Domestic consumer inflation fell significantly towards the end of last year, though concerns remain that prices may head north again given the challenging macro environment. In this exclusive interview with N Janardhan Rao, Deputy Editor, The Global ANALYST, Indranil Pan, Chief Economist, Yes Bank, talks about what he makes of the current Consumer Price Index (CPI) trend, if it is sustainable, the recent uptick in credit-offtake, the challenges that lie ahead for the economy, and if there would be a change in the central bank's stance if prices do maintain their recent downward trajectory.

Edited excerpts >>>

Retail inflation dipped below 6% in November. Where do you see consumer prices heading in 2023?

The drop in headline retail inflation is heartening, especially as it is the first print in 11 months that has come below the upper tolerance level of inflation. The other heartening factor is that this print was lower than the market consensus, thus probably opening the door for the market to revise and lower its inflation trajectory going forward. This also ticks off the first critical milestone that the policymakers were targeting to achieve-getting headline CPI inflation to within the flexible inflation targeting range of 4 +/- 2%.

Having said that, the 0.11% month over month (MoM) decline in the headline CPI inflation for November was led by a sharp contraction in food prices, which in turn was due to the seasonal drop in vegetable prices. November vegetable prices showed a contraction of 8.3% MoM, with 16 out of the 21 items within this group registering a contraction on a MoM basis. Tomato and potato prices declined by 29% MoM and 3.5% MoM, respectively. However, beyond the vegetable complex, cereal prices rose by 1.3% MoM, wheat prices were up by 2.9% MoM, and egg and milk prices increased by 6.1% and 0.8% MoM, respectively. Even the edible oil prices registered a rise in November after five consecutive months of dips (on account of customs duty changes by the government).

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According to a S&P survey, India's service sector grew at its fastest pace in six months in December 2022, led by rising new orders, while output grew faster than expected amid favorable market conditions. According to it, the growth of private sector output climbed to its highest level in nearly 11 years. The S&P Global India Services purchasing managers' index (PMI), a widely watched indicator, rose to 58.5 in December from 56.4 in the previous month. As per S&P data, it was the 17th consecutive month when the index hovered above the 50-mark, the longest stretch of growth since June 2013. A reading above 50 indicates an overall increase over the previous month, while a number less than 50 indicates an overall decrease. Meanwhile, India's manufacturing activity also rebounded, hitting a 26-month high in December. Led by strong expansion in new orders and production, the S&P Global India Manufacturing PMI rose sharply from 55.7 in November to 57.8 in December, the highest level seen since October 2020, which also marked the 18th straight month of expansion. Strong growth in both the service and manufacturing sectors pushed the composite index to 59.4 in December, the highest in 11 years or since January 2012, up from 56.7 in November. The S&P Global India Manufacturing PMI measures the performance of the manufacturing sector and is based on a survey of 500 manufacturing companies. The manufacturing PMI is based on five individual indexes with the following weights: new orders (30%), output (25%), employment (20%), suppliers' delivery times (15%), and stock of items purchased (10%), with the delivery times index inverted so that it moves in a comparable direction. A reading above 50 indicates an expansion of the manufacturing sector compared to the previous month; below 50 represents a contraction; and 50 indicates no change. PMI™ data are compiled by S&P Global for more than 40 economies worldwide and are considered one of the most closely watched economic indicators in the world.    Full Article ...

A soon-to-be-launched framework that aims to make variable capital companies a reality can be a potential game-changer, as it would give India's "GIFT City" the much-needed heft to effectively compete with rival international financial centers such as Singapore and Luxembourg, and emerge as the destination next for foreign investments.

India looks all set to move further towards challenging the long-held hegemony of Asian rivals such as Singapore and Hong Kong, courtesy of a new law that will make it possible to launch variable capital companies (VCCs), The VCC framework is a new corporate entity structure that has been well received by international investors, including venture capital fund managers and alternative investment funds (AIFs), and is said to have strengthened Singapore's "overall value proposition" as an asset management hub. If all goes as planned, the Gujarat International Finance Tec-City (GIFT City), India's answer to Singapore (and the likes of London, Hong Kong, and New York), will be taking yet another major step towards realizing its goal of becoming the next international financial center.

In case you missed it, a nine-member expert committee, led by MS Sahoo, has drafted a legal framework for allowing VCC structures in the International Financial Service Centers (IFSCs). The committee has proposed a legal framework within the International Financial Services Centers Authority (IFSCA) Act, 2019, which provides for one implementing agency, IFSCA. The agency registers VCCs as body corporates, as well as authorizes and supervises their operations. Currently, funds in India pooled through limited liability companies are governed under the Companies Act, 2013; the Limited Liability Partnership Act; or trusts governed under the Indian Trusts Act, 1882. However, such structures may not be ideal for fund management activities. AIFs, for example, operate in IFSCs under the trust structure. The proposed VCC framework will help do away with the limitations of these three structures, allowing companies to benefit from "significant cost economies and fewer cross-border administrative and compliance hurdles". Interestingly, the idea of flexibility in investments is rooted in the 2016 Investment Management    Full Article ...

