Economy

This section offers content on things happening in the country. Any news update on India, its GDP, plans and levels globally will be included in this section.

October 6, 2022

Economy

Why Did Foreign Institutional Investors (FIIs) Come Back To India?

According to financial analysts, a record Rs 4 trillion left the equities market as the Foreign Institutional Investors in India (FIIs) exited the market. Per NSDL data the Foreign Institutional Investors (FIIs) in India sold Indian equities worth Rs 214217 crore in Indian markets from the beginning of FY2021-22 till June 10, 2022.

This persistent selling of equities by Foreign Institutional Investors in India (FIIs) drove the equities market to its lowest in over a decade. However, the trend over the past couple of months seems to be reversing. With more buying versus selling, the return of FII in India looks imminent.

Before we try to understand this reversing trend, let’s look at some of the key reasons that drove the FII out of the equity markets in India.

The Shift in the Sentiment of Foreign Institutional Investors (FIIs) in India for the Equities Market

It is essential to understand what changed for the FII in India that led them to offload such enormous amounts of holdings in 15 months. Analysts believe several factors contributed to this paradigm change in sentiment of the FIIs in India.

Central banks around the world tightened liquidity following Fed rate hikes making the dollar stronger.
Inflation had hit the roof globally.
The conflict between Russia and Ukraine resulted in a record price rise in crude oil worldwide.

The central banks purchased bonds from commercial banks and financial institutions to curb inflation and pump more money into the system. It also helped to keep the interest rates under check. However, this was not a permanent solution, and buying bonds to minimize liquidity in the financial system was not a viable long-term option for central banks.

It made the FIIs withdraw their investments from emerging markets like India and take their funds to more financially stable destinations such as Indonesia and Brazil.

Reasons for the Return of the Foreign Institutional Investors in India

The aggressive selling by the FIIs in India saw a dip after a consistent selling spree. As recently as August 2022, FIIs pumped investments worth Rs 16,175 crores into Indian equities.

The FIIs in India are currently cherry-picking stocks and taking advantage of high-value stocks in the Indian equities market that is in a price correction mode. It confirms that Foreign Institutional Investors are back with renewed interest in the equities market in India.

Let’s look at the reasons for what triggered this U-turn.

1. Expectations in Rate Hikes:

Central banks globally are expected to slow down on interest rate hikes. According to a poll, Reuters conducted in July 2022, economists who expected a 100-bps rate hike by the US Fed are predicting a hike of 75 bps. The European Central Bank initiated a rise of 50 basis points, double what the economists had expected.

The central bank moves worldwide, and a weakening dollar considerably lowered the risk sentiments of Foreign Institutional Investors in India in the equities market. Hence, the FIIs sitting on a pile of cash started seeking new investment opportunities in the Indian equities market.

2. Resilient Earnings Outlook:

Market gurus predict that the consensus net debt/EBITDA for BSE500 may experience a fall to 1.1x for the FY23E as opposed to the range of 3.0-3.5x recorded in the three years in the pre-Covid era. The banking system has also decreased below 6% due to non-performing assets.

Therefore, compared to major Asian economies, specifically China, a country still experiencing structural problems, the outlook on earnings for Indian corporate seems not only resilient but also promises future growth for FIIs in India.

3. Attractive Valuation:

A price correction in Indian equities may also be why Foreign Institutional Investors in India are back with their investments in the equities market. Compared to its long-term average of 21x, over the remaining months of the financial year 2022-23, Nifty’s expected earnings via trade will continue to be at its current 18x.

Given the market dynamics, the FIIs possibly did not wish to lose complete exposure to the Indian stock market, given that the global economy is still recovering from rising inflation.

4. Macro Factors:

The Reserve Bank of India and the central government have managed to limit the skyrocketing inflation rate to below 8%. According to RBI projections, the inflation rate may decrease to below 6% by March 2023.

Credit growth has witnessed a recent uptick, and the collections from GST have also picked up a steady pace. As a result, credit card spending in India is at an all-time high. The manufacturing purchasing managers’ index (PMI) recently touched a record 8-month high, and the real estate industry is also gathering consistent momentum after several months of low to moderate growth.

All of these macro factors instill trust and confidence of FIIs in India in the equities market and, by extension, the Indian economy.

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FII Buying is Important for India

Foreign Institutional Investor in India continues to play a critical role in sustaining the Indian economy and acting as a market performance catalyst. The overall inflow of the Indian economy is still under the heavy influence of Foreign Institutional Investor as they invest a significant amount of money in securities such as banks, mutual funds, and more that drive the Indian equities market.

Read more: About Research and Ranking

September 26, 2022

Economy

5 Challenges To Making Net Zero A Reality In India

The world is on the cusp of a significant climate shift because of ignorance and inaction towards our environment. While climate treaties such as the UN Climate Convention have been in place for decades, there is a need to take more concrete action to contain the impact of climate change.

The solution for countries and governments worldwide is to work towards a net zero carbon goal.

What is a Net Zero Carbon Goal?

Everyone knows what are net carbon emissions and their impact on the planet’s environmental landscape.

Net zero refers to emissions balanced by equivalent net carbon emissions from the atmosphere. The world must achieve the net zero carbon goal by 2050 to reach the 1.5°Centrigrade global warming target set in the Paris Agreement.

It has always been the developed nations of the world that have taken the lead in committing to the net zero carbon goal. However, the United Kingdom, France, Norway, Sweden, and Denmark have been the first few countries that have already enshrined their net zero carbon goal in their national law.

However, India’s announcement to commit to a net zero carbon goal at the COP26 climate change conference by Prime Minister Narendra Modi did take the world by surprise.

What are the 5 Challenges to Making India’s Net Zero Carbon Goal a Reality?

Despite India’s COP26 promises at the conference, achieving the net zero carbon goal by 2070 can be challenging.

Let’s examine the five key challenges deter India from achieving its COP26 promises.

