The Core Report

Good morning, it's Monday, the 9th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.

The Take: The givers and the takers of Indian stock markets.
There are two kinds of people in the stock market, particularly primary markets.

The givers and takers.

Givers are those who invest their savings or earnings in initial public offers in anticipation of future returns, including on listing day and takers are those who raise funds from the market, either for themselves or their companies.

There come times when the takers' appetite exceeds that of the givers. Usually this happens at the top of cycles and leads to the whole market, primary and secondary going down.

The question is; is it happening now ?

The honest answer is one does not know whether we are at the top of a cycle.

What we do know and can see is that substantial wealth is being transferred from ordinary investors into the hands of promoters of companies or their companies, oftentimes the former.

A recent report by brokerage Kotak Institutional Equities said that promoters of 37 NSE 500 companies sold ₹87,000 crore worth of stock in the first half of the current year, marking the highest level in the past five years.

In 2019, the value of promoter stake sales were Rs 24,100 crore and touched Rs 99,600 crore for all of last year, according to a report in Mint.

Another report in Nikkei Asia said promoters sold shares worth Rs 81,424 crore between 2021 and 2023 on the exchanges in IPOs.

Of the 183 stocks, 44 were below water three months ago when the report was published.

There is no easy formula that dictates at which point the takers take so much that the overall market starts feeling the pinch.

One reason is because domestic flows are strong and are absorbing both IPOs and sending fresh funds into mutual funds.

But there is definitely good reason and history to believe that overheated IPO markets usually trigger a flattening if not drop in secondary markets.

The question once again is are we near that point ?

A few weeks ago, we heard of a motorcycle showroom in Delhi raising funds through a SME IPO.

These SME IPOs are also only regulated by the exchanges and not by Sebi.

There are several other such IPOs documented where the antecedents of the companies concerned were shaky to say the least.

In my experience signs like these are more worrying than the data that may or may not provide clear signals.

Particularly when flows are so strong.

Meanwhile, this week, four companies, including Bajaj Housing Finance, are set to raise some Rs 8,390 crore.

August too saw several major IPOs, mostly from tech companies.

Estimates suggest that main-board IPOs, or those not part of the SME offer, have raised around Rs 80,000 crore till last month and could cross Rs 1.25 lakh crore by the end of the calendar year.

And appetite is high, going by the extent of oversubscription.

In August, main-board IPOs were subscribed on an average over 75 times, while the year-to-date average for 2024 is 66 times.

For SME IPOs, the average subscription in August was 290 times, with a year-to-date average of more than 259 times, the PTI reported quoting data.

Such high levels of appetite are warning signs too and reflect a desperation to make quick returns rather than anything else.

Which also means that such capital can be more fickle than patient.

We are most likely in a more steady phase in the markets rather than hyper growth.

This is of course good for the overall health of the stock markets.

And unless something major happens, it could well stay in this mode for a longer period.

As long as the takers don’t get greedy and kill the gold goose so to speak.

And that brings us to the top themes and stories of the day:

Why markets are still weak.

Demand woes push oil prices lower, now around $71 a barrel.

Basmati rice exporters project bumper crop, want export curbs removed

US Government warns against doing business in Hong Kong

The summer of 2024 was the hottest on record

The Stock Markets Are Weak
The stock markets are on weak footing right now, not so much because there are negative news flows but there are no major positive cues either.

At least the kind that can send the indices racing up.

Not surprisingly, local markets last week responded to global negative cues. Macro factors like interest rates in the US, which are expected to fall this month, are important factors that affect world markets.

But it is somewhat amusing to see institutional investors in India talk about US jobs data, given that there is no direct correlation between the Indian and US market.

Of course US jobs data affects sentiment on Wall Street which affects markets world over. No denying that.

On Friday last week, the stock market dropped sharply, with the Sensex losing 1,017 points to 81,183 levels, while the Nifty closed 293 points down to 24,852.

