, making it impossible for law enforcement officials or even WhatsApp to view what’s being said without looking at the phone’s screen.

Govindraj Ethiraj, the founder of Boom and IndiaSpend, two sites that fact-check Indian political and governmental claims, called WhatsApp “insidious” for its role in spreading false information.

“You’re dealing with ghosts,” he said. Boom worked with Facebook during the Karnataka elections to flag fake news appearing on the social network.

There is no getting around the fact that social media is now part of the fabric of everyday life. It is the medium through which many people stay in contact with family, friends and acquaintances. It is also how companies, marketing firms and political parties maintain constant contact and attempt to influence our decisions.

10-year Treasury yields fell back to test the psychological 3% today. The Fed’s Minutes highlighted less urgency to tackle the inflation rate coming in mildly ahead of target. That eased fears the yield would surge higher imminently. An overextension relative to the trend mean is evident, so there is scope for an additional pause in this area but a sustained move below 2.7% would be required to question supply dominance.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:

Hello Eoin, Whatever age you happen to be, it is always salutary to lose a parent. A constant pillar in one's life has gone and no more questions can be asked. It brings into relief one's own fragility and mortality in a way that few, if any, other deaths will do. I hope your mother's passing was a comfortable one. My condolences to you and your family.

While it is probably improper to revert immediately to business, I am sure you will want to re-immerse yourself in the observation and interpretation of markets without delay. On this basis, I have a question:

Given that we believe we are heading for monetary contraction, a rise in interest rates and accelerating inflation how should we be positioning portfolios? Banks and resources should be well bid for the time being and Japan should benefit from inflation.

But how about India, China and the other economies of North and South East Asia? What sectors and markets are best avoided? At what point does one accumulate cash? Gold is much talked about as an inflation hedge but that will be a shooting star - it might soar in the near future but it will then weaken once more. It is to be regarded as a hedge or a trade, not as an investment - at least that's my view.

In my own portfolio, I've trimmed China and India, reduced or eliminated high flying 'big-tech' stocks (but not touched PCT), increased my Japan weighting and increased cash. I'm probably underweight gold. I plan to accumulate more cash but at this stage, I've no idea what holdings I shall reduce or sell over the coming months. Providing one is not losing money, investment is fun but over the next two or three years, I suspect there will be plenty of opportunities to lose money which we should try to avoid. It's a tough time for you and you have plenty on your plate but if you care to comment on these musings it would be much appreciated. All best.

Thank you for your condolences. The outpouring of warmth and compassion from subscribers has been enormously gratifying for my whole family and I. My mother’s passing leaves a hole in the wider family, since she was the matriarch in no uncertain terms, but it has also encouraged us all to work harder at communicating.

This is a detailed question and there is no one simple answer. I’ll attempt to more fully explore these issues over the course of the next few days and weeks but here are some of my current thoughts.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a brief summary of my view at present.

I have just returned from a visit to India and I visited China last autumn. I was struck by the difference between the two societies. In China I found an almost total absence of religious belief while in India I discovered an almost nationwide attachment to different religions and traditional mysticism. While I saw "tomorrow" all over China in the form of futuristic cities like Shanghai and Hong Kong, I only saw "yesterday 's poverty and superstition" in India. David and you harp on the importance of governance. I heard many Chinese persons state that as long as their material well-being improves, they are prepared to accept the absence of democracy because this enables the government to take action without vested interests standing in its way. In India democratic discussion was said by the persons I met to be an obstacle to rapid and firm decision-taking. What is your opinion on this?

Thank you for sharing your impressions from China and India following your travels. You are not the first subscriber to have asked this question. There have been a number of people over the years who, having visited China and India, said that on coming home they sold their India positions and transferred the balance to China.

Blackstone’s private equity funds have now invested a total of $3.5 billion in India. The firm is planning to add another $2 billion of such investments in the country over the next five years, Dixit said.

Its Tactical Opportunities fund acquired a stake last year in an Indian asset reconstruction company that buys bad loans. Blackstone is also looking at insolvent firms put up for sale under the new bankruptcy law that took effect in December 2016, he said.

At the turn of the century, many Indian industries weren’t fully open to foreign investment, and family-run businesses were wary of ceding control. Private equity has now become a “very important” source of funding for Indian companies’ growth, according to Sunil Sanghai, founder of NovaDhruva Capital Pvt. Blackstone has been successful in aligning its interests with portfolio company executives as well as finding the right time to sell, he said.

“In the past few years, the investment climate has certainly undergone a positive change,” Sanghai said. “The private equity firms have also matured: they have seen a couple of investing cycles, and they now have experience with Indian companies and Indian management.”

With a well-developed domestic consumer market and the pace of digitization increasing India’s financial, consumer and health care sectors remains on secular uptrend trends of expansion.

Xi has ratcheted up his drive to curb debt risk, pollution and poverty at a time when the world’s second-largest economy is on a long-term growth slowdown. His efforts to rein in spending contrast with an historic expansion of U.S. borrowing under Donald Trump during a period of economic expansion.

The 2018 targets “suggest slower growth and a fiscal drag,” said Callum Henderson, a managing director for Asia-Pacific at Eurasia Group in Singapore. “This makes sense for China in the context of the new focus on financial de-risking, poverty alleviation and environmental clean-up, but is less good news at the margin for those economies that have high export exposure to China.”

Growth handily surpassed 2017’s target with a 6.9 percent expansion that was the first acceleration since 2010. Economists forecast a moderation to 6.5 percent this year amid the ongoing deleveraging drive and trade tensions with the Trump administration and a further deceleration to 6.2 percent in 2019.

China has significant challenges ahead as it engages with deleveraging, particularly among the regional lenders. However, it is also worth considering that fiscal discipline at this stage in the cycle is admirable since it will leave the government with some firepower when the economy next slows. That is the exact opposite of what the US government is doing at present which is of course why interest rates are set to continue to rise.

Earlier the poor Indian farmer could sell his cow for Rs 25000 when it stopped giving milk. No longer. Now cattle buyers don't step forward lest Hindu goons lynch them.

So the farmer with an unproductive cow leaves it in some open area, and this cow becomes yet another addition to the tens of thousands of emaciated cows standing around in the countryside.

Worse, they eat up the farmer's crop. Losing him the little he has.

India has 120 million cows, according to the last agriculture census. Why would those cow-owners vote for a Modi who impoverishes them?

When Nanded voted against the BJP and Modi this week, it was speaking for all of rural India. Village voters will pulverize Modi in 2019.

About urban distress, facts speak. Mahesh Vyas is India's most respected statistician and founder of CMIE, our most credible source on the Indian economy.

Citing figures, he wrote that demonetization triggered huge job losses. Seven million of them in one year between Jan 2016 and Jan 2017. He was talking of formal jobs in the private sector.

Those seven milllost jobs means at least 28 million people pauperized, at four people per family, people who depended on those salaries to eat and live.

Today a failing GST has paralyzed commerce all over India. Small traders and manufacturers just can't cope with the paperwork.

And they can't afford the services of trained accountants.

Could Modi lose the 2019 election in India? It’s a question the majority of investors haven’t even to contemplate but it behoves us to at least consider the possibilities.

Modi is an economic reformer and his success in Gujarat was one of his most alluring attributes in delivering what was a stunning electoral victory at the last election. However, Modi is also a populist, in fact he was the first of what is now an increasingly long line of successful populist politicians. Granting single party rule to the BJP also promoted Hindu nationalism to the national stage where it has become more assertive. 

Modi, making the forum’s first speech by an Indian head of state in more than two decades, did not mention Trump by name but he criticized the rise of protectionism in remarks delivered three days before the U.S. President will address the summit.

“Instead of globalization, the power of protectionism is putting its head up,” Modi said, speaking in Hindi and causing an initial flurry in the audience of business and political leaders as people reached for their translation headsets.

