Re-record?
In this edition: Record broken, records set, correctional curve shows growth, and moti vaato as always
The Indian market witnessed another week of impressive performance, driven by foreign institutional investors (FIIs) buying, progress in the monsoon season, and positive expectations for strong first-quarter results. Small-cap stocks stood out as particularly promising. By the end of the week on July 7, the Sensex index, consisting of 30 major stocks, had increased by 0.86%, or 561.89 points, to reach a record high of 65,280.45. Similarly, the broader Nifty index rose by 0.74%, or 142.75 points, closing at 19,331.80. This marked the first time that the Sensex surpassed 65,000 points and the Nifty crossed 19,500 points. Throughout the week, the Sensex reached a new peak of 65,898.98, and the Nifty reached 19,523.60.
The Indian economy displayed signs of strength, with the manufacturing purchasing managers' index (PMI) expanding to 57.8. This growth indicated sustained demand and boosted confidence in the manufacturing sector's future. The provisional business numbers from banks, automakers, and real estate companies further enhanced investor confidence, while foreign institutional investors (FIIs) provided additional support to the domestic market. However, global investors faced challenges due to heightened trade tensions between the US and China and uncertainties arising from the hawkish stance of the US Federal Reserve, as reflected in the meeting minutes.
Market participants are eagerly awaiting domestic and US inflation data to gain insights into the sustainability of the market rally. Given the elevated market valuations, profit booking was observed at the upper end of the rally. The BSE large-cap, mid-cap, and small-cap indices experienced gains of 0.7%, 0.8%, and 1.6%, respectively.
In terms of sectors, the BSE oil & gas index rose by 4.6%, while the realty and auto indices increased by 2% each, and the FMCG index added 1.5%.
After significant gains in recent weeks, the market showed signs of fatigue and ended the week on a downward trend. Anticipations of potential rate action by the US Federal Reserve in their upcoming meeting contributed to a slump in overseas markets.
During the week, FIIs purchased equities worth Rs 20,361.75 crore, while domestic institutional investors (DIIs) sold equities worth Rs 1,564.60 crore. In the month of June, FIIs bought equities worth Rs 27,250.01 crore, while DIIs purchased equities worth Rs 4,458.23 crore.
International Markets
On Friday, the major Wall Street indices concluded the day with losses after a volatile session as investors absorbed a U.S. jobs report indicating weaker-than-anticipated growth. Market participants also awaited upcoming economic data and corporate earnings in the coming weeks.
The U.S. government's data revealed that the country added the fewest jobs in 2 1/2 years during June. However, strong wage growth suggested that labour market conditions remained tight. Initially, the benchmark S&P 500 showed a strong upward trend for most of the afternoon, but towards the end of the session, stocks experienced a sell-off.
Following a sell-off triggered by a surge in private payrolls, which raised concerns about an aggressive interest rate hike by the Federal Reserve, a report showed that non-farm payrolls increased by 209,000 jobs in the previous month.
On Friday, the Dow Jones Industrial Average declined by 0.55%, or 187.38 points, to reach 33,734.88. Similarly, the S&P 500 lost 0.29%, or 12.64 points, closing at 4,398.95, and the Nasdaq Composite dropped 0.13%, or 18.33 points, ending at 13,660.72.
Defensive sectors within the S&P 500 experienced the most significant declines, with consumer staples falling by 1.3%. However, energy stocks gained 2.1%, and materials rose by 0.9%. The small-cap Russell 2000 index concluded the day with a 1.2% increase.
Despite a strong performance in the first half of the year, major indexes recorded weekly losses. The S&P 500 declined by approximately 1.2%, the Dow slid by roughly 2%, and the Nasdaq dropped by 0.9%.
The Federal Reserve is still expected to raise rates at its upcoming meeting, following a pause in June, as job growth continues to outpace pre-pandemic levels.
Chicago Fed President Austin Goolsbee expressed agreement with fellow central bankers, stating that rates will likely need to rise a couple more times this year to address elevated inflation.
Market Movers
1. India's Foreign Exchange Reserves Rise To $595.1 Bn, Gold Reserves Decline
According to data released by the Reserve Bank of India (RBI), India's foreign exchange reserves saw a modest increase of USD 1.9 billion, reaching a total of USD 595.1 billion as of June 30. The RBI's Weekly Statistical Supplement indicated that foreign currency assets (FCAs) rose by USD 2.5 billion to USD 528 billion during the reporting period. FCAs include the impact of currency fluctuations, such as the appreciation or depreciation of non-US units like the euro, pound, and yen, held in the foreign exchange reserves.
On the other hand, India's gold reserves declined by USD 472 million to USD 43.8 billion, as reported by the RBI. This decrease in gold reserves reflects a strategic adjustment by the central bank in managing its overall foreign exchange holdings.