A Reuters report suggested that the Securities & Exchange Board of India could expectedly tighten derivatives rules to raise both entry barriers as well as increase trading costs, obviously to rein in speculation.

Last week was a tough one for Wall Street with the major indices registering losses and tech stocks taking a beating, thanks particularly to questions being raised about AI’s ability to deliver real business outcomes.

The Nasdaq composite index fell 6 percent for the week, its worst week since January 2022. The S&P 500 ended the week 4 percent lower, while the Dow Jones Industrial Average was down 3 percent.

Forex Reserves
India's foreign exchange reserves rose for a third straight week to a record high of $684 billion as of Aug. 30, data from the Reserve Bank of India showed on Friday.

The reserves rose by $2.3 billion in the reporting week, after having risen by a total of $11.6 billion in the prior two weeks, Reuters reported.

The rupee continues to stay weak, presently at 83.94 on Friday.

Oil Price Down
OPEC has postponed a possible oil supply hike by two months.

This is in response to falling prices and an attempt to keep them higher by managing supply but that has not worked.

The move wasn’t enough to roll back steep losses in crude prices amid fears about fragile demand, Bloomberg reported, adding that key coalition members won’t now increase production by 180,000 barrels a day in October and November, according to a statement on OPEC’s website.

Oil showed little reaction to the news, with prices remaining near $73 a barrel in London over the weekend and slipped further overnight to a little over $71 a barrel.

A delay doesn’t change many factors in the market that are unfavourable to OPEC, a Julius Baer analyst told Bloomberg adding “Demand is partially stagnant. The oil market will likely head into surplus supplies next year.”

Rice Exporters Warn of Bumper Crop, Want Export Caps Removed
India’s basmati rice exporters want the Government to scrap a minimum export price of $950 per tonne.

Exporters can only sell at or above this price and not below.

The high export price cap has affected their ability to compete globally and is also causing a buildup of inventory, as there is a bumper rice crop anticipated.

Exporters are saying either the minimum price should be scrapped or it be brought down to $750, the South China Morning Post quoted the All India Rice Exporters Association official saying.

India is the world’s largest rice exporter and had banned exports of non-basmati rice last year (?) in an attempt to control prices in the domestic market.

Some 40% of global rice shipments originate in India.

The other problem is Pakistan, whose rice is similar to Indians but are being exported at $700 a tonne.

The AIREA official told SCMP that India could produce 9 million metric tons this year of basmati rice, compared with about 8-8.5 million tons last year, Jain said.

The interesting bit is that the rice crop is strong despite heatwaves and extended and heavy monsoons or rather, have worked in the crop’s favour, which is usually harvested between September, this month and October.

Rice is a water guzzling crop and does better with abundant water.

I reached out to Vijay Setia, former president of the All India Rice Exporters Association, and began by asking him why the industry was asking for a scrapping of the export caps.

INTERVIEW TRANSCRIPT

Vijay Setia: You see, government concern for the Indian masses was real, and they wanted there should not be any inflation in the rice, which is a common man's diet. So they were very right. And due to some you can say procurement policy and some policy reasons were there which was causing a difficulty for the government. Despite giving free rice to 80 crore people still in the market, prices were on the higher side. So they have to control that situation. And they very wisely, made certain, taken steps to control the Indian prices, where they have succeeded, very successfully they have controlled the inflation in Indian market. So that part is now over. That problem is over. Now we are facing a different problem, that our warehouses are full. Our rice millers are still holding last year's material, which they have to supply to the government. There is no space left with the government warehouses in many states. So when you are facing a problem of too much rice, plenty of rice, then you have to revisit your whole policy. You have to improve your policy so that you can give better price to your farmers. You can give your industry to work freely, and some more value addition can be done to the raw material and paddy. Now time has come. Government has to review its old policy, which is not required at this moment, if we continue with that policy that will cause more damage than any benefit to the country,

Govindraj Ethiraj: Right. So could you give us a sense on how it breaks up? For example, the government's floor is nine $50 but that's on premium basmati rice, and you're saying there's an oversupply in the domestic market. Is it the same types of rice that are overlapping? Or how does it work?

