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Visteon Invests $10M in India's Camera Manufacturing!
Business, Equities, Market News, Markets - January 9, 2025

Bank Q3 Results reflect slower credit growth

Bank Q3 Results reflect slower credit growth

Overview
In the Indian banking space, both private and public sector banks have seen a sharp decline in credit growth in the past few months and this reduction is likely to get spilled in the financial year of 2025-26 as well. This slowdown trend is evident in the credit growth update from the Q3 results of most banks showcasing the same. Although banks have reflected increments in advances and deposits, the credit expansion and disbursement rate has taken a hit compared to previous growth rates over the past few quarters. There are many reasons for this credit growth rate erosion but the factor that stands out is RBI’s excessive crackdown on lending on unsecured loans. This is when RBI expressed a concern on bad loans thus increasing the capital requirement for personal loans and credit card loans. This has also prompted banks to improve their already high credit-to-deposit (CD) ratios. ICRA predicts that loan growth will fall to 9.7% -10.3% in the fiscal year ending March 2026. This reduction would be the result of banks lowering CD ratios and changing the implementation of adjustments in the liquidity coverage ratio framework, which would take effect in the next fiscal year.

Quarter 3 Results
Coming to the Q3 results for banks, earnings in the third quarter of FY25 will be modest, owing to weaker business growth, static margins, and asset quality stress. According to Nuvama Research, the third quarter of FY25 was difficult due to rising credit costs, slowing loan growth, a deposit shortage despite slowing loan growth, mild pressure on net interest margin (NIM), and decreased trading gains. Speaking of asset quality, micro-finance loans including unsecured loans continue to put pressure on banks’ balance sheets. While banks like HDFC, ICICI, and some state banks are less vulnerable to this factor but micro-finance Institutions (MFIs) lenders are set to see a sharp deterioration. Banks that have quite the exposure for these unsecured loans include Bandhan Bank, IndusInd Bank, and RBL Bank. IndusInd Bank reported a 0.75 percent dip in deposits and a 2.8% increase in advances, whereas YES Bank’s deposit growth was nearly unchanged sequentially and advances increased by 4.22%. Meanwhile, RBL Bank’s deposits fell by 1.11 percent, compared to a 3.3% fall, while Bandhan Bank’s deposits increased by 2.02%, despite a 1.06% loss in loans.

According to brokerage Motilal Oswal, systemic credit growth has fallen to 11.5% from a previous high of 16%, owing to a slowdown in unsecured retail and demand deceleration in certain other secured areas. While a few banks, like as IndusInd Bank and RBL Bank, have already reduced their growth forecasts, select large banks are also expected to publish sluggish full-year growth forecasts due to a high credit-deposit (CD) ratio and mounting asset quality worries. In Q3, HDFC Bank’s advances increased by 3% year on year to ₹25.42 lakh crore, while deposits increased by 16% to ₹25.63 lakh crore. According to preliminary data supplied by banks, only IDBI Bank and IndusInd Bank showed loan growth outpacing deposit growth during the quarter.

HDFC Case
Analysing HDFC Bank’s case, the gap between credit and deposits was glaring. Deposits increased five times faster than loans, by 15% year on year, compared to 3% loan growth in the third quarter. More importantly, the December quarter marked the first time since the bank acquired its parent in July 2023 that the bank’s aggregate deposits exceeded its total loan book.
Total deposits climbed by 15% year-on-year to Rs 25.63 lakh crore, with loan book at Rs 25.42 lakh crore. To put it in perspective, in the quarter ending December 2023, the gap between HDFC’s loans and deposits was a huge Rs 2.55 lakh crore, with deposits at Rs 22.14 lakh crore and loans at Rs 24.69 lakh crore. HDFC Bank sold Rs 21,600 crore of loans through securitization during the quarter, bringing the total amount sold to Rs 46,300 crore for the fiscal year, allowing the bank to reduce its C/D ratio from 110% in July 2023 to 87% in September. The lender’s deposit growth rate was 15.8% over the previous year and 2.5% quarterly.
Consequently, HDFC Bank Ltd. was the second largest contributor to the 350-point decline in the Nifty 50 index on Monday, January 6. The stock is adding approximately 40 points to the Nifty’s downward trend. The stock was the greatest contributor to the Nifty’s decline on Friday, with losses of more than 2.5%.

PSU Banks
Shares of state-owned banks fell on Monday (6th of January, 2025) after these banks reported modest deposit and credit growth data for the October-December quarter (Q3) of 2024-25 (FY25). The Nifty PSU Bank index fell 4%, with Union Bank of India emerging as the biggest loser, with its shares falling 7.5% to close at Rs 114.7, followed by a 5.7% drop in shares of Bank of Baroda (BoB) to Rs 228 and a 4.7% slide in shares of Bank of India to Rs 99.8 on the NSE. Meanwhile, the Pune-based Bank of Maharashtra reported a slight 1% increase in deposits, but advances increased by 5.13 percent sequentially. PNB’s deposits increased by 4.9% in the third quarter of FY25, while advances increased by 4.7%.