1. Create a Decarbonization Plan that is Actionable and Affordable

India’s journey to achieving the net zero carbon goal in less than 50 years needs the support of a well-thought-out and detailed decarbonization roadmap. The plan will map the overall journey and incorporate macro and micro milestones with clear strategies to achieve them through a blueprint of concrete action points.

The document must also capture the sequence of rolling out the decarbonization levers and business models. How organizations and enterprises across the country will integrate their strategies to minimize carbon footprint will play a supporting role in India’s carbon-free journey.

Additionally, the decarbonization roadmap should include ways to accelerate or even change course given the rapidly transforming regulatory and technological landscape, along with a detailed cost structure aligned with the plan.

2. Driving Businesses to Adopt and Integrate Carbon Targets into Corporate Governance

Though Prime Minister Modi may have pledged to reach the net zero carbon goal on India’s behalf, it is the corporate that must come forward to drive this mission forward. To initiate the process, the carbon KPIs that will support decarbonization at scale should be integrated into the business enterprises’ corporate governance structure and decision-making mechanisms.

The financial and strategic merits of decarbonization should be charted out clearly to overcome the adoption challenge. Moreover, the incentives, objectives, and goals must align with the plan’s carbon impact and performance.

3. Share Relevant Carbon Data with All Involved Stakeholders

Almost 50% of business leaders in India confirmed not using emissions data to make business decisions due to a lack of easy accessibility to the information or confidence in the source of the data.

The net zero carbon goal may become possible when all stakeholders involved in the mission have access to accurate data insights on net carbon emissions in a transparent and streamlined manner. In addition, emission data will help drive informed decision-making at the corporate level.

4. Drive Affordability by Leveraging Green Finance Solutions

Many companies have reported a lack of sustainable financing frameworks, for example, green loans and green bonds, which can be a way forward in terms of allocating the necessary capital for decarbonization projects at the corporate level.

The government of India, in collaboration with banks and NBFCs, can help to establish several green financing and regulatory support mechanisms that, in turn, will be a critical driver that will play an essential role in helping India’s COP26 promises. Moreover, it will initiate the change process and minimize costs for companies that commit to decarbonization action.

5. Lack of Co-ordination on Decarbonization and Mobilizing the Organization for Delivery

For India’s net zero carbon goal to become a reality, corporates must collaborate with local bodies, governments, and relevant authorities. Currently, there is a massive bottleneck in this space where stakeholders act in isolation rather than taking cohesive measures that can lead to better outcomes.

Moreover, decarbonization is not the responsibility of corporates alone. The country must be conscious and aware, and the government must take necessary action to mobilize delivery across all population segments.

Final Thoughts

Experts believe that the net zero carbon goal the Indian government committed to is not an impossible task to achieve by 2070. Moreover, when you look at it in combination with other targets the Modi government set, the plan fits in entirely with the long-term goals.

The path to transformation will not happen overnight and will require decades of strategic planning and implementation at various levels. The COP26 promises will inspire the industry to invest in technologies to support decarbonization. India’s per capita income could increase by 2070, creating the necessary fiscal space for this transition to play out smoothly.

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September 21, 2022

Economy

5 Ways Fed’s Powell Policy Can Affect The Indian Markets And Your Portfolio

The global economy is going through a very rough patch. With inflation in both developed and developing economies reaching decadal highs, an impending energy crisis due to the standoff between the West and Russia, and a food crisis has derailed GDP growth globally.

And, if that is not enough, central banks worldwide have opted for aggressive interest rate hikes to rein in inflation. However, compared to any other economy, the aggressive Fed rate hikes and its hawkish stance may prove to be a significant cause of worry for the market.

This blog will help you to understand the impact of the Fed’s Powell policy on your portfolio and the overall market.

Jackson Hole Event

Against rising inflation, the Fed’s Powell policy delivered four rate hikes in 2022 so far, including the big hikes of 0.75% in June and July. However, the rate hikes were on the expected line, but Fed Chair Jerome Powell’s recent speech at the Jackson Hole event, the Federal Reserve’s three-day annual conference, has surprised investors.

At the three-day conference, he said that Fed’s primary focus would be to bring down inflation to within the 2% target, and they will continue to have a hawkish stance, prioritizing lowering inflation and increasing interest rates despite its effect on economic growth.

The US Federal Reserve has hiked interest rates by 150bps in 2022 and may raise another 200bps during the rest of the year. Cumulatively, that turns out to be a hike of 350bps, making it one of the most aggressive rate hike cycles, according to an Acuite Ratings report.

The Dollar Index

The US Dollar has been the world’s reserve currency for almost 60 years. As a result, most financial transactions, international debt, and global trade are dollar-denominated, and nearly 60% of the world’s reserves are in dollars.

So, when the Fed raises interest rates, it encourages people and financial institutions to save more and move their money parked in risk-on assets to risk-off assets. It sucks out the liquidity from the system, reducing the circulation of dollars in the market. It helps the dollar strengthen against other currencies.

The US Dollar Index measures the strength of the USD against the basket of six foreign currencies, viz., Euro, Pound, Swiss Franc, Yen, Canadian Dollar, and Swedish Krona, which have appreciated by almost 15% since Feb 2022.

How Fed’s Powell Policy will Impact Your Portfolio?

Rate hikes by the Fed and the strong dollar are a dual hit for any economy. The following are the ways how Fed’s Powell Policy impacts your portfolio.

Weaker Rupee

In India, the rupee has depreciated by almost 7.3% against the US dollar in 2022; further Fed rate hikes will worsen the situation. However, despite depreciating against the US dollar, it appreciated against other currencies like the euro, GBP, and the yen.

While the falling rupee is good news for exporters as they can get substantial value for their goods and services, it’s the opposite for importers. India is known to have a negative trade balance, meaning imports are higher than exports, which adds pressure to the country’s foreign reserve. As a result, India’s forex reserve fell by $89 billion in the ten months to $553 billion as of September 2022.