Vijay Setia: You see, India produces large number of good quality of rice, and basmati is given a special status. And it was always in OGL Open Journal, license like situation, without any government interference. It was allowed to export. last year, first time government came with this proposal that, because of in the name of basmati, people may not export non basmati. So they brought this 950 into operation. At that time, trade accepted it. Government first thought of an average export price of 1200 USD, which trade pleaded there are number of basmati varieties which cannot be exported. Finally, after committing 850 by the commerce minister of India, after one month again, they said, no, no, not 850 it should be 950 so trade accepted it and worked accordingly. But now, when you have a competitor in Pakistan, they are using your seeds like 1509,1121, and other varieties. They have stolen from India. They have taken away seeds from India. We could not protect them. Now they are growing those seeds and competing with Indian exporters in international market. They have very cleverly done one, one thing that when they saw Indian Government has fixed MEP of 950 they made the lower level at 700 so that means all varieties of 1509, pusa, which are at the lower end, because of they have a inherent problem and less head grain recovery more brokers. That's why their paddy sells at a lower price. But it is a farmer friendly, high yielding, short duration. So now Pakistan, if sending that material in the international market at 700 so Indian exporters cannot give better price to farmers in India for these varieties, it is only possible if aggressive exports are allowed, and it is only possible if we remove 950 which has become a barrier, Indian exporters cannot export varieties like 1509, and pusa one at the price range of 950 so when our crop size, which consists of 60% of these two varieties. That means large number of farmers are going to be affected if we d0 not change this policy, if we remove 950, the gap, the purchaser will become aggressive in the market. They have a clear scenario before them. We can export this material right now, they don't have that clarity. So if they cannot export at 950 then they think Indian market cannot absorb this much material. It is premium variety, but it will be selling like a lower price, and they don't want to lose money.

Govindraj Ethiraj: I'll come back to the domestic market. But could you give us a sense on how the market is looking from the import side? As in from the demand side internationally, this year

Vijay Setia: You see Indian basmati exports are growing, and which we can see for last 15 years. Every year we are improving, improving. If the prices we look for the last year, average export price was good, despite lot of difficulties from logistics sector, because of war and shipping lines, raising their freights too much, still, we are able to export higher quantity and realisation is better. That means industry is doing their job correctly. So government interference does not helping to improve anything that is now becoming a hindrance. So I think export demand will remain good, but they will definitely see where is the more profit then they will go to Pakistan, not to India. Delay will cause loss to Indian farmers and Indian industry, that is for sure

Govindraj Ethiraj: If I were to come back to price and production of it in India. So we've had a very strong monsoon, maybe more strong than what was expected. What's the impact on that going to be in terms of production overall, as you go ahead and look towards the end of the year?

