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Table of Contents
Consumer Price Inflation Declines to 4.83% in April
Retail inflation in India eased slightly to 4.83% in April 2024, primarily due to a decline in prices of certain kitchen items. However, food inflation remained elevated at 8.70%, marginally higher than the previous month. The Reserve Bank of India (RBI) continues to monitor inflation closely, with food price uncertainties posing a challenge to its target of maintaining inflation at 4%.
Key Points:
Retail Inflation: – Eased to 4.83% in April 2024, down from 4.85% in March. – Lower than the 4.7% recorded in April 2023.
Food Inflation: – Remained elevated at 8.70% in April, slightly higher than 8.52% in March. – Contributed significantly to overall retail inflation.
RBI’s Inflation Target: – Government has tasked the RBI to maintain inflation at 4%, with a margin of 2% on either side.
RBI’s Concerns: – Food price uncertainties continue to weigh on the inflation trajectory. – RBI factors in consumer inflation when setting its monetary policy.
India Secures Long-Term Access to Chabahar Port through Bilateral Agreement with Iran
India and Iran have signed a long-term contract for the operation of Chabahar Port, marking a significant milestone in bilateral relations. India will invest $120 million in the port and provide a $250 million credit line for infrastructure projects. The agreement enables India to operate the Shahid-Behesti terminal and procure equipment for the port. Chabahar Port plays a crucial role in regional connectivity, providing an alternative transit route to Central Asia and Afghanistan.
Key Points:
Investment and Lease Agreement: – India’s IPGL will invest $120 million in Chabahar Port. – A 10-year lease agreement has been signed between IPGL and Iran’s Port & Maritime Organisation.
Enhanced Trade: – India will procure equipment and machinery for Chabahar Port. – The lease agreement strengthens bilateral ties and facilitates increased trade.
Regional Connectivity: – Chabahar Port serves as a crucial point on the Arabian Sea, providing an alternative transit route to Central Asia and Afghanistan. – It enhances India’s strategic position and bolsters trade flows.
Humanitarian Aid: – India is committed to utilizing Chabahar Port for humanitarian aid shipments.
International North-South Transport Corridor (INSTC): – Chabahar Port plays a crucial role in the eastern route of the INSTC.
Fitch Warns of Weakening Underwriting Standards in Indian Banks Due to Surge in Consumer Lending
Indian banks’ consumer loan asset quality has remained stable, but rapid growth has introduced “untested risks” that could challenge underwriting standards and risk controls. The lack of transparency in retail underwriting data further complicates risk assessment. Despite strong loan growth, banks have relied on unsecured credit to expand margins, potentially increasing risk exposure. While the Reserve Bank of India has implemented measures to mitigate risks, their effectiveness over the long term remains uncertain.
Key Points:
Asset Quality: – Indian banks’ consumer loan asset quality has held up well. – Rapid loan growth has introduced “untested risks” that could challenge underwriting standards and risk controls.
Data Transparency: – Indian banks have lower transparency in retail underwriting data compared to other Asian banking systems. – This lack of transparency makes risk assessment more challenging.
Loan Growth: – Indian banks have reported strong loan growth, driven by consumer spending. – Retail loans have grown at an annual rate of 20% since 2020-21.
Unsecured Credit: – Banks have relied on unsecured credit to expand margins. – This could increase risk exposure.
Reserve Bank of India Measures: – The RBI has increased risk weights on certain loan categories to improve buffers against risk buildup. – It has also applied business restrictions to certain entities and proposed increased provisioning for project finance. – The effectiveness of these measures over the long term remains uncertain.
Loss Absorption Buffers: – Loss absorption buffers at state-run banks remain “moderate” against high concentration risks and renewed interest in sectors such as infrastructure and construction.
Risk Appetite: – Banks’ risk appetite through higher loan growth will remain a key consideration for their intrinsic creditworthiness.
India’s Imports from Free Trade Agreement Partners Surge 38% in 2019-24 Fiscal Years
India’s imports from countries with free trade agreements (FTAs) have surged by 38% in the past five fiscal years, while exports to these partners have grown by 14.48%. The UAE, South Korea, and Australia have been major contributors to this growth.
Key Points:
1. Growth in Imports and Exports with FTA Partners – India’s imports from FTA partners increased by 37.97% from USD 136.20 billion to USD 187.92 billion from FY2019 to FY2024. – Exports to FTA partners rose by 14.48% from USD 107.20 billion to USD 122.72 billion during the same period.