“Their wish is not only to save themselves from globalization, but to change the natural flow of globalization.”

Modi is leading a big government and business delegation to the summit in the Swiss ski resort of Davos, aiming to showcase India as a fast-growing economic power and a potential driver of global growth.

Modi’s speech in Hindi was as much about speaking to the people at home as it was about sending a message to the international community that India is open for business. 
 

The upstart Indian mobile carrier backed by the country’s richest person posted its first quarterly profit almost 16 months after storming into the market with free calling and data at no charge on an introductory basis.

Net income at Mukesh Ambani’s Reliance Jio Infocomm Ltd. was 5.04 billion rupees ($79 million) for the three months through December, the company said Friday. It posted operating revenue of 68.79 billion rupees and had 160.1 million subscribers at the end of the quarter.

Jio’s ability to add subscribers and hold down costs suggests its gains on rivals including No. 1 carrier Bharti Airtel Ltd., which reported Thursday that profit fell for a seventh straight quarter, may be sustainable. After starting a price war that forced some smaller providers out of the industry, Jio is acquiring spectrum, tower and fiber assets from debt-laden Reliance Communications Ltd., controlled by billionaire sibling, Anil Ambani.

That deal puts Mukesh Ambani back in control of assets he handed to Anil Ambani in 2005 as part of an agreement to settle a family dispute.

Jio, now the country’s fourth-largest carrier, is also getting a tailwind from declines in its costs for interconnection fees. The Telecom Regulatory Authority of India reduced interconnect charges by 57 percent to 0.06 rupees a minute from October last year and plans to cut them to zero starting Jan. 1, 2020.

Jio spent 10.8 billion rupees on access charges in the third quarter, compared with 21.4 billion rupees it had spent in the three months through September, the company said.

Veteran subscribers will be familiar with my enthusiasm with the roll out of 4G mobile internet connectivity in India but I don’t think it can be underestimated. India has a major issue with the lack of educational achievement and availability for its millions of impoverished people.  Illiteracy is one of the most profound obstacles to personal development so anything that helps to promote productivity growth potential is to be welcomed.

I'm not sure whether you include 'The Economist' in your regular reading material. If so, you will have noticed that they have recently published several articles critical of India and in particular, critical of the BJP and of Modi. In last week's edition, a lead article plus a 'Briefing' suggested that wealth in India was confined to very few people and to get into the top 1% of earners you only needed an income US$20,000 a year. The articles were critical of infrastructure, of education, of the bureaucracy and of both the pace and direction of reform. They concluded that the Indian economy may be running out of puff and wondered from where it might get its second wind. As a consequence of an Asian-centric background, I have reasonably large weightings in China, India and Japan. I have no intention of reducing exposure to India (nor to China or Japan) but I would be interested in your views on The Economist's assertions particularly given your high regard for Modi and his government. All best.

Thank you for this topical question. Governance is Everything has been a mantra at this service since before I joined David in 2003. However, governance is not a static measurement. It is a relative consideration and the trajectory of governance rather than its absolute value is what we strive to identify. 

Billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. agreed to acquire spectrum, mobile-phone towers and fiber assets of his brother Anil Ambani’s Reliance Communications Ltd. helping the younger sibling cut debt at the embattled wireless carrier, the two companies said in separate exchange filings.

Reliance Jio emerged the highest bidder for assets and the sale is expected to be closed in a phased manner between January and March 2018, according to a statement from RCom on Thursday.

The companies didn’t disclose a value for the transaction. The deal will include a cash payment and transfer of deferred spectrum installment payable to India’s Department of Telecommunication.

Mumbai-based RCom is seeking to cut total borrowings by $6 billion by March. RCom posted its first annual loss last March after Jio stormed into the market by offering free calls and data. That escalated a price war that has forced consolidation in the sector. RCom this week said it expects to get about 250 billion rupees ($3.9 billion) from the sale of its spectrum across four frequencies, its optical fiber network, and its more than 40,000 telecom towers. Entire proceeds will be used for repayment of RCom’s debt.

Reliance Jio is only paying for good quality assets that will enhance its depth of network, especially in rural areas, and raise data usage capacity, Shobhit Khare, a co-founder at Inertia Wealth Creators LLP, said via phone.

Reliance Industries spent a great deal of time developing a 4G network (Jio) and is now reaping the benefits. Reliance Communications, by selling its mobile assets, is essentially exiting the mobile telecommunications business. This article from livemint.com details where management see the company focusing next:

RCom will essentially be transformed from a business-to-consumer (B2C) into a business-to-business (B2B) entity, which will provide submarine cable systems that will deliver the latest sub-sea cable technology to meet growing cloud infrastructure and data capacity demand from global enterprises and over-the-top, or OTT, service providers.

Ambani said the new RCom will be valued at Rs15,000 crore. The business, he said in a presentation, will be based on a capex-light model and will generate sustainable cash flows, with 50% of revenue and 60% of operating profit coming from outside of India.

Most observers expect Modi to win the Gujarat election when votes are counted on Dec. 18. But the narrowed lead is surprising for a bastion of BJP support such as Gujarat, as well as for Modi, whose party has swept to power in most state elections since he took national office in 2014. 

Capping days of relentless campaigning, Modi said in a rally in Surat that people of Gujarat would vote for the BJP. “My single aim is to ensure development and improve the lives of the poor,” he said on Thursday.

Anything other than a comfortable victory for Modi would surprise investors betting on a clear win in Gujarat, as well as five more years of Modi’s government on the other side of 2019. "Market assumptions so far have been of a comfortable BJP victory in Gujarat, and that the momentum continues till 2019," wrote Mumbai-based Credit Suisse analysts Neelkanth Mishra and Prateek Singh in a Dec. 5 note.

 

Elections have been catalysts for volatility, both up and down, in India over much of the last couple of decades. Modi led the BJP to victory for the first time in 14 years in Uttar Pradesh last July and that buoyed sentiment that he would carry over his majority into the 2019 general elections. The result was that the Nifty Index’s rally picked up, before pausing in August near the psychological 10,000. 

While the long term structural macro outlook remains unambiguously positive, we think India is also poised for a cyclical upturn in growth, and that the worst of the growth-slowdown, caused by temporary disruption and technical factors related to external trade, is behind us. The economy has already started to stabilize post GST and high frequency indicators are showing a rebound, which should eventually reflect a recovery in July-Sep’17 GDP growth (DB estimate 6.4%). While we expect growth to average around 6.6% during FY18, we are more optimistic about the outlook for FY19 and beyond.

We also note that growth momentum generally improves in the year prior to the elections (India’s next general elections are to be held in May 2019 or earlier), which is likely to play out in this cycle as well. We think given the various reforms that are operational at this stage and that have been implemented by this government so far, it is reasonable to expect growth to return close to 8.0% by FY20, absent any external shock that could jeopardize this baseline outlook.

A link to the full report is posted in the Subscriber's Area.

At a talk I gave for the CFA in San Francisco in 2013 I made the point that rather than comparing India to China it was probably more appropriate to compare India’s development to the UK’s and China’s to the USA. The reason for this was because the USA built its infrastructure and cities on a grid system with clear delineation between public and private responsibilities which to one extent or another China has followed. 

Away from the debate on whether the recapitalization bonds will – and should – be treated as an ‘above the line’ item in the Budget or not, and hence the optics on the Budget Deficit;

the issuance of such a large quantum over a period of 12 months will pressurize an already weak technical position for the bond markets by detracting from the public sector bank appetite for general government issuance (center and state). The specifics of the recap bonds (whether eligible for SLR, whether marketable etc.) will determine the extent of substitutability between recap bonds and other government paper. Note also the backdrop of recent lowering by RBI of both the mandatory SLR for banks, and the limit on SLR securities held under the HTM category, which should reduce the overall appetite from banks for SLR paper – and in particular for duration. There are two mitigating factors to consider though – a) that the banking system remains flush with liquidity (as obvious in the money parked with RBI) created by the demonetization exercise from late last year, and b) possible reduction in RBI OMO sales given that this recap bond issuance will, at least temporarily, take some surplus liquidity out of circulation. The net sum though, we expect, to still be negative for the demand technicals of the markets. Comes as this does together with increasing likelihood of slippage in deficit for the current FY (unless the government manages to get additional dividends from PSUs) – and likely putting at risk the FRBM Committee recommendation for 3% target for next FY – the technical picture overall points to risk of higher rates and steeper curves still in India. We stay underweight in our exposure to duration.

