The Core Report

Good morning, it's Friday, the 23rd of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital, presently in transit.

The Take: Will Adani’s Do What The Regulators Failed To
How can we invest in a stock where we feel the promoter himself is actively involved in ?

Whether these were the actual words or not told to Reliance Industries founding family over 25 years ago, this was a reference I heard from an investment banker who was close to the family and helped in their issuances.

Fast forward, the Adani Group is essentially faced with the same perception issue.

Like Reliance then, the Adani Group appears to be near teflon coated on issues relating to regulators in general and specific like Sebi, whose investigation into the ownership of companies sitting outside but allegedly acting in concert with the promoters in India seems to have gone nowhere.

Remember, Adani Group stocks like Adani Enterprises, Power and Energy Solutions have close to a declared promoter holding of close to 75%.

Which means floating stock is low and thus the likelihood of prices shooting up is high, all other factors constant.

A few weeks ago, Hindenburg Research, the NY based short-seller released a fresh set of questions targeting this time the Sebi chairperson Madhabi Puri Buch and questioning her impartiality given that there were some distant links between her own past and private career investments and some Adani funds.

There was clearly a case and still is for her to disclose publicly the areas of conflict in past decision making, as she said she has done to the board of Sebi.

That has not happened as yet which would suggest by inference that her saying or revealing anything publicly would also throw a fresh shadow on Adani’s dealings, with law enforcement in general and Sebi in particular.

But all this evident clout, even if for good reason, is not helping the Adani’s image and only sullies it further.

With each subsequent shot Hindenberg has fired, Adani’s reputation in the eyes of institutional and other investors has undoubtedly dipped further.

One example is the low institutional and mutual fund investor holding. Things could not have improved much.

Fund managers I have spoken to have tried to avoid getting into much detail but acknowledged their low exposure.

But it's not fund managers. As I have seen, investors question the system as a whole when they see the system not working transparently.

Particularly if they are exploring getting into or investing further into businesses where Indian conglomerates like Adani already have a presence.

Hindenburg Research, just to recap, had specifically criticised the Adani family for using a complicated web of offshore entities to control a larger stake in their listed businesses than disclosed to exchanges.

Like before, there is a question of how free and fair the Indian capital market ecosystem is and how transparent.

There is a tendency to believe that if something works 90% of the time freely and fairly, then we should not worry or bother too much about the other 10%.

This logic, which is quite clearly in operation here, has not worked in the past in my understanding and clearly not working for Adani either.

Since with every Hindenburg hit which is an active attack and the passive attack, which is large investors saying away, the image of the company’s stock is suffering. And by extension the country’s as well.

The Adani’s have evidently recognised this after their initial and somewhat nationalistic pushback in January 2023 when Hindenberg put out its first report, did not quite work.

There appears to be a fresh attempt.

Bloomberg is now reporting that Gautam Adani plans to appoint auditors from a top global firm and hire a chief executive officer for his family offices to bring a level of disclosure often associated with listed companies.

The founders of the mining-to-media conglomerate are talking to two of the big six accounting firms to audit the family offices’ accounts.

The moves hope to bring transparency into how the wealth of the Adani’s valued at $105 billion is managed.

The details do not matter here but Reliance as I have mentioned in earlier Core Report, did something more than two decades ago, brought in external auditors and a Bank of New York to manage their share transfers.

All the names were reputable and obviously helped at that time.

Adani is trying something similar that I can see.

As things stand, if this move pans out, Adani’s image will benefit, as will the overall stock market.

I do feel Adani still needs to address the issue of the offshore investors head-on, talk about what was going on and come clean.

Maybe the new structure and auditors is the pathway to do that.

Either way, that will be the best way to put the matter behind and move on.

No one thinks the Adanis have built a financial illusion in their companies and recognise the hard assets that power their companies, from ports to airports to cement and power, including green power.

But addressing the financial mystery in ownership and stock behaviour is critical for the longer term.

You can accuse the Ambanis of many things today including hosting over the top weddings but no one would today say that the ownership of their companies is fuzzy or their stock price is under a cloud.