Higher Inflation

While a strong dollar helps the US fight inflation more effectively, it creates inflationary pressure for other economies. A weaker rupee has significantly increased the input costs resulting in inflationary pressure on the economy. Higher input costs always impact the company’s bottom lines and capital expenditure plans, resulting in the stock’s underperformance.

High Cost of Credit

The Reserve Bank of India must resort to increasing the repo rate to tame the inflationary pressure, which increases the cost of borrowing in the country, impacting the value creation process.

In 2022, RBI has hiked the repo rate by 90 basis points, and if inflation persists, it may raise the rates further in the next monetary policy meet. The increased cost of borrowing will drive down consumption, impacting growth stocks as they rely heavily on both capital and steady consumption.

The Outflow of Foreign Institutional Investors

The Powell policy Fed rate hikes make the US treasury yields more attractive for investors. They motivate foreign institutional investors to shift their money from emerging economies to invest more in debt instruments in the US market. And the returns from investing in the US treasury are entirely risk-free, making it the best investment alternative in these volatile and uncertain market conditions.

Primarily, selling by foreign institutional investors results in share market corrections and crashes. Such corrections can create panic and fear among domestic investors, who may sell, impacting their portfolio profoundly.

Impending Liquidity Crisis

A stock market requires sustained liquidity to grow and create value for investors. It was evident during the period between 2020 and 2021 when central banks worldwide opted for an ultra-beneficial monetary policy to reduce the impact of the pandemic. As a result, nifty 50 and BSE Sensex recorded more than 100% increase in value during the period.

In the chart above comparing the movement of the Nifty 50 and Dollar Index, there are two zones marked in green and red. In the green zone between 2020 and 2022, a soft dollar index helped the Nifty 50 move higher due to a better liquidity position in the market. But, from the period starting 2022, a rise in the Dollar Index due to the Powell policy resulted in higher volatility and the Nifty 50 struggling to break higher.

But Fed’s Powell policy with aggressive and long rate hike cycles may trigger liquidity crises, high volatility, and a fall in the price of stocks. Moreover, an extended period of tighter monetary policy may spook investors and shift their money towards low-risk options to save capital.

Conclusion

So, the big question is, what should you do? Trim down your positions, stop investing, or continue buying the dip?

The answer to this question is simple, stick to your investment objectives and strategies. If you are a long-term investor, such short-term volatility should not matter to you. Furthermore, the Fed rate hikes don’t happen overnight. Instead, they discuss and debate these policies publicly weeks in advance. So, you get ample time to plan and manage your investments.

September 8, 2022

Economy

3 Reasons Why Moody’s Retains India’s Sovereign Rating To Baa3 With A Stable Outlook

‘Moody’s retains India’s Sovereign Rating;’ is a headline that greeted us this week. This is despite other agencies slashing their ratings.

What does this rating mean? Will the Baa3 rating impact India’s economic growth and should you know more about these ratings? The answer is a simple Yes.

Moody’s outlook rating reflects India’s economic environment and the reforms that have contributed to India’s growth and financial stability. Let us look at why Moody’s retained India’s Sovereign rating though it slashed India’s growth forecast to 7.7% last week.

What do Moody’s ratings measure?

Moody’s Investor Service rates fixed-income debt securities and assigns ratings based on the borrower’s creditworthiness via a standardized rating scale. This scale measures expected investor loss in case of a default. It also measures long-term foreign currency deposits, issuer, and senior unsecured debt ratings, and the bank’s baseline credit.

Investors often look at Moody’s, Fitch’s, or CRISIL’s ratings to gauge the risks associated with stock investment, bonds, and government securities.

History of India’s Sovereign Ratings

Moody’s had downgraded India’s sovereign rating from Baa2 to Baa3, with a negative outlook in November 2019. But after India’s economic growth and sustained bull run post-May 2020 Moody’s changed India’s rating from negative to stable in October 2021, two years after its downgrade in 2019. This year it has retained India’s Sovereign rating and EXIM’s long-term ratings to Baa3 with a stable outlook.

It has also upgraded EXIM Bank’s baseline credit assessment (BCA) and adjusted BCA from ba3 to ba2, which reflects an improvement in the bank’s standalone capital credit strength.

In June 2022, Fitch Ratings revised its outlook for India’s long-term foreign currency Issuer Default Rating (IDR) to ‘stable’ from ‘negative’ after a gap of two years but has retained the lowest investment grade of ‘BBB- for India’s sovereign rating for the last 16 years.

What Does A Baa3 Rating Mean?

A Baa3 rating is the lowest investment grade of Moody’s Long-term Corporate Obligation Ratings. These obligations are subject to moderate credit risk and considered medium grade with few speculative characteristics.

Reasons for Retaining India’s Sovereign Rating and Outlook

Moody’s said it retained the Baa3 rating with a stable outlook as India’s credit profile shows its strengths like the large, diversified economy with a potential for high growth, its strong external position, and a steady domestic financial base to support government debt.

It also believes the ongoing global challenges such as the Russia-Ukraine conflict, rising inflation, and tightened financial conditions globally will not affect India’s economic recovery from the pandemic. India has higher capital cushions and liquidity now. Also, the negative reactions between the economy and the financial policies are fading.

Though risks of high debt burden, low per capita income, weak debt affordability, and limited government effectiveness remain, analysts believe a positive economic environment will gradually reduce the government fiscal deficit in the next few years, avoiding a further decline of the sovereign credit profile.