Simultaneously, the country's reserve position with the International Monetary Fund (IMF) decreased by USD 118 million to USD 5 billion during the same week, indicating an adjustment in India's financial position with the IMF.
It's important to note that India's foreign exchange reserves reached a record high of USD 645 billion in October 2021. However, the reserves have gradually declined since then as the central bank has utilized them to support and stabilize the Indian rupee in response to global economic developments.
2. Bank Lending To NBFCs Rises To 41%
According to data from the Reserve Bank of India (RBI), bank lending to non-banking finance companies (NBFCs) has been steadily increasing. As of March 2023, bank lending accounted for 41.2% of NBFCs' total borrowings, up from 39.6% in March 2022 and 37.6% in the previous year. This trend is attributed to the challenges faced by smaller NBFCs in accessing funds from money markets, as they struggle to secure bond issuances due to lower credit ratings.
On the other hand, market borrowing by NBFCs has declined, representing 38.8% of total borrowings as of March 2023. This is a decrease from 41.0% in March 2022 and 43.8% in the previous year. The data indicates a shift in borrowing patterns, with NBFCs relying more on bank loans rather than market borrowings.
Smaller NBFCs, facing limitations in issuing bonds, prefer to secure funds from cheaper sources, such as commercial banks. These banks have a better understanding of local conditions and markets, making them a preferred funding option for smaller NBFCs. Stronger NBFCs have more flexibility in choosing between the bond market and bank loans to raise funds at lower costs.
The reduced willingness of mutual funds to lend to NBFCs has also contributed to the increased reliance on bank lending. Mutual funds now concentrate their exposure to higher-rated firms, limiting credit supply to NBFCs. Additionally, the attractiveness of external commercial borrowing (ECB) as a source of credit for NBFCs has diminished due to taxation and higher hedging costs.
During the COVID-19 pandemic, smaller NBFCs faced even greater challenges in raising funds due to the perception of higher risk associated with their operations. Experts highlight the need for a thriving secondary market for bonds and commercial papers to strengthen the Indian debt market. Introducing a refinancing mechanism for NBFCs, similar to the NHB refinance for housing finance, could also help reduce their reliance on bank lending.
There has been a notable shift in the funding pattern for NBFCs in recent years. They are now reducing their dependence on short-term borrowings and placing greater emphasis on managing asset-liability mismatches and maintaining liquidity coverage ratios, as mandated by the RBI. While banks continue to play a significant role in lending to NBFCs, exploring alternative funding options will contribute to a more diversified and sustainable funding landscape.
3. SEBI Notifies Regulations For ESG Rating Providers
The Securities and Exchange Board of India (SEBI) has introduced regulations for Environmental, Social, and Governance (ESG) rating providers. These regulations were established in response to the growing interest from stakeholders, including investors and financial regulators, in addressing ESG-related issues.
Previously, ESG rating providers were not subject to any regulatory or supervisory norms. However, SEBI has amended its regulations concerning credit rating agencies to include a subchapter specifically for ESG rating providers.
The amendment empowers SEBI to establish guidelines and rules for the registration of ESG rating providers. This includes determining eligibility criteria, conditions for registration, code of conduct, transparency, governance, and measures to prevent conflicts of interest in the rating process.
Moreover, the regulations will facilitate the monitoring and review of ESG ratings, ensuring the required disclosure and applicability.
Research?
A Systematic Investment Plan (SIP) is an investment strategy offered by mutual funds that allows individuals to invest a fixed amount regularly in a specific mutual fund scheme. It is a disciplined approach to investing and helps individuals accumulate wealth over time.
Here's how a SIP typically works:
Fixed Amount: Investors need to decide on the amount they want to invest periodically. This can be as low as a few hundred units of currency.
Regular Intervals: Investors choose the frequency at which they want to invest, such as monthly, quarterly, or weekly. The chosen amount is deducted automatically from their bank account at these intervals.
Mutual Fund Investment: The invested amount is used to purchase units of a mutual fund scheme of their choice. Each investment adds to the existing portfolio.
Net Asset Value (NAV): The number of units allocated to the investor depends on the Net Asset Value of the mutual fund on the investment date. NAV represents the fund's per-unit value.
Benefits of a SIP:
Disciplined Investing: SIPs help individuals inculcate a habit of regular investing and overcome the temptation to time the market.
Rupee Cost Averaging: By investing a fixed amount at regular intervals, investors buy more units when prices are low and fewer units when prices are high. This strategy averages out the cost of investment over time.
Flexibility: Investors have the flexibility to start, stop, increase, or decrease the SIP amount based on their financial goals and requirements.
Power of Compounding: SIPs allow investors to benefit from the power of compounding, where the returns generated are reinvested and earn additional returns over time.