Our Top Stories and Themes

Stock Markets rise for the 6th session, albeit slowly.

How an Indian auto maker’s multi-fuel approach for the same car model is paying off.

A much delayed Census might finally become even as the clamour for good economic and social data increases.

Gold is holding near record highs globally, decoding the India outlook.

Deposits in banks are not growing as fast as lending is, a recap of why this is important

Government bans more multi-use drugs.

Markets Gain Slowly But
A Federal Reserve rate cut is the big signal now that markets are once again focussed on, world over.

While the markets did not shoot up and stayed range bound, they continued to advance, albeit slowly.

Both the benchmarks have logged gains for six sessions in a row, adding about 2.8% each, Reuters said.

The BSE benchmark index ended at 81,053, up 148 points while the NSE Nifty 50 index closed with gains of 41 points at 24,812.

The broad markets were stronger with the mid and small-cap indices outperforming the Sensex and Nifty with the BSE MidCap index added 0.67 percent and the BSE Small Cap 0.47 percent.

Meanwhile oil prices continue to fall.

Oil prices have extended their decline to the lowest in more than six months as trend-following algorithmic sellers overlooked a bullish US stockpile report, Bloomberg said.

Brent crude is now quoting at $76.45 or less than $77 a dollar.

This is in general good news for India because Russian crude that was available cheaply for almost two years is now almost at the same price of crude elsewhere. This obviously increases India’s import bill and has done so.

Tata’s Punch Gains on Multi Fuels
Tata Motors Punch has become India's top-selling car, surpassing Maruti Suzuki's WagonR with over 1,26,000 units sold between January and July 2024, a report from the Economic Times points out.

Punch's success marks the end of Maruti Suzuki's long-standing dominance in this segment.

While the lead did not hold in July, the longer six month period reflects a clear shift.

The interesting thing is that Punch is a multi-fuel car model and that is an interesting reflection of consumer behaviour.

Alternate fuels including CNG and electric represent nearly half of Punch’s total sales, says the ET report while Maruti Suzuki Wagon R is 45% and in the case of Ertiga its 58%.

Remember, we saw a CNG, mutl-fuel bike launch as well from Bajaj Auto.

Those who track the auto industry closely obviously have been seeing this for a while but it is interesting how Indian consumers have switched to cleaner fuels because of affordability and of course availability.

While electricity could be cleaner, hybrid cars are doing better than electric cars right now in India, which suggests that for various reasons, people want cheaper and durable fuels first.

Hyundai has seen similar benefits among its models.

In earlier days, the same model may have different features depending on whether it was premium or basic.

Today, a model is further subdivided into which fuel it runs on and thus otherwise has the same features or offers the same features.

A Census is Coming
For the last 2 years, at least, economists, among others, have been clamouring for the Indian Government to conduct the once in 10 year Census, which was last held in 2011 and thus should have happened in 2021.

Covid came and went as did many major elections including the latest one in 2024 so it was not clear that there were any challenges faced in the kind of mobilisation required to conduct a Census for which a full-fledged Government body exists who in turn works with Government officials across the country, similar to the Election Commission who of course has been quite active.

Reuters is now reporting that India may start conducting a long-delayed population census in September.

It will take about 18 months to complete the new survey after it begins next month.

The lack of data and current data obviously leads to speculation about why it is not being done at best and poor policy planning and response at worse, including responses to inflation, jobs and other fairly burning issues.

Most government schemes run on the findings of the last population census released in 2011, give or take.

Gold Prices, Where Are They Headed?
Gold is in record territory, topping $2,500 an ounce on expectations that the Federal Reserve could cut US interest rates next month.

Gold has jumped 21% year-to-date also making it one of the best performing major commodities in 2024, and banks including UBS Group AG and ANZ Group Holdings Ltd. say that there’s still scope for further gains, Bloomberg reported.

Analysts are now predicting that prices are heading toward $2,700 an ounce by around the middle of 2025.

We have been discussing gold prices here for a while in the context of central banks including India buying more gold as well as of course general demand.

To get a sense on how gold prices were looking in India right now and into the festive season, I reached out to Sugandha Sachdeva, commodity and currency analyst and founder of Delhi-based SS Wealthstreet.