Vijay Setia: Yeah, you see, till date, there is no insect pest attack on any rice variety I have not heard in the northern India. So that means we are heading towards a excellent crop. Rice is a basically a grass, and intermediate rains are very helpful to it. Only thing, if the monsoon continues for some more days, it can delay in harvesting. I think no other loss is coming to the rice. Maybe some people are to create the market scenario, say that too much rain will cause loss. I don't see only where we have seen floods, too much rain and floods only in that part, we lose the crop, but rest of the crop is always benefited. So I think this year we are going to have a bumper crop, and the climatic conditions are very suitable. Night temperature is good. It is not that warm. So that is a indicator we are going to get a very good head grain recovery of the rice. Also, it won't be too much broken this time as compared to last year. So I think availability for export rice will be too much. The Government of India, like wheat, they buy rice, which is meant for common man, for PDS, that is 100% procured by the government. No policy, no economics. Says one government should buy 100% any product. If I talk about wheat first, let me give him one minute on that first you buy wheat, and then after one year or two years, you are giving it to the rice miller. Sorry, flour Millers. How much quality deterioration, nobody is marrying that you see if someone is stealing the wheat and putting water on it, all insects, all fungus, effluent toxin will be coming, which will become cancerous, and that wheat flour, that means there is no proper checking. So government buying 100 percent and then giving to the floor Mills does not suits. It should be. Government should buy 40%-50% for food security. Rest should be entered by the private trade. And if there is inflation, then government can offload their material. Some imports can be allowed so that they can cool the market. And wheat definitely going to be a concern in the coming future, because of weather changing, and our wheat crop is not going much up. So coming back to rice, the non basmati rice, which is a common man's food, again, state governments had made a policy that rice millers will be buying on their behalf at MSP, but nobody is buying at MSP. Reason being, if farmers are bringing their material with a very high moisture, unclean material, okay, so what commission agents are doing? They take the MSP as a benchmark. You have a more moisture, so you will get two rupees less. So farmers are not bringing the right specifications of material in the Mandi, and they are getting lesser prices. Then the whole material is going to the rice Millers for custom milling, when the common man's rice is with the government. And how you can manage the inflation. So this is where government starts, Bharat rice sometime free distribution. So that does not work. If you look at 2020, 5 years back, our policy was the government will buy only the material in those areas where rice millers are not buying to support the farmers they used to buy at MSP. So of the total material, Paddy, 10-15% was for CMR. Now, of 100% Paddy is going for CMR has created a vicious circle. The rice is circulating into the system. It is going to the government warehouses, coming out again, reconditioned and going to the government like that. So government has got lot of millers. But why you make a policy which gives this type of loopholes and leverages? Lastly, I will say the current policies are helping only those who have aggregators outside India are their offices outside India, they are averaging and exporting, whether it is non basmati or basmati and 20% duty is 100% wrong conceived idea. It should have been like $100 or $50 anything government feels fit. So nobody can do under-invoicing or over-invoicing, that's all. So my submission is that government needs to see it carefully, because in 2009-10, the government in Thailand just failed, and their Prime Minister has to resign because farmers expectation went up like anything because of too much inflation in 2008-9, and they procured entire of rice paddy everything they don't have that warehousing and quality deteriorated, some cheating on, some wrong things happened, and it became a scam. And ultimately, Prime Minister has to resign for rice. This is the record. So our bureaucrats, they are not realising what problems are associated with the rice and wheat. If you buy too much, the cost goes up for storage and everything and quality goes down. So this is my message.

Govindraj Ethiraj: Right. Vijay Ji, thank you so much for joining me.

Vijay Setia: Thank you.

Doing Business In Hong Kong
Hong Kong’s reputation as an Asian financial power centre took a fresh blow after the US Government warned of heightened risks for firms doing business in Hong Kong, including the possibility of running afoul of expanding U.S. sanctions, a move that comes amid a continued corporate exodus from the city, the WSJ has reported.

Doing business in Hong Kong, which is legally distinct from mainland China but increasingly in Beijing’s orbit, poses a number of reputational, financial, regulatory and other risks, the US Government said on Friday in a notice jointly issued by the U.S. Departments of State, Treasury, Commerce, Agriculture and Homeland Security.

Hottest Summer
The summer of 2024 was the hottest on record, according to the European Union’s climate monitor.

The EU’s Copernicus Climate Change Service (C3S) said on Friday that the global average temperature for the boreal summer, which refers to the Northern Hemisphere’s June through August period, was the highest on record.

The summer months were found to be 0.69 degrees Celsius above the 1991-2020 average for the June-August period.

It surpassed the previous record from June-August last year, which was 0.66 degrees Celsius above the average baseline, CNBC reported.

“This string of record temperatures is increasing the likelihood of 2024 being the hottest year on record,”.

High temperatures affected food prices and production in India apart from impacting productivity.

The auto industry blamed high temperatures for customers not turning up at dealerships and thus for slower sales in the last few months.

There are many more areas of the economy that are impacted by high temperatures but perhaps not as well studied as they should be.

On the other hand, sales of air conditioners have done well apart from other cooling devices.