While the trend toward EVs looks promising, commercial success in the absence of any government subsidies or incentives could be the true litmus test.

Electric vehicles (EVs) has been the buzzword in the Indian auto sector for the past few years now, especially post- pandemic. Encouraged by growing interest among households, several domestic companies, such as Tata Motors and Mahindra & Mahindra, besides foreign auto majors such as Tesla and BYD, have been outlining their ambitious plans. However, despite their many benefits and a slew of new launches, the EV market is yet to pick up in the country. That may not be surprising, as we all know that not all buzzes live up to their expectations. For example, we have seen that solar vehicles are yet to find commercial use, even after being in the development stage for decades. In this article, I explore whether EVs will prove to be yet another fad that will soon fade away or whether they signal a paradigm shift in the automobile industry. I have kept the article India-focused but globally-driven, to give the readers a holistic view of the industry. Let us begin the discussion with an important 'why'-why it is that India places a deep focus on developing the EV sector? What's in it for the consumers? The econo    Full Article ...

In terms of funding and IPOs, 2022 has seen many contrasts with 2021. Equity and debt funding markets have slowed by 20% to 11 lakh cr in 2022. For firms raising funds through equity, the fastest was the preferential equity route in 2022, and with the debt cycle reduced and the paucity of interest rate hikes, debt was also the preferred route used by corporates for raising funds. Even in private markets, fundraising has slowed drastically, and the valuations are down 50-70% from a year ago.

IPOs: 2022 proved to be a lacklustre year for India's primary market, after a strong show in 2021, owing to a number of adverse events such as geopolitical instability, global economic turmoil, etc. Fund mobilization has halved to 57,000 cr in 2022 compared to 2021 of which 35% came from LIC, which raised 20,000 cr.

The list of start-ups that deferred going public grew longer as the months passed in 2022. Some of these were Snapdeal, Ola, Droom, MobiKwik, PharmEasy, Oyo, BoAt, and Flipkart. In addition to the market volatility, start-ups also deferred their listing plans because of the poor performance of start-ups that went public in 2021, such as Zomato, Paytm, and Nykaa, due to high valuations and poor fundamentals.

Fintech (artificial intelligence), editech, gaming logistics, SAAS, logistics, and beauty were dominant sectors in raising funds. Technology - Playing a Dominant Role: In the aftermath of the pandemic, we have seen more than 50% of business models change and adapt to online/remote working. Hybrid environments and workplaces have now become accepted, and the flexibility of    Full Article ...

The banking sector appears to be in a sweet spot, thanks, to a great extent, to a sharp reduction in bad loans, which in turn have led to their vastly improved finances and robust balance sheets, enhanced risk-absorbing capacity, and an uptick in credit demand.

earlier. Subsequently, in June, it removed the word 'accommodative' from its stance and maintained its stance of "remaining focused on the withdrawal of accommodation." Overall, the banking system's liquidity remained in surplus. The average liquidity absorption during October-November FY23 was about 1.4 tn, which is lower than the average absorption of 2.2 tn during August-September FY23. System liquidity remained marginally in deficit during the last week of December 2022. With the reduction in currency in circulation following the holiday season, the higher inflow of forex as foreign portfolio investors (FPIs) returned to India, and higher government spending during the remaining months of FY23, the system liquidity is expected to turn back into a surplus. FPIs made net investments of $132,815.22 mn in December 2022. The government currently has about 2.95 tn in cash balances with RBI that will be used in spending, which will increase system liquidity. India's central bank is expected to maintain system liquidity at a level that is about 0.5-1% of net demand and time liabilities and would expect the banks to draw down on their SDF and VRRR balances to meet their growing credit demand. As far as policy stance is concerned, RBI is expected to change the stance to 'neutral' from the present "remain focused on the withdrawal of accommodation."

What's in store?
Although the MPC is likely to take cognizance of domestic growth and inflation dynamics while deciding on its future rate actions, it    Full Article ...

The threat of a recession looks more real now as major economies, notably US, China, India and EU, sputter amidst a challenging macro environment.