Reasons For an Upgrade In EXIM, BCA, And Adjusted BCA Ratings

The material improvements in asset quality and capital and its expectations of an increase in profit in the next 12 -18 months as the high-credit cost burden reduced drove Moody’s to upgrade EXIM India’s BCA.
India’s gross non-performing loan (NPL) ratio declined from 8.75% at the end of March 2020 to 3.56% as of the end of March 2022 because of improved recovery, upgrades, and write-offs. The EXIM bank continues to have high provisions against the declining stock of gross NPLs with a net NPL ratio of 0% as of 31 March 2022 with a provision coverage ratio of 100%, which is higher than other rated Indian banks.
The Indian government infused capital in the last few years improving EXIM’s Capital. It reported a Capital Adequacy Ratio of 30.49% and a Tier 1 capital ratio of 28.58% as of 31 March 2022, higher than the 20.13% and 18.70%, respectively, as of 31 March 2020.
The ROA (Return on assets) rose to 0.5% as of the year ended March 2022 from 0.2% in the earlier quarter during the year, because as the asset quality improved the credit costs also declined in line with it.

EXIM’s final Baa3 rating is a two-notch jump from its previous rating as Moody believes it will get staunch support from the Indian government (Baa3 stable).

India’s Economic Scenario Now

Despite the ratings, FIIs have been flocking to the Indian stock market. In August, they turned Net Buyers with an inflow of more than Rs. 51,200 crores over the past year after months of pullback. In fact, they have been notable drivers of India’s financial market recovery. It means, that FIIs don’t specifically consider the rating when investing in Emerging Market Economies (EMEs) like India.

Will Moody’s upgrade India’s Sovereign rating?

Moody’s could upgrade India’s rating if its growth potential rose beyond expectations supported by effective economic and financial reforms that could augment private sector investments.

But the ratings could fall if the economic conditions become worse due to low growth in the medium term and a re-emergence of financial sector risks. Despite challenges, Moody’s retaining its Sovereign outlook is a positive sign for the economy.

The Q1 GDP may have fallen short of RBI’s forecast; however, India is one of the fastest-growing economies today. September 2022 saw India officially overtake the UK to become the fifth-largest economy in the world by market capitalization.

That just means there are enough opportunities for you to invest in the economy and create wealth. All you must do is take a careful look at all the aspects of the businesses, and decide on your time horizon before you invest. Remember, Long Term = Wealth Creation.

June 6, 2022

Economy

Can India Become The Next Agro-Exporter In The Face Of The Food Crisis In The World? Find Out

Will India become the next Agro-exporter?

It is a question that has been doing the rounds lately.

The world population could grow to almost 10 billion by 2050, increasing agricultural demand if you consider a modest economic growth of 50% compared to 2013. Any income growth in low- and middle-income countries would accelerate the dietary shift to a higher intake of fruits, vegetables, and meat than cereals. It would mean a corresponding change in the agricultural output adding pressure on natural resources.

2022 saw several countries facing food issues reversing decades of improvements. Conflict, socio-economic factors, increased natural disasters, climate change, and modified pests are a few reasons for today’s food crisis.

Additionally, the war in Ukraine increased the risk to global food security, as food prices rose and could likely remain high in the future, pushing millions into severe food insecurity. Though global food supplies remain positive, the sharp increase in food prices due to high input costs, logistics costs, and war-led trade disruptions have added to the import bills. Such increases affect the poor and developing countries as they hinge on food imports to fulfil domestic demand.

Per World Bank’s Commodities Price Data for May 2022, the Agricultural Price Index rose 42 per cent compared to January 2021. Maize and wheat prices surged 55 per cent and 91 per cent, respectively, compared to January 2021, while rice prices fell 12 per cent.

Despite COVID disruptions, India’s exports rose 20% to $50.21bn. This rise was the highest ever for India. This is because the commodity prices in the world are booming, and we are in a unique place to capitalize on this opportunity caused due to supply chain issues and the Russia-Ukraine war.

India now has a chance to become the next agro-exporter in the world. It exports onions, fruits, pulses, dairy products, rice, meat, grains, wheat, nuts, alcoholic beverages, cereals, cashews, vegetables, etc. Rice contributed over 17% to agricultural exports in 2021-22.

Rice exports grew 9.35 per cent to $9.65bn. Though we did not export wheat till two years ago, our wheat export in 2021-22 jumped to $2.2bn from $567mn in 2020-21. We shipped seven mn tons of wheat last year compared to 2 min tons two years

Can This Surge Mean India Will Become The Next Agro-exporter?

India is self-sufficient, unlike China, which depends on imports to fulfil its food demands. Except for importing edible oils and a few pulses, we grow enough to meet the domestic market. It was evident when the Government could give free food to people during the pandemic without supply issues.

Countries dependent on Russia and Ukraine for food imports are suddenly facing shortages. So they looked for countries with surplus agricultural production that can become the next agro-exporter and found India had a surplus of wheat, maize, sugar, and other products.

For instance, Indonesia and Ecuador are the largest exporters of bananas. However, their exports suffered due to supply chain issues. So, India exported bananas, which increased 100 per cent y-o-y, to become one of the most prominent players in the Middle East markets. We forayed into a commodity that we did not export earlier.

Another opportunity that India can enter is the export of eggs and poultry. The Middle East imports eggs but has not imported them from India. Exports of our poultry products rose to $71mn in 2021-22 from $58 mn in 2020-21

India does have the opportunity to export products that it has not shipped before. But, what must India do to make the most of this opportunity in the face of the food crisis?

Make India a brand: One of the first steps to becoming the exporter of the world is to create a brand for India. We export several commodities; however, none indicate they are Indian. For instance, we’ve heard of California almonds and Washington apples. In the same way, Indian products like basmati rice to turmeric must have a global identity. Therefore, the Government and private producers must create and promote brands for each category.

Improve infrastructure and supply efficiencies: The war may have opened doors for exports barred earlier. However, to ensure that we continue to export the products even after the end of the issue, we must improve our port structure, have better storage facilities, and manage overheads. In addition, we must ensure the changes happen and the brand India is marketed globally.

How Is The Government Supporting Such An Initiative?

The Government is focusing on improving agricultural productivity. It has introduced several initiatives to help agriculture. As a result, in the last few years, the share of agriculture in the GDP has declined. However, the changes and the focus have helped as the agricultural contribution to GDP rose over 20 per cent.