 

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Indian 10-yr government bond yields contracted from 9.5% in 2013 when the Rupee was among the weakest currencies in the world to lows of 6.2% in late 2016. The yield has broken its downtrend over the last year and a sustained move below 6.5% would be required to question support building. 

We expect the stocks to trade above their historical averages on P/BV given cleaned-up balance sheets and lack of foreign ownership. Hence, we assign core F19e multiples of 1.1x for SBI and BOB and 1x for PNB . This compares to the three-phase residual income model approach we previously used to value corporate banks. The table below summarizes our key assumptions for these banks: cost of equity (no change), sustainable RoE (no prior assumptions because we used RI models),and long-term growth (no prior assumptions because we used RI models). We leave the valuations of non-bank entities and cost of equity unchanged. This drives the price target and scenario value changes at these banks. We double upgrade SBI and PNB to OW. We upgrade BoB to EW. 

Both ICICI Bank and Axis have been affected by continued NPLformation and inability to get ahead of the problems. These banks are not the direct beneficiaries of the government's move. However, they should benefit in two ways: 

1. With SOE banks properly capitalised, they can finally see proper clearing of NPLs in the system.

2. This makes it easier for the RBI to implement IND-AS in F19 as SOE banks will not be constrained by capital from taking the necessary hits. The implementation will allow private lenders to recognise losses in the transition period, raise capital (if needed),and potentially move to normalised provisioning from F19 itself.

 

A link to the full report is posted in the Subscriber's Area.

India has hundreds of millions of young people entering the workforce over the next decade and has one of the lowest average aged populations in the world. In order to deliver a path to a better standard of living, which can ensure social cohesion, it is going to need credit growth. 

India’s government has won a resounding reception from investors and credit-rating firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks.

The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.

“The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”

Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state- run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.

 

Non-performing loans have been one of the biggest concerns of international investors in India over the last few years. Despite the obvious benefits of digitisation of the economy, the upgrading of mobile networks from 2G to 4G and the slow and steady pace of reform, the parlous condition of the banking sector was the one reason I heard more than any other that deterred investors from participating in the Indian market.  

Digitization is that idea in India, right now. The government and the Central Bank are on a mission to rapidly formalize and financialize the Indian economy. India has introduced a universal biometric identification system (Aadhaar), initiated measures to boost financial inclusion (Jan Dhan), moved to a new fully online value-added goods and services tax system and implemented real-time payment systems (Unified Payments Interface and Bharat QR). Coupled with rising smartphone penetration, likely doubling from 300 million to nearly 700 million by 2020, these changes are driving India's digitization. We expect a step change in India's per capita income, banking system and stock market performance over the coming years. The channels of change include more financial penetration,
greater tax compliance and increased credit to micro enterprises and consumers.

The result could be a multi-trillion dollar investment opportunity. Aside from the near-term teething issues involved in execution of such big changes and other cyclical problems faced by the economy, there is scope for visible shifts in economic activity starting in 2018 eventually leading to India being a) the third-largest economy in the world with a GDP of US$6 trillion, b) among the top five equity markets in the world with a market capitalization of US$6.1 trillion and c) the country with the third-largest listed financial services sector in the world with a market cap of US$1.8 trillion by 2027. We also expect India's consumer sectors to add about US$1.5 trillion to their current market cap of US$500 billion over this period.

There are implications beyond India. The concomitant increase in e-commerce, consumption basket, financial products and investments will make India a significant market for global corporations. Most importantly, if India succeeds, it will become the template for other emerging nations. While increasing financial inclusion has been the policy objective across emerging nations, India can provide leadership with its unique model. Hence, it is very important for corporates, investors and policymakers across the globe to observe and understand these developments in India. Indeed, there may be lessons for developed countries too.  

 

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Governance is Everything but it is not an absolute designation. Governance is all about the trajectory of policy and in India we can unabashedly say the trend is upwards. That is of course in full realisation that is it coming from a low base. 

A link to the full report is posted in the Subscriber's Area.

There were a number of interesting points raised but I believe the most relevant for subscribers’ centre on what he said about shrinking the Fed’s balance sheet, the outlook for the Dollar, commodity markets, the relative attractiveness of emerging markets and his best guess for when to expect the next recession.

``India will account for more than half of the increase in Asia’s workforce in the coming decade, but this isn’t just a story of more workers: these new workers will be much better trained and educated than the existing Indian workforce,’’ said Anis Chakravarty, economist at Deloitte India. ``There will be rising economic potential coming alongside that, thanks to an increased share of women in the workforce, as well as an increased ability and interest in working for longer. The consequences for businesses are huge.’’

While the looming ‘Indian summer’ will last decades, it isn’t the only Asian economy set to surge. Indonesia and the Philippines also have relatively young populations, suggesting they’ll experience similar growth, says Deloitte. But the rise of India isn’t set in stone: if the right frameworks are not in place to sustain and promote growth, the burgeoning population could be faced with unemployment and become ripe for social unrest.

 

India has lots of young people who urgently need work and millions more entering the workforce over the coming decades. Little wonder China is racing to move up the value chain in manufacturing and employing robots to boost productivity. Competition for the moniker of workshop of the world is heating up and India has a fighting chance at providing competitive low-cost labour, with no language barrier, to the world’s manufacturers of low cost goods, many of whom are owned by China. The key to achieving that kind of growth in employment will be heavily dependent on standards of governance improving. 

A point I have made repeatedly in big picture long-term audios is that the rollout of 4G to India’s hundreds of millions illiterate unbanked masses is a gamechanger for the economy.

Asia is enjoying better growth so far this year versus 2016. Of the 11 countries we track in Figure 1, seven registered faster growth in 2017 (based either on Q1 or H1 GDP data). China leads the pack, growing 6.9% in H1 – we now think China may register faster growth in 2017 than 2016; this would be the first time that annual growth has not slowed since 2010. Of the three economies that underperformed versus 2016, India was due to demonetisation, the Philippines was slower versus a high base and Korea’s Q2-2016 growth was boosted by budget front-loading.   

The region is benefiting from a pick-up in external demand. All the economies we track above are enjoying faster export growth. As a whole (excluding China, Indonesia and Vietnam), exports rose 13% y/y in 5M-2017. A caveat is that 32% of the increase went to China. This is reflected in the export broadness index above, which shows a relatively narrow export destination profile for the region so far this year. We expect Asia’s export performance to ease in H2 on the back of growth moderation in China and less favourable price base effects.  
Comparatively, domestic economic activity appears more divergent across the region. Credit growth remains soft in several economies, reflecting still-cautious domestic sentiment. Government-led infrastructure in places such as Indonesia and Thailand will be needed to mitigate soft private investment. 

 

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There are two ways of looking at the impressive performance of Asia’s stock markets. The first is that it reflects the region’s continued economic outperformance driven by favourable demographics and leverage to global economic expansion. The second is that they do not exist in a bubble and both US interest rates and the Wall Street Leash Effect cannot be ignored. 

While bond markets are rallying as investors wager the data will trigger a rate cut from the Reserve Bank of India, the figures signal the economy faces hurdles even as the stock market surges to a record, the rupee rallies and the world’s major economies head into an era of higher borrowing costs.
There’s a realistic chance of a 25-basis point rate reduction in August, Indranil Pan, chief economist at IDFC Bank Ltd., said. “It could be a very close call as the RBI is expected to remain cautious of the international rhetoric of tighter monetary policy and unwinding of quantitative easing," Pan said in a note.