INTERVIEW TRANSCRIPT

Sugandha Sachdeva: So if you see gold prices, they have been one of the major performing assets this year, having gained more than 20% so far this year, it's majorly the safe haven demand which has ignited strong returns and demand for gold this year, it's the tensions that we have seen in the Middle East, and the Russia Ukraine war is also going on. And besides, the central banks have been loading up gold into their reserves. And besides this, the expectations of rate cut by the US Fed this year, it's going to be the start of monetary easing cycle by the US feds. So that's a key catalyst which is driving gold prices. Apart from that, the Indian rupee depreciation that is also acted as major tailwind for gold prices, even though, on the domestic scenario, we are not seeing gold prices at record highs right now, but in the international market, prices are very close to the record highs of in spot gold, we have seen highs of around only 25-30 per arms. So as of now, the Fed, recent minutes have kind of confirmed the fact there were a lot of bets that Fed is going to start its monetary easing cycle in September. And Fed minutes have shown that policy makers are quite inclined towards that. And there is going to be 25 basis rate cut in September. There's high probability as of now, and so rate cuts are on the horizon. And we also anticipate that Fed is going to cut rate at its three further meetings this year in 2024 so in all, we are anticipating a rate cut of around 75 basis point, to 100 basis point this year. So this is, in a way, very positive trigger for gold prices, because gold doesn't pay any interest. So whenever interest rates are lowered, it kind of reduces the opportunity cost of holding gold. Besides this, a rate cut is also a signal that growth is kind of receding in US. There are growth concerns. Apart from that, the US payrolls data has also been revised lower recently, as for the recent data, so for the year ending March 2024, so the jobs have been revised lower by 820,000. So this is signaling a softness in the labor market in us. So these are all very positive triggers for gold prices, and that's the reason we have seen gold prices staying quite buoyant. Apart from that, central banks have been loading on to gold, and we are also seeing physical demand also coming back in India, after the recent import duty cut by the government. So in all, we anticipate that in the last quarter of this year, because of the festival demand, and also because of the import duty cut, because of which we have seen a sharp cut in prices, also the demand is going to increase significantly. So all of these factors are kind of driving world prices as of now,

Govindraj Ethiraj: Right. So if I were to come to India, specifically, how are you seeing the demand and supply forces and what's really either pushing it up or down at this point.

Sugandha Sachdeva: So forces of demand are basically strong, central bank buying geopolitical tensions, as I mentioned, and the prospects of rate cut by the US Fed. However, on the negative side, we also see certain factors which are playing out at the moment. China has not been loading on to gold right now. In fact, Chinese demand has declined almost 24% in July and in June also, the demand fell by around 58%. Chinese central bank was one of the major factors, which was driving prices last year and this year also. But then, for last couple of months, China has not been amassing rule significantly. Besides this, geopolitical tensions in the Middle East are also kind of easing, so that would also play out and can kindly and can be a slight dampener for prices. Apart from this, markets would be looking forward to further policy signals from the Jackson Hole symposium this week, where Fed's chair is about to give further insights into the rate cut path, and may also talk about the quantum of rate cuts this year, so that will also have an impact on good prices. So we do see that overall trend in goal is very positive. But then in the domestic markets, if I talk about specifically, I see a strong hurdle in place at 72,300 odd levels. In case that hurdle is convincingly breached, we see further rally in good prices. However, in case that is not breached, there can be some dip in prices. And we see prices finding floor at levels of 70,500 odd levels. In the international markets, Aaso, I foresee that prices will consolidate for a while between 2450 to 2520 where 2520 mark is acting as a strong resistance area as of now, only if that is breached, for the momentum is slightly near term. Otherwise, some consolidation is quite lightly in prices,

Govindraj Ethiraj: Right. So, if you were to look at Gold prices in India before customs duties were reduced in the budget in July and today, how would you describe, let's say, the elasticity or the nature of demand, I mean, or the propensity to buy or consume more,

Sugandha Sachdeva: I think, at higher prices, Indian demand had also reduced. If we look at the recent data in the April to June quarter, demand fell by around 5% in India. However, as per the latest reports by word Gold Council, this. Drop in prices is likely to entice lot of buying interest, and in the last quarter of this year, 50 tons additional demand is likely to come in. But rather, we anticipate slightly more demand, as we have spoken to certain jewellers also, and people who are selling gold physical bars as well. So demand is likely to pick up significantly. So I think demand by the end of this year is likely to pick up. And we see demand at Hill the 850 to 900 tons. So this was the steepest cut in import duty on record, and the lowest since june 2013 so I think this is certainly likely to entice lot of buying interest in gold.