The Government has several initiatives like

Crop diversification where the Government is looking to encourage the production of crops beyond rice, wheat, and maize.
100% FDI under government approval route for trading, including e-commerce, for food products manufactured or produced in India.
Pradhan Mantri Kisan Sampada Yojna to create modern infrastructure with efficient supply chain management from the farms to the retail outlet. This scheme includes other sub-schemes like Integrated Cold chain and value addition infrastructure, Creation or Expansion of Food Processing Preservation capacities, Infrastructure of Agro-Processing clusters, and Operation Greens.
Nivesh Bandhu is a dedicated investors’ platform that will facilitate ease of business and offer information on incentives and policies on a single platform.
Infrastructure support through 41 mega food parks, 350 cold chain projects, and 62 agro-processing clusters.
Animal Husbandry Infrastructure Development Fund will facilitate dairy and meat processing investments and establish animal feed plants. In addition, the Government offers the borrowers a 3 per cent interest subvention and a credit guarantee of 25 per cent of the total borrowing.
The investor Targeting and facilitation desk for the food processing ministry will help investors frame policies or strategies and keep them informed of various initiatives, opportunities, and schemes.

Does this mean there are no hurdles to India becoming an agro-exporter?

No, there could be several issues. One of the hurdles to India becoming an agro-exporter could be increasing domestic demand for food. So India before becoming an agro-exporter will have to check the surplus available after it meets domestic food demands. Another obstacle to becoming an agro-exporter could be inconsistent supply —countries import from Ukraine and Russia because of their consistent supply.

Can India fulfil their food demands consistently by becoming an agro-exporter? That is something we will have to see how the Government takes advantage of the opportunity in the crisis.

…

Can India Become The Next Agro-Exporter In The Face Of The Food Crisis In The World? Find OutRead More »

May 12, 2022

Economy

Sri Lankan Economic Crisis – The Situation Overview And Important Lessons For Investors Today

We are a little late in covering the Sri Lankan Economic Crisis. But we did not want to just scratch the surface and present an overview of the situation. We were analyzing the situation to share distinctive insights that matter to you as an investor.

In this article, you will learn-

How one unwise move can lead to other wrong decisions
Why it is important to have a right management at the helm
What boatloads of debt can do to the entire country and its rippling effects?

Sri Lanka, an island country famous for its picturesque beaches, breezy hill stations, rich culture, clean streets, and heritage structures is now facing the worst economic crisis since its independence in 1948. The reason is the country’s enormous foreign debt of ~$50 Bn.

The country is now facing acute shortages of essentials like food, electricity, lifesaving medicines, fuel, etc. Price of items like rice and sugar has skyrocketed to Rs. 300 per kg, 400gm milk powder is available for Rs. 790 according to media reports.

Though the crisis has just surfaced, you can trace the beginning of this downturn to 2006.

What happened in 2006?

An article in Firstpost noted, “In 2006, after the end of the civil war, the Sri Lankan government tried to accelerate growth in island nation by borrowing heavily and attracting foreign capital by propping up the Sri Lankan rupee. This helped in the short-term and the economy boomed. Lifting 1.6 million people out of poverty.”

This sounds like fantastic news. In fact, it is. Lifting 1.6 million people out of poverty is a remarkable achievement for an economy like Sri Lanka. However, this exuberant growth came at the cost of foreign debt of whopping 119% of the GDP. This means if Sri Lanka’s GDP was Rs. 100* the foreign debt was Rs. 119.

*Please note the illustration is just for information purposes only. The lower denominations are for the ease of understanding.

During Mahinda Rajapaksa’s regime, the former Sri Lankan President, the government borrowed heavily, which increased the country’s fiscal deficit.

A String of Wrong Decisions

Too Much China Debt

Despite the country’s worsening economic condition, Sri Lanka continued financing its ambitious infrastructure development projects under Mahinda Rajapaksa’s presidency (2005-2015). One such project was the international port development in the Hambantota district.

The former Sri Lankan government took large investment loans from state-owned Chinese banks to finance infrastructure development projects.

The government believed the Hambantota project would help its economy become a busy trade hotspot like Singapore. However, corruption in the project led the Sri Lankan government to surrender the port’s control to China as collateral after it defaulted on loan repayments.

According to New York Times, over the last decade, Sri Lanka accumulated a debt of $5 billion to China alone.

Tax Cut in 2019

Gotabaya Rajapaksa ousted Maithripala Sirisena to win the presidential election in November 2019. Soon after the election, Gotabaya announced a sweeping tax cut ahead of parliamentary ballot.

His cabinet almost halved the value added tax (VAT) from 15% to 8% and eliminated seven other taxes, including 2% nation building tax that businesses paid. This substantially depleted the government’s revenue.

These tax cuts didn’t bode well with the credit rating agencies. They downgraded Sri Lanka’s credit rating in early 2020. As a result, the country lost access to international financial markets. So, the government started using its foreign reserves to meet debt obligations.

Ban on Chemical Fertilizers and Agrochemicals

Amidst the ailing economic conditions, Gotabaya took another decision that sent inflation soaring through the rough. He declared a ban on the import of chemical fertilizers and agrochemicals to promote ‘organic only’ farming in the country on 29^th April 2021.

While the decision was for a noble cause and to alleviate pressure on the forex reserves, it didn’t feel like a well-thought-out plan. Agriculture experts disapproved the move as ill-advised and unscientific.

Farmers expressed fears that such a policy shift could lead to steep drop in yields. And that’s what happened. According to a report published in The Week, the yield dropped 25% hitting outputs of tea, pepper, cinnamon, and vegetables badly. This drop in output sent the Sri Lankan government to foreign countries asking for rice and other staple food items.

Coronavirus Ate Up the Foreign Reserves

As we mentioned earlier, Sri Lanka is famous for its clean streets, breezy mountains, beaches and more. But a series of church bombings in 2019 that led to the killing of almost 300 people including foreign nationals halted the thriving tourism sector.