Some of the pessimism stems from the fact that is India is still recovering from a cash ban that interrupted employment for millions, forced farmers into fire sales of agricultural produce and bogged down the manufacturing sector. The introduction of a goods and services tax on July 1 only added to the confusion while a glut of bad loans means businesses are not borrowing to invest in Asia’s third-largest economy.

Bank credit to industry contracted in the year to May, while deposits surged following the ban of high-denomination notes in November, leaving the banking system grappling with surplus cash.

Data on Wednesday showed headline consumer price inflation fell to 1.5 percent in the year to June from an annual 2.2 percent a month ago and below forecasts for a 1.6 percent reading. That’s below the RBI’s medium term target of 4 percent and through the bottom of its 2 percent projection for the first-half. Core inflation, which strips out volatile food and fuel items, also slipped below 4 percent.

 

For long suffering investors who forced themselves to accept India’s persistently high inflation, weak currency and lumpy growth, the last year must feel like a blessing. The prospect of RBI rate cuts is gaining credence and that is being reflected in the outperformance of the stock market. 

Ashish Shah, head of equities at Mumbai-based A.C. Choksi Share Brokers Pvt., said his firm placed orders for AU Small Finance Bank Ltd. on its first day of trading. As of 3:15 p.m. local time, he was still waiting to find out if his firm owned the stock, which rose 51 percent on its debut.

“We punched in the trades and they are still pending, and we don’t know whether we got the shares,” said Shah. “Will they be scrapped, reversed or executed? The bourse could have done a better job at communicating as clarity reduces chaos.”

The NSE handles about twice the stock volume of rival BSE Ltd. and controls about 80 percent of India’s derivatives market, which is among the world’s largest. The exchange company, which has filed for an initial public offering, has been embroiled in a probe into whether it allowed preferential access to some high-frequency traders. BSE saw its volume almost double over previous days, data compiled by Bloomberg show.

“NSE deeply apologizes for the glitch,” it said in an emailed statement. “The matter is being examined by the internal technical team and external vendors, to analyze and identify the cause which led to the issue and to suggest solutions to prevent recurrence.” A Securities and Exchange Board of India spokesman declined to comment on the developments.

 

Trading halts as a result of glitchy software are not quite the same things as runs on prices due to panicky selling but are nonetheless an inconvenience and a symptom of how reliant the global market is on computers. 

2) Growth-inflation balance has improved and should remain; time now to focus on quality of growth
India continues to be one of the fastest growing economies in the world, but what has changed in recent years is the quality of growth-inflation mix. Currently India’s real GDP growth is in the 7-7.5% range, with CPI inflation anchored around 4.5%. This is markedly different from FY10-11 period, when real GDP growth averaged about 9.5%, but with CPI inflation running around 11.5%. While achieving high economic growth is important, it is more important in our view to achieve this along with low or acceptable inflation. In fact we would argue that it is imperative to get inflation and inflation expectations down, to achieve higher (and sustainable) growth and investments. From this perspective, there is no trade-off between growth and inflation in the long term.

In fact, we believe that today’s corporate sector balance sheet stress can be traced back to the developments of the FY10-11 period, when a lot of mal-investments took place, with entrepreneurs believing (wrongly) that high nominal GDP growth, negative real rates and stable rupee environment would continue for the foreseeable period. In reality (and in hindsight), the FY10-11 high growth period was an aberration and led to the formation of macro imbalances, which later would unravel in the form of a currency crisis in mid-2013. In our view, a large part of those mal-investments were caused by persistent and large negative real rates, which gave a false sense of confidence and comfort to the Indian entrepreneurs about potential high return on investments.

We are reasonably certain that similar type of macro imbalances will not be tolerated or allowed to be formed in the first place, given the changes that have taken place particularly with respect to RBI’s inflation management policy. With RBI formally committed to keep CPI inflation low, in the 4-5% range, and real rates positive in the 1.5-2.0% range, we believe chance of misallocation of capital, based on faulty market signals remain low in the future and would be dealt with decisively and proactively, if it were to manifest somehow. This would ensure that India’s growth-inflation mix remains prudent in the period ahead, which should help investors make decisions regarding long-term investments based on realistic expectations of returns and profit.

India’s current growth rate is below potential, as per various metrics, including the composite PMI, which has remained stagnant in the last three years. Furthermore, growth is mainly supported by consumption at this juncture (10.5%yoy real growth in FY17), with private investment remaining anemic due to the high leverage of the corporate sector and weak demand. Or in other words, the quality of growth is not optimal at this stage. In our view, a healthy mix of consumption and investment growth needs to be achieved to prevent macro imbalances and inflationary expectations from building up and monetary actions should be calibrated keeping this in mind. The developments of the last two years, where RBI has cut policy rate by 175bps but private investment momentum has weakened further, have raised doubts about the efficacy of monetary policy action to solve the malaise of the private sector.

We think both RBI and the government have been prudent with their monetary and fiscal policy stance in the past few years, focusing more on sustaining macro stability, rather than choosing the easy way out to prop up growth in the short-term. The strategy instead to focus on long-term structural reforms, like improving ease of doing business conditions in the country, will in our view help support a more robust and sustainable private sector capex cycle in the future, once demand starts coming back. India, in our view, is buying higher growth for the future by adopting a prudent macro policy stance at the current juncture.

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The RBI has done its best, through a change of leadership following Modi’s election, to stick to an inflation targeting strategy that delivers on real growth rates. That has allowed the currency to stabilise and the Rupee rallied from early this year to break a medium-term downtrend. 

On 5 May, 2017, the President of India cleared an ordinance proposed by the central government amending the Banking Regulation Act, giving the RBI greater powers to deal with stressed assets. The amendment was considered to be necessary to help resolve nearly Rs 10 lakh crore in stressed loans in the Indian banking sector. Through the Ordinance, the RBI hopes to speed up decision making which has been stuck due to the reluctance of bankers to take tough calls.

Immediately after the government’s ordinance was released, the RBI too released guidelines to allow the use of S4A and strategic debt restructuring (SDR) schemes as part of the corrective action plan (CAP) devised by joint lender forums (JLFs). The regulator also revised the minimum threshold to approve a CAP to 60 percent by value of the loan and 50 percent by the number of banks in the JLF. Banks that did not want to adhere to the JLF decisions were asked to leave the JLF by selling their loan exposure.

The framework released on Monday will likely be followed by operational guidelines. Key to these guidelines will be triggers used to invoke a specific course of action such as initiating bankruptcy proceedings.

Creating committees and expanding the size and scope of the OC seem like good measures. However, we must remember that the OC is only a group that checks for compliance. The key is still resolution, for which the RBI needs to come out with a clear strategy.

India is in something of a sweet spot right now. Nevertheless, the issue most institutional investors are worried about are valuations and the bad loans sitting on bank balance sheets. 

For the first time since 2010, the global economy is enjoying a synchronous recovery (see chart). The developed markets’ (DM) private sector is exiting deleveraging after several years of slow growth due to a focus on balance sheet repair and, after four years of adjustment, the emerging markets are in a recovery mode. These trends create a positive feedback loop. Indeed, the DM economies account for 60% of emerging market (EM) exports, so as their real import growth accelerates, EM exports are rebounding. What’s more, an improving EM outlook reduces DM disinflationary pressures. 