2. Impact on Trade with Specific Countries – Exports to the UAE increased by 18.25% to USD 35.63 billion, while imports surged by 61.21% to USD 48.02 billion. – Exports to Australia more than doubled to USD 7.94 billion, and imports grew by 23.06% to USD 16.16 billion. – Exports to ASEAN increased by 10% to USD 41.21 billion, and imports jumped by 34.3% to USD 79.67 billion. – Exports to South Korea rose by 36.38% to USD 6.42 billion, and imports increased by 26.12% to USD 21.14 billion. – Exports to Japan showed a modest increase of 6.06%, while imports rose by 38.56%.
3. India’s Global Trade Position – India ranks 17th globally in exports, with a 1.8% share in world trade. – India ranks 8th in imports, holding a 2.8% share in global trade.
4. Decline in Overall Exports and Imports – India’s merchandise exports fell by 3.11% to USD 437.1 billion in 2023-24. – Imports declined by 5.4% to USD 677.2 billion in the last fiscal.
Government Mandates Anti-Fake Review Regulations for E-commerce Platforms
The Indian government plans to mandate quality norms for consumer reviews on e-commerce platforms due to the ineffectiveness of voluntary compliance. The move aims to curb fake reviews that mislead consumers and undermine trust in online retail.
Key Points:
- Voluntary Norms Failed: Voluntary quality norms issued a year ago have failed to curb fake reviews on e-commerce platforms.
- Consumer Protection: The government seeks to safeguard consumer interests by making quality norms mandatory.
- Meeting with Stakeholders: The Consumer Affairs Ministry will meet with e-commerce firms and consumer organizations on May 15 to discuss the proposed move.
- BIS Standard: The Bureau of Indian Standards (BIS) issued a standard in November 2022 prohibiting the publication of purchased or biased reviews.
- Consumer Reliance: Consumers rely heavily on online reviews due to the lack of physical product inspection.
- Booming Online Retail: India’s online retail sector is projected to grow significantly, making it crucial to address fake reviews.
Warburg Pincus Invests Rs 4,630 Crore in Shriram Housing Finance
Warburg Pincus, a US private equity firm, has acquired Shriram Housing Finance Ltd (SHFL) from its promoter Shriram Finance and minority shareholder Valiant Capital Management for Rs 4630 crore. This marks the largest M&A deal in the housing finance sector in India. The acquisition will allow Warburg Pincus to enter the growing affordable housing market in India.
Key Points:
Acquisition Details: – Warburg Pincus acquired 100% of SHFL from Shriram Finance (84.82% stake) and Valiant Capital Management (remaining stake). – The transaction includes equity and all convertible instruments of SHFL. – The deal is subject to regulatory approvals.
Warburg Pincus’ Strategy: – Warburg Pincus is excited about the affordable housing finance segment in India. – The firm has a history of partnering with exceptional teams in financial services.
SHFL’s Performance: – SHFL has a pan-India presence with 155 branches. – Assets under management of Rs 13,762 crore as of March 2024. – Net worth of Rs 1,924 crore. – Grown at a 56% CAGR over the last four years.
Management Continuity: – The entire management of SHFL, including managing director Ravi Subramanian, will join Warburg Pincus and continue to lead the business.
Shriram Finance’s Perspective: – The transaction aims to maximize value creation for both Shriram Finance and SHFL. – Both companies will independently fulfill their long-term visions.
Tata Electronics to be Led by N Chandrasekaran
Tata Sons Chairman N Chandrasekaran will assume the role of Chairman of Tata Electronics, signaling the importance of the semiconductor business to the conglomerate. The company has earmarked $14 billion for investments in this sector and has made key appointments to bolster its expertise. Tata Electronics aims to become a major player in India’s electronics manufacturing industry and is wooing top-tier global clients.
Key Points:
Chandrasekaran’s Role as Chairman: – Chandrasekaran will take over from Banmali Agrawala, who has held the post for several years. – His appointment highlights the significance of the semiconductor business to the Tata group.
Key Appointments: – Randhir Thakur, former Intel Foundry Services veteran, joined as CEO & MD in 2023. – Srinivas Satya, former country president of Applied Materials, joined as chief supply chain officer and president of components business.
Industry Impact: – Tata Electronics has hired top-level expatriates to enhance its expertise in semiconductor technology. – The company is wooing global clients and may surpass growth expectations.
Tata Electronics’ Growth Strategy: – The company is expanding its facilities in Hosur, Tamil Nadu, and Karnataka. – It is reportedly looking to acquire Pegatron’s facility in Tamil Nadu to increase capacity.