SIPs are popular among investors as they provide an accessible and convenient way to invest in mutual funds while managing risk through systematic investing. It is important to note that investments in mutual funds are subject to market risks, and past performance is not indicative of future results. Therefore, it is advisable to conduct thorough research and consult with a financial advisor before making any investment decisions.
Why SIPs?
Investing through a Systematic Investment Plan (SIP) offers several advantages that make it a popular choice for many investors. Here are some key reasons why you might consider investing using an SIP:
Disciplined Investing: SIPs instill discipline in your investment approach by automating the investment process. With a fixed amount being deducted regularly from your bank account, you are less likely to be influenced by short-term market fluctuations or emotions. This helps you stay invested for the long term, which is crucial for wealth creation.
Rupee Cost Averaging: SIPs employ a strategy called rupee cost averaging. Since you invest a fixed amount at regular intervals, you end up buying more units when prices are low and fewer units when prices are high. This strategy helps in averaging out the purchase cost over time. As a result, you are less exposed to the risk of making a lump-sum investment at the wrong time.
Flexibility: SIPs offer flexibility in terms of investment amounts and intervals. You can choose an investment amount that suits your financial goals and risk appetite. Additionally, you have the freedom to increase or decrease your SIP amount as per your financial situation. This flexibility allows you to align your investments with your changing circumstances.
Power of Compounding: SIPs harness the power of compounding. As you continue investing regularly and stay invested for the long term, the returns generated by your investments get reinvested. Over time, these reinvested returns also earn returns, leading to exponential growth in your investment portfolio. The longer you stay invested, the greater the compounding effect.
Diversification: SIPs provide an opportunity to diversify your investment portfolio. Mutual funds offer a wide range of schemes across various asset classes, such as equity, debt, and hybrid funds. By investing in different funds, you can spread your risk across multiple investments and potentially enhance your overall returns.
Accessibility: SIPs are accessible to a wide range of investors. You can start investing with a relatively small amount, making it easier for individuals with limited capital to participate in the financial markets. This accessibility allows you to begin your investment journey even with a modest starting point.
It is important to note that while SIPs have several benefits, investments in mutual funds carry inherent risks. The performance of mutual funds is subject to market fluctuations, and there is no guarantee of returns. Therefore, it is advisable to assess your financial goals, risk tolerance, and investment horizon before investing. Additionally, seeking guidance from a financial advisor can help you make informed decisions and construct a well-rounded investment portfolio.
Motabhai ni Moti Vaato
As the Sensex and Nifty, two key stock market indices in India, reached new record highs, foreign institutional investors (FIIs) invested around $2.7 billion in Indian stocks within just five trading days this week. Despite expectations of a 25 basis point interest rate hike by the US Federal Reserve during the FOMC meeting on July 25-26, FIIs continue to pour money into the Indian market. If this trend continues, the monthly FII inflows in July are projected to surpass the figures seen in May and June, which were $5.3 billion and $5.7 billion, respectively. This shift in FII flows, from negative in January and February to positive now, has been the primary driver of the strong market rally since the market lows in March. In June, the financial services sector received net inflows of Rs 19,229 crore ($2.3 billion), a 9% increase compared to May. The automobile and auto ancillary sector also attracted significant FII inflows, although lower than those seen in May. Despite the market reaching record highs, valuations have become expensive, with the Nifty one-year forward PE ratio standing at 18.7x, above the 10-year average of 17.4x (assuming 20% FY24 earnings growth), but still below the peak of 23x in October 2021. The global market is closely monitoring the US 10-year bond yields, which have surpassed the psychological level of 4%. This rise indicates a potential for more rate hikes by the US Federal Reserve, which could potentially lead to a cooling down in FII inflows and result in market consolidation or a correction.
Word Wise
Foreign Institutional Investors
FII stands for Foreign Institutional Investor. It is a term primarily used in the context of financial markets in India. An FII refers to an entity or organization that is based outside of India and is investing in the Indian financial market. FIIs are typically large institutional investors such as mutual funds, pension funds, insurance companies, and hedge funds.
FIIs play a significant role in the Indian stock market and other financial instruments. They are allowed to invest in securities such as stocks, government bonds, corporate bonds, and other permissible instruments. Their investments can have a substantial impact on the Indian economy and stock market, as their buying and selling activities can influence prices and market trends.
To invest in India as an FII, a registration process with the Securities and Exchange Board of India (SEBI), the regulatory body for securities markets in India, is required. FIIs have certain regulations and limits on their investment activities, including sectoral caps and ownership limits in specific companies.
It's important to note that the term "FII" may have variations or similar concepts in other countries with different names, such as Foreign Institutional Investor (FII) in India, Qualified Foreign Institutional Investor (QFII) in China, and Institutional Investor (II) in some other regions. The specific rules and regulations governing FIIs may differ between countries.
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Motabhai.