How sustainable is this recovery? Typically business cycles end with macrostability risks (price, external and financial) spiking, forcing policymakers to tighten monetary and/or fiscal policy. In this cycle, considering that emerging markets inflation and current account balances are moving toward their central banks’ comfort zones, it is unlikely that macrostability risks will surface soon. Moreover, the emerging markets now have high levels of real rate differentials vis-àvis the US, providing adequate buffers against normalization of the Federal 

DEVELOPED MARKET RISK. In our view, the key risk to the global cycle is apt to come from the developed markets— most likely the US, considering that it is most advanced in the business cycle. Moreover, the US tends to have an outsized influence on the global cycle, particularly the emerging markets. While price stability features prominently in debating the monetary policy stance of any central bank, financial stability is clearly emerging as an equally important factor.

How will it play it out? For insight, we can look at history. The late ’60s saw fiscal expansion at a time of strong growth and low unemployment. In the mid ’80s, the US pursued expansionary fiscal and protectionist policies in an improving economy. We look at similarities and differences versus today, analyzing asset class performance by fiscal deficit and unemployment quartiles.

To that end, private-sector leverage has picked up modestly in the US. In fact, the household-sector balance sheet, which was the epicenter of the credit crisis, had been deleveraging until 2016’s third quarter. Moreover, the regulatory environment has been relatively credit-restrictive. Hence, we see moderate risk to financial stability. However, risks could rise, considering that monetary policy is still accommodative, and particularly so if the administration eases financial regulations. Price stability is a critical risk, too—especially since the core Personal Consumption Expenditures Index inflation rate is close to the Fed’s target and US unemployment is around the rate below which inflation could accelerate. Reflecting this, we expect the Fed to hike rates six times by year-end 2018 (see page 3). We expect other major DM central banks to take a less dovish/more hawkish stance

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The MSCI World Index broke out to new all-time highs in March and continues to extend that breakout. There is no denying that the Index is heavily weighted by the USA but it has been a generally firm period for global stock markets as economic growth figures pick up against a background where interest rates are still relatively accommodative. 

The National Association of Software and Services Companies (NASSCOM), a trade group that represents the Indian IT industry, played down the possible impact of the new USCIS memo. “The clarifying guidance should have little impact on NASSCOM members as this has been the adjudicatory practice for years and also, as several of our member executives have noted recently, they are applying for visas for higher-level professionals this year,” the association said in an emailed statement.

The Indian IT sector has been preparing for this sort of tightening for some time now. For instance, TCS, India’s largest IT services company, has sharply reduced the number of US visa applications: In 2016, it filed only 4,000 compared to 14,000 the year before. In 2015, the company also began tweaking its business model to effectively operate in “a visa-constraint regime,” former TCS CEO N Chandrasekaran explained in January.

Late last year, Infosys, the second-largest in the sector, too, signalled that it would look to hire local talent more aggressively in the US, a far cry from the turn of the decade when such companies were infamously called out for “body shopping“—i.e, hiring Indian software professionals to use them on short-term projects elsewhere.

Despite all such evasive action, though, the US clampdown will hurt the sector. “It’ll be a short-term jolt,” said Sanjoy Sen, a former Deloitte partner and doctoral researcher at UK’s Aston Business School, although the exact magnitude of the impact will depend on the size of the companies and their levels of preparation. Smaller firms with a headcount in the hundreds, in particular, may be harder hit, Sen said.

 

The Indian outsourcing sector is one of the country’s primary foreign revenue generators  and the ability to send workers to the US for medium-term project work has been an important support for that business model. The new US administration is already changing how the foreign worker program function and that represents a challenge for outsourcing companies. However if time differences could be overcome the evolution of cloud computing and distributed work environments mean that the absolute requirement to have programmers based in Silicon valley could be reduced. 

Currently, selling across the borders of India's 29 states means paying a central sales levy, which can't be set off against tax paid on raw materials procured from within a company's home jurisdiction. Those input credits will now be available under a GST.

This would do two things: One, given enough competition, most manufactured goods should get cheaper, stoking demand. Two, more companies will want to engage in interstate commerce, which they avoid at present by moving goods (without selling) to their own small, inefficient warehouses around the country.

Smaller Indian industrial firms -- those with less than $1 billion in revenue -- end up carrying more than five times their annual sales as inventory, compared with just 36 percent in China. A narrowing of this gap would boost profitability. More centralized warehousing would also boost demand for higher- tonnage trucks made by Tata Motors Ltd. and Volvo AB. 

But GST is also causing some anxiety. As Gadfly wrote last year, India is planning to employ Jeff Bezos of Amazon Inc. as its tax collector. All e-commerce marketplaces will deduct 2 percent from what they pay sellers of merchandise and deposit the money with the government. Sellers would then have to claim input-tax credits. The increase in working capital may be problematic for small businesses working on thin margins. Amazon India estimates that 180,000 jobs could be at risk.

 

India has a dismal record of collecting taxes which has led to all manner of levies on transactions to pad out state coffers. This has created an environment where business is penalised and interstate trade is less appealing than attempting to embark on overseas expansion. 

“The markets are trading at all-time-high multiples and are pricing in a lot, or expecting reforms to continue and growth to come back fairly quickly,”  Chhaochharia said. “The risk-reward is definitely not attractive.”

Skeptics like Chhaochharia are becoming harder to find as foreign and local investors pile into equities and analysts predict further gains. The S&P BSE Sensex will climb to 32,000 by year-end, up 10 percent from current levels, according to a survey of traders and investors by Bloomberg News on March 14, three days after Modi won the state polls. Citibank, which previously forecast the Sensex to reach 30,000 by September, now sees the gauge at 31,500 in December.

Overseas investors have plowed a net $3 billion into Indian equities in March, the biggest monthly inflow in a year, while mutual funds have been buyers for seven months through February.

The liquidity-aided euphoria saw a department store chain double in its trading debut on Tuesday, and an exchange-traded fund of state companies on Friday got bids for about four times the target.

 

10-year local currency Indian government bonds yield 6.82%. That’s well below the 9% which was on offer in 2014 but the question of the currency is much less pressing today than it was then. More than any other factors, the combined trends of the currency and the bond market offer a window into how large foreign investors view the prospects for India. 

“The U.S. Fed action was in line with market expectations and allayed concerns that the outlook comments might turn hawkish,” Hemant Kanawala, head of equities at Mumbai-based Kotak Mahindra Old Mutual Life Insurance Ltd., said on phone.

“This is positive for emerging-market flows and overseas inflows to Indian stocks will resume,” he said.

Resumption of foreign inflows and seven straight months of net purchases by local funds have boosted the valuations of Indian stocks to their highest level in more than six years. The Sensex traded at 17.3 times estimated 12-month earnings, the highest since November 2010.

Foreign funds have purchased $3.5 billion of local shares so far this year after a record $4.6 billion outflow in the three months through December. Domestic funds have been buyers for seven straight months through February, including a record 138 billion rupees ($2.1 billion) in November.

“In an environment where earnings haven’t been so exciting the valuations from the price-to-earnings perspective will always look expensive,” Kanawala said. “Price-to-book ratio is a better parameter in such cases.”

 

India has been making headlines for all the right reasons of late. The country has just moved from 2G to 4G mobile speeds which has the potential to unleash economies of scale in online business that were not previously possible. Efforts to boost manufacturing are paying dividends with Apple opening a factory in the country. Meanwhile Modi’s emphatic victory in, Congress Party dominated, Uttar Pradesh signals widespread public support for his administration’s reform and anti-corruption mandates. 

Although there is understandable scepticism given the government’s track record, our confidence on the implementation of free pricing for petroleum products stems from the following measures that the government has already taken: 

The extinguishing of the diesel subsidy in October 2014 and the revision of prices in line with changes in international prices without any government intervention; 

The increase in LPG and kerosene prices each month since June 2016; 

Increases in the auto fuel price even during elections and in times of sharp price increases for crude; 

The aggressive implementation of Direct Benefit Transfer (DBT) to LPG and kerosene to contain subsidies. 