Market Dynamics: – The pandemic and geopolitical realignments have disrupted supply chains. – Indian players like Tata Electronics are seeking to capitalize on these changes by attracting brands looking to diversify away from China.
Fitch Warns of Weakening Bank Underwriting Standards Amidst Surge in Consumer Lending
Indian banks’ consumer loan asset quality has remained stable, but rapid loan growth poses risks to underwriting standards and risk controls. Fitch Ratings highlights the lack of transparency in retail underwriting data and the reliance on unsecured credit for margin expansion. While the Reserve Bank of India has implemented measures to mitigate risks, their effectiveness over the long term remains uncertain.
Key Points:
Asset Quality: – Indian banks’ consumer loan asset quality has held up well. – Strong loan growth has been driven by consumer spending and economic growth. – Retail loans have grown at an annual rate of 20% since 2020-21.
Risks: – Rapid loan growth may challenge underwriting standards and risk controls. – Unsecured credit expansion has been used to increase margins. – Lack of transparency in retail underwriting data limits risk assessment.
Regulatory Measures: – The Reserve Bank of India has increased risk-weights on certain loan categories. – Business restrictions have been applied to entities with supervisory concerns. – Provisioning on project finance is proposed to be increased.
Effectiveness of Measures: – The effectiveness of RBI measures over the long term is uncertain. – Loss absorption buffers remain moderate, especially at state-run banks. – High concentration risks and renewed interest in sectors like infrastructure and construction pose challenges.
Creditworthiness: – Banks’ risk appetite through higher loan growth will impact their intrinsic creditworthiness. – Improved financial performance may not fully offset potential risks.
Sebi Mandates Certification for Investment Teams of AIF Managers
The Securities and Exchange Board of India (Sebi) has amended rules to mandate that at least one key personnel within an investment team of an Alternative Investment Fund (AIF) manager must obtain certification from the National Institute of Securities Market (NISM). This move aims to enhance competency and professionalism in the AIF sector.
Key Points:
- Mandatory Certification: At least one key personnel in the investment team of an AIF manager must obtain NISM Series-XIX-C certification.
- Objective: To boost competency and professionalism in the AIF space.
- Effective Date: The new rules are applicable from May 10, 2023.
- Rationale: To ensure higher proficiency in managing AIFs.
- Ease of Doing Business: Sebi has also allowed certain changes in the private placement memorandum of AIFs to be submitted directly to the regulator, reducing the need for merchant bankers.
- Cost Rationalization: The move aims to rationalize compliance costs for alternative investment funds.
Exim Bank Plans to Raise ₹63,000 Crore through Domestic and International Borrowing
Exim Bank of India plans to borrow ₹63,000 crore to support credit growth and repay foreign currency borrowings. The bank has a robust capital position and is not seeking government capital infusion. With the adoption of Basel III guidelines, the bank expects to release capital and increase its borrowing capacity. Exim Bank reported strong financial performance in FY24, with a 62% increase in net profit and a 17.2% growth in loan portfolio. The bank plans to expand its operations by opening new offices and exploring new business opportunities.
Key Points:
Borrowing Plans: – Exim Bank plans to borrow ₹63,000 crore to support credit growth and repay foreign currency borrowings.
Capital Position: – The bank has a robust CRAR of 21.18% and is not seeking government capital infusion.
Basel III Guidelines: – The adoption of Basel III guidelines will release capital and increase the bank’s borrowing capacity.
Financial Performance: – Exim Bank reported a 62% increase in net profit to ₹2,518 crore in FY24. – Loan portfolio grew 17.2% to ₹1,57,602 crore.
Expansion Plans: – The bank plans to open new offices in Madhya Pradesh and Nepal to cater to rising business opportunities.
Asset Quality: – Gross NPAs and net NPAs improved to 1.93% and 0.29% of gross and net advances, respectively.
Guarantee Extension: – Exim Bank is exploring the possibility of extending guarantees to commercial banks to support working capital for exporter clients.
KVB’s Net Profit Surges 45% in FY24 Driven by Revenue Growth and Reduced Provisions
Karur Vysya Bank (KVB) has reported a strong financial performance for the March 2024 quarter and FY24, with a 45% increase in net profit to ₹1,605 crore. The bank maintained its asset quality, with gross NPA declining to 1.4% and net NPA remaining below 1%. KVB has recommended a dividend of ₹2 per equity share for the year ended March 31, 2024.
Key Points
Net Profit – Net profit increased by 45% to ₹1,605 crore for FY24. – Net profit grew by 35% to ₹456 crore in the March 2024 quarter.
Operating Profit – Operating profit grew by 14% to ₹2,829 crore in FY24. – Operating profit increased by 17% to ₹868 crore in the March 2024 quarter.