Tourism, previously worth $4.4 bn, has been a pivotal contributor to Sri Lanka’s economy. Moreover, it’s a primary source of foreign currency that adds to the foreign reserves of the country.

In 2018, the tourism industry earned ~$5.6 bn that helped Sri Lanka manage its $10 bn trade deficit. But COVID-19-led travel bans and series of shutdowns took away all the foreign money that tourists brought in.

The island nation attracts a significant number of tourists from both Russia and Ukraine. When Sri Lanka was hoping to attract tourists after travel bans were removed, Russian invasion of Ukraine slowed the industry’s recovery.

In addition to this, Sri Lankan exports of tea and rubber plummeted because of lower demand. Sri Lankans working abroad lost their jobs during the same period, further decreasing foreign exchange reserves.

Beginning of the Worse

Sri Lanka plunging into a crisis hit the news in March this year when the government announced a 13-hour power cut daily. The government tried saving energy amid the ongoing crisis, but it irked the Sri Lankan public.

The power cuts left Sri Lankans without jobs and thousands flocked the streets to protest the power cuts over the next few weeks. Gotabaya declared an emergency on April 1, 2022. The Sri Lankan Cabinet resigned soon after the emergency law was imposed. That prompted Gotabaya to revoke the law.

Currently, the Sri Lankan government is in talks with the International Monetary Fund for a bailout plan. IMF had indeed assessed its accumulated debt as unsustainable.

With not enough finance to run the country, skyrocketing inflation, schools cancelling exams, acute shortage of essentials, lifesaving medicines, and the government having no clear plan to restore the country’s economy, Sri Lanka’s future relies in IMF’s hands.

Sri Lanka has $25bn worth foreign loans of which $7bn is due for repayment this year with the remaining payable by 2026. The World bank has promised to provide $600mn to help Sri Lanka meet its essential import payments.

As Sri Lanka stares at bankruptcy India plans to step-up its economic aid focusing on humanitarian requirements after supplying fuel, medicines, and rice early this year.

India has given ~$3bn to Sri Lanka since January 2022 via currency swaps, credit lines for essentials, and loan deferments.

The Sri Lankan cabinet cleared a proposal to source more fuel from India through a short-term loan from the Exim Bank of India of $200mn.

Lessons for You – The Investor

The story of Sri Lankan crisis is full of lessons for investors.

An investor should not invest just because a company is coming up with growth initiatives like new product launches, territory extension, etc. Not every growth initiative or a project that company may take yield expected results.
Keep an eye on how a company intends to finance its growth initiatives. Financing new projects using debt is fine but understand if the project holds merit. Study how the company intends to fulfill its debt obligations in the future. It’s a major red flag if a company axes an existing revenue stream.
The Sri Lankan economic crisis highlights the importance of having a visionary management at helm. Without an intelligent head(s), it’s difficult for a company to function smoothly despite all other things in line.

March 19, 2022

Economy

Should FPIs Outflow From Indian Equities Worry You Today? Get The Answer Now

Let’s start with some Good News; then move to the …Great News.

After struggling for over a week in Red, the Indian markets recouped to Green on the closing bell yesterday. What changed?

There has been neither a significant change in the economy nor a positive update on the Russia-Ukraine war. In fact, Ukraine has declared an air alert in Kyiv as the war continues. In our opinion, it’s the very nature of the markets that revived it from a week’s slumber. Sensex gained over 1,000 and NIFTY jumped more than 300 points on the back of exit polls suggesting wins across UP and Manipur for the BJP.

To effectively invest your money into equities amid such turbulent times, subscribe to our 5 in 5 Wealth Creation Strategy here.

Now, let us come to the Great News. In today’s article, we will learn about FPIs or Foreign Portfolio Investors.

If you are keeping up with the media reports, you may have come across the following headlines,

“FIIs pull out more than $29 bn in FY22 amid high valuations, US Fed rate hike fears, and geopolitical tensions“

“FIIs outflow shoots past Rs. 2 Lakh crore since October, but DIIs offer a balance“

“Foreign Investors likely to continue pulling out funds“

Of course, the headlines alone are scary. But is the matter really grave? Should you worry if foreign investors are pulling their money from Indian equities?

We will answer these questions here but before that know who FPIs are.

Know FPIs

Foreign Portfolio Investors or FPIs are foreign entities governed by the market regulator SEBI. They are allowed to invest in various financial assets categories, including shares of listed companies, non-convertible debentures, government securities, mutual funds, and other asset classes.

FPI regime is a harmonized route for foreign investment in India. FIIs (Foreign Institutional investors) and QFI (Qualified Foreign Investors) are together called FPIs. However, many use the terms FIIs and FPIs interchangeably.

Categories of FPIs

According to a leading consulting firm PwC, there are three categories of FPIs. Look at the chart below to understand these categories better.

FPIs presence in the Indian markets

FIIs (FPIs since 2014) were allowed to invest in India since 1992. As the rules got amended, authorities open other investment channels such as the corporate debt market (1995) and Government securities (1997) to FPIs. Over the years, FPIs made a significant amount of investments in the country, especially in equities of listed companies through both primary and secondary markets. Per the CDSL website, FIIs invested an enormous sum of Rs. 2.74 lakh crore in FY21, a record high till today. If you were to go by the numbers, only 3 out of 20 years the FPIs have been net sellers in the Indian equity markets.

Should you worry if FPIs sell today?

The simple answer is no.

Yes, the FPIs have pulled money from the Indian equities in FY22. Per the CDSL website, they have sold equities worth Rs. 1.36 Lakh crore as of March 9, 2022. But this does not mean they are going away from the Indian stock markets.

There is no one size fit for FPIs. Like any other investor class, they have different horizons, objectives, and investment strategies. For instance, Pension funds have a very long-term horizon (decades) but Hedge funds & AIF have a short-term horizon (3-6 months).