FCF yield improves by up to 280 bps over FY17-20 
Operating cash flow for OMCs will likely be driven by improvement in marketing margins, rising refining margins and higher volumes. Over FY17-20, the FCF yield of state-owned OMCs should improve dramatically, by more than 280bps for IOC and BPCL. HPCL, with capex starting from FY18, will likely see its FCF yield decline by 130 bps. We expect the OMCs to generate robust free cash flows of about USD10bn over FY18-22E. We also estimate net debt/equity of OMCs to decrease further over FY16-22E – HPCL from 1.6x in FY16 to 0.6x in FY22, IOC from 0.6x in FY16 to 0.2x in FY22, and BPCL from 0.7x in FY16 to 0.1x in FY22.

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India is a quickly growing economy that needs to take the greatest possible advantage of its democratic dividend before that massive young population ages. Smoothening out what has often been a distinctly anti-business regulatory regime with a reputation for fickle decisions has been one of Modi’s ambitions in taking on the bureaucracy. Therefore there is reason for some optimism that policy continuity can be achieved in more sectors. 

The telecom arm of Reliance IndustriesBSE -0.01 %, which debuted in September last year, has already set a benchmark by hitting a subscriber base of 100 million in record 170 days. And with aggressive plans in place, it looks set to raise the bar, giving sleepless nights to the incumbents. 

The company is heavily banking on building significant data capacity and triggering price elasticity for data demand. 

At Jio’s first analyst meet last week, the company management indicated that currently about 1b GB/month data is getting consumed on Jio and it will have the capacity to offer about 4b GB data per month by the end of FY17. According to the management, it should be able to cater to 60 per cent of estimated data demand at 6b GB per month by FY21. 

 

Reliance Industries has a footing in just about all of India’s biggest industries. It went through a significant capital expenditure program to build the nation’s most comprehensive 4G network and is now reaping the rewards. Considering that the vast majority of India now has the opportunity to move from 2G to 4G the potential for growth in ancillary services is considerable.  

Rupee rose to strongest in 8 weeks as PM Modi stuck to fiscal prudence in budget presented Wednesday, Fed signaled it wasn’t in a hurry to raise U.S. rates.

USD/INR falls 0.2% to 67.3725, lowest since Dec. 8; seventh day of losses is longest losing streak since Dec. 8

Positive stock sentiment in response to budget may keep INR bears at bay for now, Citibank says in note. Medium-term trend remains dependent on broader USD trend, global risk sentiment, oil prices

Tailwinds from declining oil prices, widening real rates now dissipating, issues of competitiveness may soon arise. Stays tactically neutral INR, no longer bullish for medium term

Buy rupee as India budget shows fiscal prudence, Scotiabank says

Contained budget gap to give RBI room to cut rates, S&P Global Ratings says Govt endeavor is to improve on FY18 fiscal gap est., 

Economic Affairs Secretary Das says Expect bond yields to remain range bound over the next 5-6 weeks on positive investment demand from banks, CPI expected to stay sub-4% in Jan./Feb. and supply lull in February and March, says Morgan Stanley in note dated Monday
Expectations for RBI rate cut at the Feb. 8 monetary policy meeting Yield on govt bond due Sept. 2026 drops 3bp to 6.40%

 

The Rupee had been reflecting widespread angst that the Indian budget would be inflationary in nature and that fear had been weighing on sentiment not least in the aftermath of demonetisation. With a more fiscally responsible tone being set, the Dollar has pulled back to test its progression of higher reaction lows. A sustained move below it would signal Rupee dominance beyond the short-term. 

Thank you for another very well done video commentary. I think it was excellent. When you or any one from the collective have time, could you please share their/your views on the effect of India's move to change their currency bills. Thanks in advance

Thank you for your kind words and I am delighted you are enjoying the video commentaries, which have so far been very well received and are a further example of how technology is advancing the ease with which we can communicate. 

Global headwinds and domestic uncertainties prevail in Nov’16
November’16 was a perfect storm for India, as rising US bond yields, a strengthening USD, and EM risk aversion, coupled with an unprecedented demonetization drive in India, led to a significant decline in Indian assets. MSCI India was down 5.3% during the month – underperforming MSCI EM/Asia by ~300bps. While equity markets underperformed MSCI EM/Asia for a fourth month, INR performed better than many EM currencies. INR depreciated by 2.4% in the month while other EM currencies such as TRY, MXN, BRL, and IDR depreciated by 4%-10%.

Sectors relatively immune to demonetization were clear outperformers 
The sectoral performance during the month was clearly driven by the market’s assessment of the likely impact of the demonetization drive. Sectors with a global orientation or that saw significant cash inflows after demonetization were outperformers. Accordingly, BSE Metals, BSE Power, BSE IT, BSE Oil & Gas and BSE Healthcare were the outperforming sectors. On the other hand, given the disruptive ramifications of demonetization for (i) consumption sentiment, (ii) the operations of businesses with a meaningful reliance on cash transactions, (iii) the wealth effect and (iv) expectations of further follow-up action on unaccounted wealth, BSE Realty, BSE Consumer Durables and BSE Auto were the biggest underperforming sectors, with the respective indices declining by 18%/13%/9% during the month. 

Tale of two investors: 8-year-high selling by FIIs matched by record DII buying 
The flows of domestic and foreign investors touched multi-year records, albeit in different directions. Driven by hardening US bond yields and generic risk aversion towards EMs, foreign institutional investors [FIIs] were net sellers of Indian equities at US$2.6bn – the highest monthly outflows since the global financial crisis eight years ago. However, sharp FII outflows were matched by equally robust inflows from domestic institutional investors [DIIs], which net bought US$2.7bn – the highest since at least 2007 and most likely the highest ever monthly inflows. The sharp surge in DII inflows could be attributable to (i) strong inflows into mutual funds in the preceding months, (ii) a likely continuation of strong inflows into MFs in Nov’16, (iii) lower valuations for stocks hit by demonetization, (iv) a sharp surge in buying by insurance companies (at US$687mn) after eight months of net outflows/anemic inflows.

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The Dollar surged to test its high against the Rupee following Trump’s election success and the demonetisation announced soon afterwards. It has unwound much of the It unwound much of that advance over the last 10 sessions as optimism about the success of Modi’s strategy to legitimise large parts of the economy improved. The concurrent release of 4G mobile services is an additional tailwind since it opens up whole new avenues for growth that did not exist a month ago, not least for mobile banking and payments.  

Indian companies including Tata Consultancy Services (TCS), Infosys and Wipro have long used H1-B skilled worker visas to fly computer engineers to the U.S., their largest overseas market, temporarily to service clients.

Staff from those three companies accounted for around 86,000 new H1-B workers in 2005-14. The U.S. currently issues close to that number of H1-B visas each year.

President-elect Trump's campaign rhetoric, and his pick for Attorney General of Senator Jeff Sessions, a long-time critic of the visa program, have many expecting a tighter regime.

"The world over, there's a lot of protectionism coming in and push back on immigration. Unfortunately, people are confusing immigration with a high-skilled temporary workforce, because we are really a temporary workforce," said Pravin Rao, chief operating officer at Infosys, India's second-largest information technology firm.

 

India has benefitted enormously from the offshoring of jobs in the customer service, programming, IT and pharmaceuticals sectors. However a number of these large Indian companies are dependent on ready access to their US based customers so they can offer the best possible service which is why India has tended to dominate H1B visa applications. When headlines such as this one highlight how India got 84% of such visas in 2014 there are very real risks that a more protectionist administration could pose a threat to India’s heretofore comfortable access to Silicon Valley. 

Rupees: for the sake of clarity following your comments of the 9th and today, please note that the R1000 is being replaced by the new R2000. The net effect, therefore, is to increase the circulation of high-value notes. So far as gold is concerned, now that so many people have learnt that fiat money can be made valueless at a stroke, the attraction of keeping some money in precious metals has increased. (I am visiting India and have found it salutary to have a practical lesson in what I had always understood theoretically.) My guess is that the recent decline in gold follows expectations of rising interest rates.