Net Interest Income – Net interest income grew by 14% to ₹3,809 crore in FY24. – Net interest income grew by 12% to ₹996 crore in the March 2024 quarter.
Other Income – Other income rose by 43% to ₹1,659 crore in FY24.
Provisions and Contingencies – Provisions and contingencies dropped to ₹729 crore in FY24.
Asset Quality – Gross NPA declined to 1.4% in the March 2024 quarter. – Net NPA remained below 1% at 0.40% in Q4 of FY24.
Total Business – Total business stood at ₹1,63,536 crore in Q4FY24, an increase of 16%.
Dividend – The bank has recommended a dividend of ₹2 per equity share for the year ended March 31, 2024.
AIS Enhancements for Taxpayers: New Features Unveiled
The Central Board of Direct Taxes (CBDT) has introduced a new feature in the Annual Information Statement (AIS) that allows taxpayers to provide feedback on transactions, confirm their accuracy, and respond to feedback in real-time. This move aims to enhance transparency and accuracy in the tax filing system by enabling taxpayers to verify and correct data before filing their income tax returns.
Key Points:
- New AIS Functionality: Taxpayers can now provide feedback on every transaction displayed in the AIS.
- Confirmation of Transactions: Taxpayers can confirm the accuracy of transactions listed in the AIS.
- Real-Time Feedback Response: Taxpayers can receive responses to their feedback in real-time.
- Data Verification and Correction: Taxpayers can verify and correct data in the AIS before filing their income tax returns.
- AIS Data Sources: AIS data is populated from various sources, including banks, mutual funds, and credit cards.
- Previous Issues: Taxpayers have previously reported incorrect or incomplete information in the AIS.
- Improved Compliance and Taxpayer Services: The new functionality enhances ease of compliance and improves taxpayer services.
Public Sector Banks to Prioritize Specific Industries in Business Strategies
Public sector banks (PSBs) in India are implementing a strategy to identify and focus on specific “champion sectors” to expand their presence and develop specialized capabilities. This initiative aims to complement the government’s efforts to enhance manufacturing capabilities and support economic growth.
Key Points:
Champion Sector Focus: – PSBs will identify one “champion sector” in their business plans to develop specific sector capabilities and expand their presence. – They will design tailored products for segment-specific lending and build internal capacities for stress testing and early warning signals.
Viksit Bharat Strategy: – This initiative is part of the Viksit Bharat (developed nation) strategy for PSBs, which includes onboarding sector-specific advisors and developing credit underwriting models.
Collaboration and Expertise: – Banks will collaborate to leverage expertise developed among them and focus on non-traditional sectors.
Enhanced Access and Service Excellence: – PSBs will be assessed on various parameters under the Enhanced Access and Service Excellence reform version 7.0. – Measures include increasing low-cost deposits, raising capital, resolving bad loans, improving cybersecurity, and undertaking financial inclusion outreach.
Credit to MSMEs: – PSBs will focus on improving credit to medium and small businesses (MSMEs) using analytics-driven scorecards, end-to-end automation, and improved risk management.
Customer Focus: – PSBs will prioritize both customer retention and acquiring new clients.
Profitability Concerns: – While PSBs have reported profits in the last quarter of 2023-24, concerns remain about the impact of declining credit growth on profit margins.
Stricter Regulations on Personal Loans and Project Financing: Potential Impact on Banks in FY25
Indian banks experienced a strong fiscal year 2024, with robust growth and low bad loans. However, analysts anticipate a more challenging fiscal year 2025 due to a potential slowdown in credit growth, regulatory changes, and pressure on net interest margins.
Key Points:
Credit Growth: – Credit growth is expected to moderate in fiscal 2025, with ICRA projecting a growth of 11.6% to 12.5%. – Regulatory changes in unsecured consumer loans and new provision norms on project finance and ECL are likely to impact credit growth.
Net Interest Margins: – NIMs are expected to remain under pressure due to higher deposit rates, affecting banking profit growth.
Credit Costs: – Credit costs may inch up, but are not expected to significantly impact return ratios.
ECL Provisions: – The RBI’s proposed ECL provision model will require banks to increase provisions by 20% to 40%. – The impact of ECL provisions is expected to be spread over five years.
Banker Guidance: – Banks are guiding credit growth to be in line with fiscal 2024 levels. – SBI expects credit growth of 14% to 16% in fiscal 2025.
Sectoral Caution: – Banks may become cautious in certain sectors due to regulatory actions, but the impact on banking profits is not expected to be significant.