Many FPIs take self-canceling positions in equities of various regions, categories, segments, countries, etc. They leverage on the short-term trading opportunities, which do not define their fundamental view on a country, region, stock, etc. They just complete their assigned tasks – buy and sell.

Moreover, FPIs alter their buy and sell activities based on the asset allocation ratio. They take strategic calls on shifting from equities to debt or from secondary to primary markets or from India to other countries.

Thus, don’t panic when read or hear a sensational headline talking about FPIs pulling money from the markets. We recommend you analyze the reasons behind the selling, whether it’s because of a structural change or just trading strategies.

If you think this is a lot to do, we can help you out with your equity investment needs. Subscribe to our 5 in 5 Wealth Creation Strategy to begin your wealth creation journey today.

March 19, 2022

Economy

Know How Rising Crude Oil Prices Affect India’s Economic Recovery Now

This black greasy commodity has garnered everyone’s attention of late. We are talking about Crude Oil, a commodity that binds as well as divides the world. As the Russia-Ukraine issue advanced, Crude Oil prices touched a 14-year-high last week.

In this article, let’s look at if the rising crude prices have had an impact on India’s economic growth.

What is Crude Oil and why is it important?

Crude Oil is a commodity/liquid fuel found beneath the earth and extracted through drilling. It is used for transportation, heating, generating electricity, petroleum products, and plastics.

Crude has proved to be an essential commodity for years. Economies rely heavily on it to function as every industry uses crude for something or the other.

The vehicle you drive runs on the petrol or diesel extracted from crude. The truck delivering food products to supermarkets, the packaged food you eat wrapped in plastic, the polyester, nylon used to make couch cushions or carpets and others use crude oil. To put it simply, Crude Oil is vital to everything we use, wear, and eat.

It has contributed to over a third of the world’s energy consumption.

What happens when the crude oil prices rise?

Now that you know the use of crude in almost everything we use, wear and eat, it’s a no-brainer, then to guess what will happen when the prices go up.

Rising crude oil prices have a multiplier effect on the economy. It drives the prices of other fuels like gasoline, home heating oil, and natural gas up. It also plays an important role in the cost of industrial processes and residential living. Higher oil prices essentially increase the cost of everything you buy, resulting in inflation.

The impact of rising crude prices on India

India meets most of its energy needs through fossil fuels and is heavily dependent on imports to meet the requirements. Around 86% of the country’s crude is imported, which brings India’s import bills into the picture. Higher crude oil prices will increase India’s import bills and add pressure to the current account balance.

The current account tallies the value of exports and imports of both goods and services along with international transfers of capital.

Per the latest RBI data, India posted a current account deficit of $9.6 billion or 1.3% of the GDP in the second quarter of FY22. This is way down from the current account surplus of $6.6 billion or 0.9% of the GDP in Q1FY22.

However, it’s not only the current account that reels under pressure. Dan Fineman, a co-head of equity strategy for APAC at Credit Suisse says, “Higher oil prices hurt the current account, add to inflationary pressures, and increase sensitivity to Fed rate hikes”.

According to data released by the National Statistical Office (NSO), the headline inflation, as measured by the Consumer Price Index (CPI), jumped to 6.01% in January 2022 from 5.66% in December. The Retail inflation breached the upper limit of the RBI’s tolerance band of 6%.

[There are two types of inflation – Headline and core line. Headline inflation refers to the change in the value of all goods and services in the basket. Core inflation excludes food and fuel items from Headline inflation]

Last month, FM Nirmala Sitharaman presented the economic survey in the parliament that projected India’s GDP growth of 8 to 8.5% for FY23. She assumed the average crude oil price to remain in the range of $70 to $75/barrel during the fiscal.

However, crude prices have almost doubled from the government’s assumption. With Russia advancing its military operations in Ukraine, Putin warned that the crude price may go up to $300/barrel if the US and European countries put embargoes on Russian oil further.

Crude prices have increased significantly in the last two years. If the average price of the commodity stays above $100 during FY23, it will substantially hamper the country’s budget calculations.

The government has two alternatives. Either pass on the price increase to the end-user or absorb the price hike.

Fuel prices in India will increase some more if the government decides to pass on the increase in price to end-users. Needless to say, it will have a cascading inflationary impact. If the government decides to absorb the price hike, the trade deficit will widen.

After reading all this, you may feel it’s the beginning of the bad times for the country. However, that’s not the case. Let’s remind you that these are interim hiccups. This is not the only time when crude prices have gone through the roof. We have witnessed a similar trend during 2008-09 too.

ONGC CMD Alka Mittal believes that the long-term oil prices should eventually settle in the range of $60-80.

Well, we’d like to stay optimistic and believe the crude prices will come down. Predicting whether the crude oil effect is positive or negative in the long run is impossible. We may have to wait and see what happens.

Meanwhile, you may subscribe to the 5 in 5 Wealth Creation Strategy and start creating long-term wealth.

Read more: About Research and Ranking.

March 11, 2022

Economy

Know More About The New T+1 Settlement Rule That Kicked Off Last Week

Last week several things happened together, such as President Putin declaring war on Ukraine, the markets across the globe falling, and eroding investor wealth to the tune of crores. But did you miss the kickoff of the much-awaited T+1 Settlement rule on 25th February 2022?

If you have missed it, don’t worry. We have put together the details in this email for you. Here is what that settlement rule means

T+1 Settlement Rule

The new settlement rules refer to the time between the date of trade i.e., the date an order is executed in the market, and the settlement date, i.e., when participants in the trade exchange cash for securities or cash.
The new T+1 settlement rule will roll out in phases. Stock exchanges in India followed the T+2-day settlement rule before 25th February
It meant if you bought shares on Monday, they would reflect in your Demat account on Wednesday. In case of a weekend, the settlement would happen the following Monday.