And

Any follow-up to your article discussing the demonetisation of India's 500 and 1,000 rupee notes? The Bombay Bank Index initially shot up but has retraced all of the move. Chaos seems to have ensued, but would like to hear from the community

 

Thank you for this clarifying that the removal of the old R1000 and R500 notes is in fact about removing old notes from circulation and forcing consumers and business people to move onto the new notes. The primary aim would appear to be to get more people to declare their income but as you point out the introduction of a new R2000 note is also a potential source for new black market activities. 

The surprise move, announced on Tuesday evening, is part of a crackdown on corruption and illegal cash holdings.

Banks will be closed on Wednesday and ATM machines will not be working.

India is overwhelmingly a cash economy. New 500 and 2,000 rupee denomination notes will be issued to replace those removed from circulation.

"Black money and corruption are the biggest obstacles in eradicating poverty," Mr Modi said.
People will be able to exchange their old notes for new ones at banks over the next 50 days but they will no longer be legal tender.

The announcement prompted people across the country to rush to ATMs that offer 100 rupee notes in an attempt not to be left without cash over the next few days.

 

Bribes are most often paid in cash so removing high value notes makes it somewhat more difficult to stuff money into an envelope. For a country like India where the government needs tax income to fund social and infrastructure projects, the war on cash is an understandable project. Even the ECB has committed to stop printing €500 notes by the end of 2018 because of the role these high value denominations have in allowing money to be moved around often for nefarious activities. 

Why retirement? Substantial savings for state utilities, better efficiency
India is planning a retirement policy to dispose of 18% of India’s coal-fired old capacity (36GW) over 5-6 years, starting with 6GW (2.2%) by Mar’17. Stringent new pollution norms and a coal linkage transfer policy have been instigated to hasten the retirement. Retirement will lower coal consumption by ~30% and will also cut pollution and reduce the tariff burden for state utilities.

Replacement is warranted and pressing
The states’ role in power generation is declining and will trigger a new capex cycle, for energy security. Additionally, with shut-downs we estimate annual requirement of 19-22GW projects to avoid power shortages. Government (CEA) estimates corroborate the requirement of 24GW annually. Rising PLFs should exceed the 2008 peak by FY19-20e, necessitating further investments now – as the power project cycle is six years from concept to commissioning.

Stage-I Capacity utilisation recovery to benefit utilities (Prefer NTPC)
With higher retirement and lower supply addition (just a 2% CAGR over FY17-22E) – we believe capacity utilisation rates are likely to stage a strong recovery. We raise PLF estimates for utilities by 2-3pps beginning FY18E. With 37% volume growth over four years and valuations still at a c20% discount to the historical average, the sector looks attractive.

 

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Revitalising the electricity utility sector to remove outdated coal fired stations and to build new more efficient operations is a very positive development. It is also a testament to the ability of the new government to remove roadblocks to Indian infrastructure development that investors despaired would ever be achieved under the last administration. 

Indian sovereign bonds also advanced on Tuesday. Urjit Patel assumed charge as the Reserve Bank of India’s 24th governor on Sept. 4, succeeding Raghuram Rajan. Patel’s first test will come Oct. 4 -- a scheduled monetary policy review -- where investors will gauge if governorship reduces his traditional reticence.

“An interest-rate increase by the Fed is unlikely,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “Inflows into stocks remain strong and that’s supporting the rupee.”

The rupee climbed 0.5 percent to 66.5250 a dollar at the close in Mumbai, according to prices from local banks compiled by Bloomberg. It rose to 66.49 earlier, the strongest level since May 9. Tuesday’s gain reduced the currency’s 2016 loss to 0.6 percent, Asia’s worst performance after China’s yuan. RBL Bank expects the rupee to appreciate to 66.40 a dollar in the near term should equity flows sustain their momentum, Lasrado said.

“We don’t expect a change in the RBI’s foreign-exchange management under the new leadership,” he said. “They will love to buy dollars at dips and refrain from intervening should the rupee weaken in line with Asian fundamentals.”

 

The RBI engaged in a reserve accumulation policy which put pressure on the Rupee between mid-2014 and early this year when the currency tested its spike lows against the US Dollar. However it has stabilised over the last six months with the 6.5% base rate looking increasingly attractive in an environment where so many government bonds are trading on negative yields. 

European equity markets are by far the most global, more than their economies, and are most exposed to Emerging Markets (EM)

US equity market is the most closed of the Developed Markets (DM), a key ingredient to the US’s relative ‘safer-haven’ status

Japanese overseas revenues have grown sharply in recent years, but are now threatened by yen strength

EM stock markets are the most closed, accounting for the bottom seven countries in our ranking
Economies are not stock markets. DM and EM have similar exports/GDP levels, but DM stock markets are twice as global

Chinese corporates going abroad, but only generate 10% overseas today. Brazil corporates only 20% overseas after commodity slump 

Italy and India have ‘globalized’ the most in recent years

IT is the most global US sector; Healthcare the most global European sector. Utilities and telecom are respectively the most local

Overall overseas revenue contribution has stalled (at 44%) the last three years, as globalization has come under pressure

Looking at indices based on revenue rather than domicile transforms the investment universe: EM much larger, whilst US a lot smaller

 

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With the growth of the global consumer base we began to pay attention to large international businesses that dominate their respective sectors from about 2011. I developed the list of Autonomies by looking at data similar to that compiled in this report; using it to identify companies that have global businesses. In perusing the report veteran subscribers will no doubt be familiar with many of the names. 

Today is indeed a historic day," Finance Minister Arun Jaitley told reporters after the vote, noting it was significant that the vote passed unanimously. In a series of tweets, Modi congratulated lawmakers on a “path-breaking decision" and said “together we will take India to new heights of progress."

For answers to all your questions about GST, click here. 

The tax stands to benefit companies in the world’s fastest-growing major economy, where internal barriers to trade increase logistics and compliance costs. Indian equities climbed last week near the highest level since August 2015 as optimism increased that the measure would finally pass.
“GST is the poster child of the Modi government’s reform agenda,” said Nilang Mehta, senior investment analyst at HSBC Global Asset Management, which oversees assets of about $429 billion. “Pushing this through will provide a major boost to the credibility of the reform process in India.”

Plaudits rained in from India Inc. as it became apparent that the measure would pass on Wednesday evening. The country’s main business group hailed it as “one of the most awaited reform measures by the industry." PwC India called it “a momentous occasion." Microsoft India said it was a “positive development." Wal-Mart India praised it as an “extremely progressive step."

 

The Modi government has been criticised for the modest pace of reform since winning a landslide in the 2014 election. However, as he said at the time, there are a large number of small changes that can be made which can have a big impact and he has been delivering on as many of these small successes as was possible. Successfully rationalising the myriad sets of, often competing tax rates, within the economy by imposing a general sales tax is a major accomplishment and further emphasises that despite the heretofore slow pace governance is improving in India. 

“We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor. What is happening today is truly revolutionary – we are abandoning the ways of the past that benefited the few at the expense of the many."

“Indeed, the fact that inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply." 

“If a critic believes interest rates are excessively high, he either has to argue the government-set inflation target should be higher than it is today, or that the RBI is excessively pessimistic about the path of future inflation. He cannot have it both ways, want lower inflation as well as lower policy rates."

“At the same time, the RBI does not focus on inflation to the exclusion of growth."

“The bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle."

“Decades of studying macroeconomic policy tells me to be very wary of economists who say you can have it all if only you try something out of the box. Argentina, Brazil, and Venezuela tried unorthodox policies with depressingly orthodox consequences."

Rajan has done an admirable job as Governor of the RBI so the big question for investors will be to what extent policy continuity can be achieved when his successor will be a political appointee. The decision will be a fresh test of Modi’s commitment to reform and long-term growth rather than short-term solutions. 

Mark Mobius is betting on shares of smaller Indian companies to profit from expansion in the world’s fastest-growing major economy.