Project Finance Provisions: – The RBI’s draft circular tightening provisions on project finance may impact how banks solicit project finance business. – The final version of the norms is expected to be less onerous than the draft.
Government Initiatives to Support Exporters Facing Countervailing Duty Challenges
The Indian government is developing a verification system to assist exporters in countering anti-subsidy duties imposed by the US and EU on domestic products under the RODTEP scheme. The system aims to ensure that exporters have proper documentation and that the government is randomly verifying the incidence of duties to support claims made under the scheme.
Key Points:
Verification System: – The government is establishing a joint verification mechanism involving DGFT, DGTR, and DoR to randomly verify units and maintain records.
Purpose of Verification: – To ascertain whether the actual incidence of duties on units availing RODTEP benefits is not below the claimed reimbursement rate.
Countervailing Duties: – Imposed by importing countries when they determine that imports are subsidized and harm domestic industries. – WTO allows member countries to use these duties to level the playing field for domestic players.
US and EU Investigations: – US investigated paper file folders, common alloy aluminum sheet, and forged steel fluid end blocks. – EU investigated graphite electrode systems.
Indian Government’s Response: – Defended subsidy allegations against government programs and schemes.
RODTEP Scheme: – Implemented in January 2021 to refund un-refunded taxes and levies incurred in manufacturing and distributing exported products. – Implemented by CBIC in an end-to-end IT environment.
EPFO Automates Claim Settlement for Education, Marriage, and Housing Expenses
The Employees’ Provident Fund Organization (EPFO) has expanded the scope of its auto claim settlement facility to include housing, marriage, and education purposes. The claim limit has also been doubled to Rs. 1,00,000. This facility was initially introduced in April 2020 for advance claims for illness.
Key Points:
- Expansion of Auto Claim Settlement:
- Scope expanded to include housing, marriage, and education purposes.
- Increased Claim Limit:
- Limit doubled to Rs. 1,00,000 from Rs. 50,000.
- Introduction of Auto Claim Settlement:
- Introduced in April 2020 for advance claims for illness.
- Claim Settlement Statistics:
- EPFO settled around 45 million claims in 2023-24.
- Over 60% (28.4 million) of claims were advance claims.
Supreme Court Seeks Government Response on GST Imposition on Joint Development Agreements
The Supreme Court has issued a notice to the Union government regarding a petition challenging the Telangana High Court’s decision to impose GST on rights under Joint Development Agreements (JDAs) in the real estate sector. The petitioner argues that JDA rights are incidental to the sale of land, which is exempt from GST, and that the additional tax would make projects unviable. The matter will be heard on September 9th.
Key Points:
- GST on JDA Rights: Telangana High Court ruled that JDA rights are taxable under GST, while the petitioner argues they are exempt as incidental to land sales.
- Interim GST Applicability: GST will continue to be applicable on JDA rights until the Supreme Court’s decision.
- Constitutionality of GST on Land: Some argue that the Centre lacks the authority to levy GST on land sales, which is a state subject.
- Tax Cascading: The petitioner claims that additional GST on JDA rights would lead to tax cascading and make projects unviable.
- Hearing Date: The Supreme Court will hear the matter on September 9th.
Gold Reserves in India Surge by 40% Over Five Years
India’s gold reserves held domestically have witnessed a significant surge of 40% between March 2019 and March 2024, reaching 408 metric tonnes. The total gold reserves have also increased by 34% during the same period, standing at 822 metric tonnes as of March 2024. This increase has contributed to a rise in the share of gold in India’s total foreign exchange reserves.
Key Points:
- Domestic Gold Reserves: Surged by 40% to 408 metric tonnes between March 2019 and March 2024.
- Total Gold Reserves: Increased by 34% to 822 metric tonnes during the same period.
- Share of Gold in Foreign Exchange Reserves: Rose from 7.37% in September 2023 to 8.15% in March 2024.
- Import Cover: Increased to 11 months as of March 2024, reflecting reserve adequacy.
- Foreign Exchange Reserves: Reached $641 billion by March 2024, up from $578 billion in March 2023.
- Short-Term Debt to Reserves Ratio: Declined from 22% in September 2023 to 20.3% in December 2023.
- Volatile Capital Flows to Reserves Ratio: Decreased from 73% in September 2023 to 70.4% in December 2023.
- Foreign Exchange Reserves (Excluding Valuation Effects): Increased by $32.9 billion between April and December 2023.
- External Assets: Grew by $97.9 billion between December 2022 and December 2023.
- External Liabilities: Expanded by $95.1 billion during the same period.