Govindraj Ethiraj: Right. That's a good note to end on. Sugandha, thank you so much for joining me.

Sugandha Sachdeva: Thank you so much.

Why Banks Are Struggling For Deposits
The Finance Minister of India last week said banks should do more to raise deposits, including offering innovative products and perhaps higher interest rates as well since they had the leeway.

The looming problem, if it can be called that, is that the gap between lending and deposits has shrunk and now to levels both the Finance Minister and the Reserve Bank of India governor repeatedly have called uncomfortable.

The Finance Minister pointed out that deposit growth has been lagging behind credit growth by 3% to 4% in recent months.

One reason is that people are now putting money into mutual funds, real estate or stock markets instead of putting them into fixed deposits. There could be other reasons as well.

I reached out to Economist Dr Brinda Jagirdar and asked her to recap what was happening and why this was important.

INTERVIEW TRANSCRIPT

Dr Brinda Jagirdar: One of the reasons for slower deposit growth, deposit growth, lacking credit growth, of course, is that the overall household savings, which is about 60% of the total savings in the country, this has come down now the share of overall household savings as a percentage of GDP, is about 18.4% according to the NSSO data in 2023 this against 22.7% in FY 21 and an overall 10 year average of 20% so you see the overall savings, household savings in the economy is shrinking. That is one and if you look at the RBI data, RBI, in its financial stability report, said that the share of financial savings and total household savings has come down from about 40% in the 10 year period, from 2013 to 2022 to about 29% now. So you see household savings are shrinking, and within that the financial savings are shrinking. So this is getting reflected in the trend of deposit and advances growth in the economy, deposit growth, if you take this whole financial year, has been lagging. The rate of growth of deposits has been lower than the rate of growth of advances for all scheduled commercial banks taking the latest data, Wednesday, July 24 credit growth at 15% at deposit growth at about 11% this is excluding the HDFC impact merger, merger of the HDFC Bank, even if you exclude this merger impact, it's 14% for credit growth and 11% for deposit. So over the year, the whole year, deposit growth has lagged growth by about three to four percentage points everywhere, even up to five percentage points at some time. So this growth in deposit, which is not picking up, it is not keeping in step with credit growth, is definitely a cause for concern, and this is mainly and it further. Now even if you look at the household savings pattern, not only has the share in share of household saving in financial assets gone down, but its share in physical assets have actually gone up, and net financial savings has gone down. So that is why I think the Governor and the finance minister have raised this issue,

Govindraj Ethiraj: Right. So a couple of questions, including a hypothetical. So right now, it appears that banks are borrowing, institutionally, two certificates of deposits, and that number seems to have gone up quite dramatically this year, as opposed to last year, for this period, it was about 1.89 lakh crores, or 189,000 crores, and now it's about 3.5 lakh crores. So my hypothetical question here is, why would the banks, or why are the banks compelled to borrow from somewhere else to lend? I mean, couldn't they just slow down lending? For example.

Dr Brinda Jagirdar: The economy is really growing very fast. So lot of measures have been taken to make sure that the manufacturing sector picks up, that services sector grows. And you can see all that in that growth numbers, GDP growth numbers. So to keep up this credit demand, banks are looking at, looking at credit from, I mean, if revenue for wherever they can funds from wherever they can source. Now, why is this deposit growth lagging credit growth? Why is credit growth? It's at such a higher rate, mainly because the personal credit that retail credit that is showing a very high, high growth and banks are also pushing retail credit. In fact, the governor has been cautioning banks to go slow on retail credit. And also, we have a young labor force with a greater appetite for borrowing, and maybe for lifestyle reasons or whatever, and also because technology has made it so much easier to borrow. So therefore banks, the young labor force, the young working population, is willing to take on more risk and within the financial instruments, if you see, there's a shift away from bank fixed fixed deposits, and consumers are willing to invest into equities, mutual funds, small savings, and this is helped by the UPI and digital growth, because then they don't have to keep so much money in the fixed deposits. They need to keep money in savings so that they can move it around more easily, aided by UPI and the digital growth.