The major economies are heading into a new slump in production, investment, and income in 2023. International agencies such as the International Monetary Fund (IMF), World Bank, and the Organisation for Economic Co-operation and Development (OECD), as well as private forecasters, all agree that global growth will slow significantly this year. The IMF, for example, reckons that global real gross domestic product (GDP) growth in 2023 will be just 2.7% after increasing by 6% in 2021 and 3.2% in 2022. The World Bank is even more pessimistic, with a forecast of 2.3% for 2023. In fact, it even warns that in case there is any "financial-market stress," global GDP growth would crash to 0.5% in 2023-or a 0.4% contraction in per-capita terms that would meet the technical definition of a global recession. The OECD forecasters project an even lower growth rate at a mere 2.2%, while expecting global inflation to average 6.6%. According to the Paris-headquartered organization, "the global economy is facing significant challenges. Growth has lost momentum, high inflation has broadened out across countries and products and is proving persistent. Risks are skewed to the downside."    Full Article ...

Apple is expected to move the production of some of its displays in-house to get control of its supply channel and reduce related risk.

Industries tend to swing between the two extremes of outsourcing and vertical integra- tion. When a firm is vertically integrated, almost everything is built in-house. Once the pendulum calms down, businesses generally wind up somewhere in the middle. Apple has been trending toward full vertical integration ever since it moved its internally designed M1 processor in-house, which, while built by third parties, is designed inside of Apple.

Both outsourcing and vertical integration have advantages and disadvantages. Changing market conditions and leadership (new leaders tend to prefer one method over the other) can often cause a firm to flip between the two strategies. Let's take a look at the advantages and disadvantages of outsourcing and vertical integration, and why Apple is likely making this latest move to vertically integrate.

Outsourcing
The advantage of outsourcing is that it reduces fixed costs for plants and staffing significantly. You don't need to build and staff plants whose ownership costs are largely fixed regardless of market demand. In addition, when outsourcing, you can have a number of manufacturers build your product with some degree of failover if a disaster were to strike any one of them. And finally, the company you outsource to may be able to build the part more inexpensively and better than you could yourself due to their volume and protected intellectual property. This last point means that any intellectual property challenges are typically assured by the supplier    Full Article ...

The demise of FTX, the once flourishing crypto exchange, raises a question mark over the future of crypto, as an uneasy calm grips the otherwise booming crypto markets.

In a span of 12 months between November 2021 and November 2022, the value of bitcoin dropped from $68,000 to $16,000. Given that the price of bitcoin is generally seen as an indicator of the broader crypto market, this dramatic decline of over 75% has left the crypto market very vulnerable. Inflation and interest rate hikes in US have enormously contributed to the decline in the crypto market. However, in November 2022, there was an unprecedented drop in the value of bitcoin and other associated cryptos in the aftermath of the collapse of FTX, one of the most popular digital currency exchanges based out of the Bahamas. The fall of FTX, valued at $32 bn, in January 2022 came as a surprise to crypto followers across the world. It was only in May 2022 that the currency exchange offered financial lifelines to many crypto firms that were trying to stay afloat amid a $2 tn crypto market crash. Interestingly, the fall of FTX is less of a reaction to the general decline in the crypto market and is more of a regulatory fallout, and it is closely tied to FTX's relationship with a crypto investing firm, Alameda Research.    Full Article ...

With inflation showing signs of easing and RBI expected to reverse or at least pause its rate hike spree, things may brighten for IPOs this year after a lacklustre 2022.

With 63 listings and 1.2 lakh cr in capital raised, 2021 was a banner year for primary market activity. The amount raised was the most ever in Indian history. However, things swiftly became worse in 2022, when only 0.6 lakh crore, or around half of 2021's worth, was raised by 40 listings. What changed was the macro environment, which brought about higher interest rates. As inflation increased, the Reserve Bank of India (RBI) raised interest rates, tightening the financial landscape and decreasing the appeal of risky assets. Although inflation has decreased from its peak in 2022, RBI has made it apparent that it is committed to maintaining current interest rates, which are anticipated to have an adverse effect on primary market activity.

Liquidity has been reduced in secondary markets and the economy due to the tightening, which in turn is expected to affect primary markets in the near term. Investor sentiment has decreased as a result of the subdued returns for 2022, which has decreased flows from institutions and retail customers alike and further impacted the primary markets.    Full Article ...

India's march towards a green future has quite a few hurdles.