“If you factor in the reforms that are taking place and the impact they can have on company earnings, it tells us that India is on the cusp of an interesting opportunity,” Mobius, executive chairman of Templeton Emerging Markets Group, said in an interview to Bloomberg Quint in Mumbai. The money manager has $2 billion in Indian stocks, of which more than $600 million is invested in shares of small companies, he said.

The S&P BSE SmallCap gauge of 762 small companies has fallen 5.4 percent this year, compared with the 2.8 percent advance in the S&P BSE Sensex, as some of the worst-performing stocks on the benchmark index last year rebounded in 2016. The smaller companies are likely to climb after trailing the rally in the biggest shares as benefits from Prime Minister Narendra Modi’s growth-boosting measures take hold, Mobius said.

 

Progress in reforming the Indian economy is slow but it is happening and one of the highest economic growth rates in the world is a testament to the benefits improving governance can deliver. Continued speculation about whether Rajan will seek or indeed receive another term as governor of the RBI is likely to become more important as the urgency of the decision increases but in the meantime India represents a bright spot on the global tapestry of markets. 

world. Zurich leads the way, followed by Sydney, London, Milan, Stockholm, Copenhagen, NYC, San Francisco, Amsterdam and Madrid. Tokyo is amongst the most expensive cities on most measures but surprisingly cheap hotel rooms (more akin to EM prices) help push it below many others. Our cheap date index sees Zurich, Copenhagen, Tokyo, Stockholm and Amsterdam as the most expensive cities to woo a partner. One might choose to settle down at a younger age in these countries or risk expensive courtships. London has dropped 2 places this year and out of the top 5. At the other end of the scale, cities in Malaysia, India and South Africa are the cheapest for a weekend away and around a third of the cost of the most expensive places. For those wanting a real cheap ‘cheap date’, India, Indonesia, the Philippines and South Africa are the places to go. Indeed in all of these places you can have at least 4 dates for the price of one in Zurich but please don’t tell the other 3 people! 

Don’t lose your phone while away in Brazil, India, Sweden, Denmark or Italy as a new iPhone is most expensive there. The US remains the place to buy a new one, followed by HK and Japan. Interestingly there are signs that perhaps Uber is making its mark on the world as taxi prices in many places are falling sharply. Indeed in San Francisco (where Silicon Valley resides), taxi prices have fallen more than anywhere in the DM world over the last 12 months (-30%). 

Bad habits cost you most in Melbourne, Singapore, Auckland, NYC and London as our ‘sin index’ of cigarettes and beers suggests. Singapore and Copenhagen really don't want you to own new cars as prices are nearly 4 times and 2 times the cost of NYC here. Buying a new car in India is half the price of NYC if you can find a way of driving it home. In addition to the aforementioned items this report also looks at the cost of various goods and services across the world. The index page provides the full list.

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Scrolling through the constituents of this index, the same group of countries crop up at the top and bottom of the most and least expensive. Part of the reason for this is because of relative states of economic development but the declines in many emerging market currencies is another consideration and helps to highlight how much competitiveness can be gained from a prolonged period of currency devaluation. 

Despite its impressive growth record over the past decade and a half, India’s structural deficiencies are well known, holding back its potential. Infrastructure is poor, goods market efficiency suffers from excessive regulation, labor market is inflexible, little is spent on health and education, and both the economy and financial markets have been hampered by heavy handed state intervention.

Our analyses show that not only is India in a mediocre cohort with respect to its structural strength, it has in fact slipped in recent years. While education attainment has improved marginally and the economy has undergone a few bouts of liberalization measures, there have been setbacks in areas such as goods market efficiency, labor and financial markets, along with no discernible improvement in institutional quality. India scores particularly poorly on infrastructure.

It is too early to tell if the new government that came to power in mid-2014 will be able to improve India’s structural scores expeditiously. Efforts to maintain fiscal discipline, raise the efficiency of cash transfer to the poor, reduce wasteful subsidies, tackle corruption, improve health indicators, pass the much-belated Goods and Services Tax legislation, widen the scope of privatization, liberalize the labor market, break down goods market cartels, pass business friendly laws, etc are welcome, but clearly the to-do list is arduously long

Furthermore, the structural scores would rise only when such measures are pushed through successfully, many of which would likely receive pushback from vested interests and face numerous other implementation risks, especially related to the political calendar. We appreciate the goal of the government to improve India’s ranking in the cost of doing business surveys, but would need to see a broader range reform initiatives in order to anticipate decisive improvement in structural rankings. 

 

A link to the full report is posted in the Subscriber's Area.

Structural reform is perhaps the clearest evidence of improving standards of governance. However if one waits for the full effects to take shape the chances are the market will have already priced in the majority of the positive outcome. There is no doubt that India has many challenges facing its economy in achieving greater efficiencies and growth outcomes for more of its people. 

I noted the Nifty & Sensex indices did a weekly reversal early March, which you mentioned in your Comment of the Day. At that time you were looking for a move above the moving average to confirm upside potential, which if I am correct has happened now. How do you now interpret the prospects for the Indian market?

Thank you for this email sure to be of interest to subscribers. The Indian stock market trended lower for a year; losing about a quarter of its value in nominal terms before finding support in February.

The rupee’s relative strength since February has flattered the performance of foreign denominated funds and as you point out the main stock market index is now trading back above its 200-day MA.

Rajan is boosting reserves to counter any volatility in outflows amid slowing growth in China and prospects that the Federal Reserve will consider raising U.S. interest rates. The rupee, down 0.4 percent this year in Asia’s worst performance, slumped to a record in August 2013 as indications the U.S. would curtail monetary stimulus spurred investors to pull back from emerging markets.

“With flows coming back into the market, the RBI has been there and buying at every dip,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “Speculators who see that the RBI has the firepower will not try to depreciate or take advantage of the situation, compared to earlier times when reserves were low and India saw outflows.”

 

India has a sound pair of hands in its central bank governor who was appointed following a particularly dire period when the Rupee was accelerating lower. Over the last two years he has allowed the currency to trade back towards its 2013 nadir as the policy of reserve accumulation took its toll. A break in the Dollar’s progression of higher reaction lows, currently  in the region of INR65.6, would signal a return to Rupee demand dominance. 

Investors have grown disillusioned with India. Deteriorating corporate profitability, a depreciating currency and concerns that momentum on reform was slower than had been expected have contributed to a reversal of investors’ previous optimism on investment prospects. After foreign investors brought in more than USD60bn over an 18-month period from late 2013 to early 2015, flows have reversed since May last year.
 
While these concerns are valid, sentiment may now have turned too negative. In the near-term, we see little reason to expect a significant decline in the trend growth rate of about 7% on real GDP even though fiscal and monetary policies are unlikely to provide much more support to growth from here. Unless inflation rises sharply and unexpectedly, consumption is likely to remain strong enough to support this rate of growth and we think it is reasonable to expect the improvement in investment conditions to yield an increase in investment growth. For that reason, we see growth rising modestly over the next few years. 

Will this be “Chinese-style” double-digit growth? Probably not. India faces some constraints on growth that China didn’t, and not (just) because it is a democracy. Its banking system is unlikely to be able to grow fast enough, the government itself is not in a position to provide the investment needed and the global backdrop is less supportive with slower growth and a rising protectionist tide than China faced. 

But India’s demographic profile lends a certain inevitability to growth being sustained at a high rate for a prolonged period as long as the government does not stand in the way. Since the government is committed to doing the opposite, to facilitating private investment by opening up the economy and improving the business climate, we remain fundamentally optimistic on India’s medium- and long-term prospects.

A link to the full report is posted in the Subscriber's Area. 

India’s RBI has been building reserves which amounts to selling the Rupee. This has acted as a headwind to foreign investors and as the above report highlights people are getting impatient with the pace of reform and the removal of impediments to economic expansion.