The stock markets worked on a T+3-day cycle in 2003 before the T+2-days rule. SEBI decided to shorten the settlement cycle to T+2. Now the new T+1 settlement will help to improve market liquidity.

Benefits Of This Rule

Reduce The Risk Of Default:

The T+1 settlement cycle will help reduce the risk of non-payment or non-delivery of shares from the broker by a day; an improvement over the current cycle followed. When things are uncertain, shortening the cycle by even a day counts, especially when large transactions are involved. Speeding up the settlement process will undoubtedly reduce the risk of default in the stock market.Improve Liquidity: A shorter settlement cycle will provide liquidity as the money for the shares sold and credited will be a day earlier. Investors can then use their cash to buy shares or trade for another day to improve their profits. An early settlement in a volatile market can help investors use their capital efficiently to accrue more profit.

Improve Liquidity:

A shorter settlement cycle will provide liquidity as the money for the shares sold and credited will be a day earlier. Investors can then use their cash to buy shares or trade for another day to improve their profits. An early settlement in a volatile market can help investors use their capital efficiently to accrue more profit.

More transactions:

Additional liquidity means the chances of investors undertaking more transactions in the stock market are high. More transactions will benefit the investors and the brokers as they will earn more from high turnover. Remember, increased turnover means the stock exchanges, depositories, depository participants, and even the government will benefit from more fees and taxes.

How Will The Rule Work?

SEBI will rank all stocks in descending order based on an average daily market capitalization for October 2021 across exchanges. If a stock is on multiple exchanges, then the market capitalization will be based on the stock price at the stock exchange with the highest trading volume during October 2021.

The T+1 rule will be rolled out in phases starting with the bottom 100 stocks based on market value from 25th February 2022. Next, SEBI will add 500 stocks to the list on the last Friday of March and every following month. The criteria to pick the stocks will be the same as the first 100.

Investors who transact in stocks that fall under the T+1 settlement will get their money or shares delivered to their Demat accounts in less than 24 hours.

We hope we’ve managed to give you a better idea of the new settlement cycle.

In the meantime, subscribe to 5 in 5 Wealth Creation Strategy to begin your wealth creation journey.

February 24, 2022

Economy

Inflation – Know more about the current scenario in India now

High inflation levels in India captured the headlines across the country on 14 February. As per the Ministry of Statistics and Programme Implementation India’s benchmark inflation rate rose to 6.01% YoY in January 2022.

Inflation for January crossed the upper tolerance level the RBI maintains. This seven-month high inflation rate was due to high food and beverage prices, contributing 43% to inflation YoY and 198% MoM.

Before you panic about rising inflation, you must understand a little more about CPI and WPI.

The Consumer Price Index (CPI) from April to December 2021 was 2.9% compared to 9.1% for the same period in 2020. The decline was led by easing food inflation. However, untimely rains, seasonality, lockdowns, night curfews, and supply chain disruptions contributed to the rise in December.

On the other hand, wholesale inflation based on the Wholesale Price Index (WPI) remained low in the previous financial year but rose sharply to 12.5% between April and December 2021-22. Increased economic activity, a sharp rise in crude oil, imported inputs, and high freight costs raised wholesale prices.

The image above shows the increasing gap between wholesale and consumer inflation. Factors like variations due to base effect, the difference in scope and coverage of the indices, the items covered, and the difference in commodity weights affect the WPI and CPI differently.

WPI is highly-susceptible to imported inputs-led inflation. But as the base effect in WPI wanes, the gap between CPI and WPI will also narrow down.

What is driving retail inflation and why?

Retail inflation may remain high and rise further by the end of the quarter. Volatility in commodity and crude prices are the chief causes of this rise. A surge in Brent Crude prices due to rising geopolitical tensions between Russia and Ukraine, depreciation bias in the rupee, and imported inflation are key risks to inflation in India.

Rise in food prices is a vital inflation driver. Food inflation rose 5.4% in January from 4% in December. The unfavorable base effect led to a rise in inflation, though the food index fell for the second month in a row. Inflation in food jumped 110bp in January to 5.6% because of a 100bp drop in the base period. Price rise for commodities, such as cereals, milk, and vegetables, hovered around 5%, while inflation for pulses and eggs, meat, and fish fell to 3% and 5% respectively.

Expected hikes in the MSP for agricultural products and the depressed base for the last year could mean higher food inflation. Rising consumer goods prices and telecom tariffs are primary reasons for rising inflation. Increasing input costs seem to have pushed up inflation for footwear, clothing, household goods, and services.

Also Read: CNC Full Form in Share Market

The Inflation Scene

Inflation has become a Key global concern raising inflationary expectations and central bank action after the pandemic-led slowdown since 2019. Over 40 countries have raised policy rates by 150bps, while the US may raise 100bps on the policy rate by July 22. But RBI expects inflation to ease considerably in FY23 indicating less pronounced action.

The RBI Governor Shaktikanta Das said inflation in January rose largely due to adverse base effects. But the RBI expects India’s inflation rate to go down to 4.5% below its upper tolerance level at the beginning of the new financial year.

However, economists caution that high inflation is now turning structural, with price rise in non-food segments like clothing, fuel and light, household goods, health, transport, and communications above 6%.

Non-food commodity MRP prices hiked may not be decreased even if the inflation rate falls. With manufacturers looking to pass on their high input costs to consumers, a rise in prices could be on the cards.

What can you expect?

Several automobiles, telecom, and FMCG firms announced price hikes due to high input costs. It means non-food commodity prices will increase. Food CPI rose considerably in the last three months as the favorable base effect wore off.

You can expect the retail prices to go up as manufacturers face double-digit WPI inflation.

But look at India’s inflation rate comparison from 1986 to 2026

Look at the graph above. Do you think the inflation rate will rise or decrease as the RBI expects it to in the next fiscal? We will have to wait and see how the drivers of inflation behave going forward.

What do you think of this article?

Write to us at createwealth@researchandranking.com

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