Countries around the world are becoming more reliant on fossil fuels as a result of, first, the reopen- ing of their economies following the pandemic, and now, a year-long Russia-Ukraine war and the subsequent flooding of markets with what many refer to as "cheap Russian oil," which saw major energy consumers like India and China scoop up as much of the black gold as they could before the embargo was imposed. According to The Wall Street Journal, Europe increased its imports of Russian liquefied natural gas (LNG), which increased by 41% year-on-year in August 2022, forcing several member states, including Germany, which was previously regarded as a global frontrunner in energy transitions, to re-embrace so-called dirty fuels like coal as they struggled to quickly ramp up renewable capacity amid an approaching winter. The prolonged Russia-Ukraine war has prompted China to step on the gas and register a record import of Russian crude, LNG, and coal. As per estimates, China's oil imports from Russia in November 2022 increased by 17% on a year-on-year basis to 7.81 million metric tons (MMT), before its sea-borne imports plunged post-G-7 oil price cap. In August 2022, China's coal imports from Russia increased dramatically, reaching a 5-year high of 8.54 MMT. According to Chinese customs data, Chinese LNG imports from Russia in November 2022 doubled from a year earlier to 852,000 metric tons. Interestingly, Russia was also the third-leading petroleum product supplier to US, at 538,000 barrels per day (bpd). The import figure in May 2021 was the highest recorded from July 2020 to April 2022, and the total imports throughout the year 2021 exceeded 245 million barrels.    Full Article ...

US consumer inflation growth slows to 6.5% y-o-y in December, marking the sixth straight monthly drop since a mid-2022 peak.

US consumer price growth slowed for the sixth consecutive month in December, the lowest print since October 2021, data from the US Bureau of Labor Statistics showed. As per the official statistics, retail prices grew 6.5% y-o-y in December compared to 7.1% in November. On a month-on-month basis, prices fell by 0.1% in December, aided by lower energy prices, which fell by 4.5% compared to November. Gasoline prices fell by 9.4% month-on-month in December and were down 1.5% year-on-year. Consumer price index (CPI) had grown 0.1% in November. Consistently falling consumer inflation has prompted some economists to predict that the Fed may consider pausing or reducing the rate hike quantum. US President Joe Biden, while welcoming the latest inflation data, said, "We are clearly moving in the right direction." The Federal Reserve raised rates seven times during the previous year after it commenced raising rates in March. The last rate hike of 2022 was announced in December, when the Fed raised its key interest rate by haf a percentage point to a range of 4.25 to 4.50%, the highest level since 2007.    Full Article ...

Global economic growth to fall to 1.7% in 2023, warns a new World Bank study.

Millets, the once forgotten foodgrain, are slowly but surely making a comeback to the shelves of neighbor- hood kirana shops and supermar- kets in India, and elsewhere. And that is good news as a majority of nations grapple with the challenge of feeding their vast and growing population, especially the poor and the vulnerable. This is nudging governments to seek food security and promote sustainable farming. However, this is easier said than done given the challenges such as global warming. Extreme weather events such as excessive heat, unseasonal rains, droughts, etc., have become more frequent now. It is no surprise that the world is increasingly turning to millets.

In an effort to increase awareness and promote its adoption, the year 2023 has been designated as the "International Year of Millet." The move is also expected to encourage better crop rotations and better connectivity within food systems, thereby promoting millets as a key component of the average household's food basket. The Food and Agriculture Organization (FAO), a key UN body, is promoting awareness among relevant stakeholder groups and showing the significance of sustainable cultivation and consumption of millets. Actually, the idea to promote the use of millets among the world's population was spearheaded by Prime Minister Narendra Modi. Under his leadership and guidance, the Government of India sponsored the proposal for the International Year of Millets (IYM) 2023, which was accepted by the United Nations General Assembly (UNGA). The declaration has been instrumental in getting the Government of India to be at the forefront of celebrating the IYM. Modi has also shared his vision to make IYM 2023 a "people's movement" and position India as the "global hub for millets."    Full Article ...

It all happened within a week: Gautam Adani, founder of the Adani Group, who until recently was the richest Indian in the world, has now slipped to the 22nd spot in the Forbes billionaire list.

On January 24, Hindenburg Research, a US-based investment research firm with a focus on activist short-selling founded by Nathan Anderson in 2017, released a report accusing the Adani Group of "a brazen stock manipulation and accounting fraud scheme." Citing two years of research, including talks with former Adani senior executives and the analysis of thousands of documents, it stated that the key listed companies in the group had "substantial debt," and thus the group companies are on "precarious financial footing."

The report further stated that "the seven key listed companies of the Adani Group are 85% plus overvalued even if you ignore our investigation and take the companies' financials at face value." It is, perhaps, in support of this averment, the report furnished a table indicating a company-wise PE ratio, a price/sales ratio, and an EV/EBITDA ratio, along with the industry average and the implied downside thereof. They are all on the higher side vis-a-vis industry averages. For instance, the PE ratio of Adani Enterprises is shown at 508x as against the industry average of 12x, which would mean a downside of -97.68%, a price/sales ratio of 5.7x as against the industry average of 0.5x, which implies a downside of -91.33%, and an EV/EBITDA ratio of 66x as against the industry average of 8x, which means an implied downside of -88.16%.    Full Article ...