Govindraj Ethiraj: Obviously, what's working in one end of the financial spectrum is creating problems at the other end, Governor and the finance minister have both been saying that banks should get more either aggressive or innovative with their products and offerings to draw in more depositors. What could that mean? As in, wouldn't a higher interest rate be the only attraction? Or could there be other things as well?

Dr Brinda Jagirdar: Household sector or other investors not only are more interested in other financial instruments, they're also interested in the real estate. So there's more demand for real estate from the household sector, and there's increased demand for foreign travel, high in spending, increase in personal loans. So when this trend is on, it's very difficult to say that it's not an easy situation to garner deposits from such a such a depositor base. So here's, I suppose the banks will have to look for innovative methods, because increasing the cost of deposits will also mean increasing the. Cost of credit, and at a time when the economy is investing, at a time when the government pushing for more and more investment in manufacturing and capex and increasing more investment in the economy, it would not be such a good idea to increase the cost of credit, because that could, in turn, slow down all the steps that have been taken right?

Govindraj Ethiraj: And have you seen similar cycles? Or rather, I'm sure you've seen similar cycles before, including while being an economist at the State Bank of India. How does these things usually resolve themselves? If they do.

Dr Brinda Jagirdar: The past is not always a good guide to the future, especially now, when the environment has completely changed. So So here Govind, they'll have to say that we'll have to learn lessons from what we are seeing now over here and earlier. What happened was that domestic savings in India was such a robust source of lending for banks, so they would come into bank deposits and they would be passed on into the credit stream. But now, if the deposits are going to slow down, then it would mean that our dependence on external sources would go up to that extent FDI. We are not very dependent on FDI for our growth. It was always domestic savings which fueled domestic growth. So that is a trend we need to watch out for and make sure it doesn't get reversed.

Govindraj Ethiraj: Brinda, thank you so much for joining me.

Dr Brinda Jagirdar: Thank you. Govind.

Remittances Drop
Meanwhile, the mandarins must be breathing collective sighs of relief, because outward remittances, a constant source of blood pressure to policy makers consistently for maybe 50 years, has slowed down.

Business Standard reports that outward remittances under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS) dropped 24.39 per cent year-on-year (Y-o-Y) to $6.9 billion in the April-June quarter of financial year 2024-25, from $9.1 billion in the year-ago period.

In June 2024, overall remittances fell around 44 per cent Y-o-Y to $2.18 billion amid a decline in remittances across categories.

The Union Government introduced TCS on remittances under the scheme for all purposes except education and medical treatment, scheduled to be effective from July 1, 2023, which was later deferred to October 1, 2023.

The LRS scheme was introduced in 2004, permitting all resident individuals to remit up to $250,000 per financial year for any permissible current or capital account transaction, or a combination of both, free of charge. In its initial phase, the scheme was introduced with a limit of $25,000, which was gradually revised.

In the first quarter, remittances declined across categories except for donations, medical treatment, and others.

In Q1 FY25, the largest segment—international travel—recorded a 6 per cent drop to $3.8 billion compared to $4.07 billion in the year-ago period.

Similarly, remittances for the maintenance of close relatives dropped by 46 per cent Y-o-Y to $983.2 million.

Likewise, remittances under the ‘gift’ category dropped by nearly 41 per cent from last year to $811.9 million.

Investments in equity and debt schemes also witnessed a drop to $318.02 million in the first quarter of FY25, compared to $503.73 million in the year-ago period. Remittances for deposits saw a steep decline of 61 per cent Y-o-Y to $164.7 million.

There could of course be many reasons for all of this but presumably there is more peace and calm now.