To summarise, according to central bank data, retail credit growth fell to 16.3% in the fortnight ending November 29, 2024, down from 18.7% in the same time in 2023, owing mostly to a drop in growth of personal loans and auto loans. Auto and personal loan growth has been cut in half, to 10% from 21% and 12% from 25% a year ago, according to central bank data. Credit card outstanding growth has also slowed to 18% in November 2024, down from 34% the previous year. Thus, to rescue this situation, RBI is expected to induce liquidity soon by way of further rate cuts which would allow the deposits and advances to grow in tandem with GDP of the nation.

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Strong Growth in India’s Auto Components Industry: A Positive Outlook for FY25

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Expansion of capex to tackle global issues and decline in economic growth
Business, Equities, Market News, Markets - January 9, 2025

Centre Eases Capex Loan Norms to Boost State Spending in FY25

Centre Eases Capex Loan Norms to Boost State Spending in FY25

Overview
The Center has loosened a number of regulations pertaining to the issuance of interest-free capital expenditure loans to state governments in order to guarantee that the entire Rs 1.5 lakh crore allocated for 2024–2025 is utilized throughout the year and to prevent a reduction in public capital expenditures.

The action is intended to reduce the probable shortfall between the actual budgetary capital expenditure and the Rs 11.1 lakh crore budgeted level. To put this in perspective, just about Rs. 5.13 lakh crore or about 12.3% or less than the previous year had been spent from capex budget by November, 2024. The government hopes to streamline the procedure for states and increase capital spending in the latter quarter of FY25 by transforming tied savings into untied loans.

To aid long-term asset creation and investments, capex loans which are provided by the government as interest-free advances for 50 years are intended. Of the entire amount allotted for FY25, Rs 95,000 crore is linked to particular reforms like infrastructure development, land reform, and industrial growth, while Rs 55,000 crore is currently untied and available to states for initiatives of their choosing. However, with less than Rs 1 lakh crore sanctioned so far this year, disbursements have delayed. In the first half of FY25, the Center approved Rs 70,000 crore and released Rs 40,000 crore, falling well short of the yearly target of Rs. 1.15 lakh crore.

Delays in disbursement of loans
Delays in states achieving reform-linked standards, which were released in August rather than February, have resulted in slower payments of the tied share of the capital expenditure loans. States’ capacity to enact the necessary reforms was further hampered by the fact that this postponement fell during both the general and state elections. States have shown the greatest interest in tourism projects out of the 12 conditional allocations under the linked component. Urban land reforms, car scrappage, and working women’s hostels are further areas of concentration. Rs 25,000 crore of the Rs 95,000 crore in tied loans are contingent on states attaining a minimum of 10% growth in capital expenditures. The remaining portion will be released depending on growth in April–September of FY25, with the other half being determined by performance in FY24. After certain states such as Andhra Predesh, Kerala, and Punjab failed to meet the criteria, in FY24, the centre’s allocation of Rs. 1.30 lakh crore was reduced to Rs. 1.05 lakh crore.

Amendments in norms
States that experienced severe natural disasters in 2024–2025—as confirmed by the home ministry panel—will get an additional allocation of up to 50% of the funds already allotted under the untied category, according the most recent change to the regulations. The impacted states would have to utilize this sum for projects aimed at preventing future disasters as well as for the rehabilitation of infrastructure, ideally in areas devastated by the disaster. Additionally, on a first-come, first-served basis, states that have used the first installment under the untied category and have used the second installment will receive an additional allocation of up to 100% of the original allocation to the Hill and North East States and 50% of the original allocation for the other states.

Compared to the earlier allocation of Rs 55,000 crore for FY25, these two adjustments will significantly boost the total flow of untied loans to states. Further, the Center has loosened a number of requirements under the loan’s “tied” component, including as the one pertaining to the states’ “own capex” accomplishment.

According to the first standards, the Center gave states Rs 25,000 crore as a capex performance incentive: 50% if they achieved over 10% on-year growth in FY24, and the remaining 50% if they achieved over 10% growth in the first half of FY25. According to the 15th Finance Commission’s decision, funds would be distributed across the states in proportion to their share of central taxes and charges. The Center also modified incentives for the implementation of the SNA SPARSH Model for Just-in-Time disbursement of money under nationally sponsored schemes, as well as criteria pertaining to infrastructure projects in both urban and rural areas. These would guarantee that states will make full use of loans designated for these uses.

Further, the transfer of funds under the scheme has been extremely rapid this year, particularly in the last two to three months. Since several states were unable to comply with the severe conditions imposed by the Center, the Center was able to disburse Rs 1,05,551 crore, or 70% of the expenditure of Rs 1.5 lakh crore, during the previous fiscal year. Between April and November of the current fiscal year, the Center’s capital expenditures fell by more than 12%.
It is said that government’s capex would fall short of the FY25 target of Rs. 11.11 lakh crore by Rs. 1-1.5 lakh crore.

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India’s $30 Billion Sulfur-Cutting Program: A Strategic Review

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Sprayking Ltd Announces Stock Split, Rs 50 Cr Rights
Business, Equities, Market News, Markets - January 8, 2025

India's Manufacturing Sector Hits 12-Month Low in December

India’s Manufacturing Sector Hits 12-Month Low in December

India’s manufacturing sector recorded a 12 month low growth in December due to slow down growth in factory orders and expansion of production. It is also due to increased competition and price pressures on the operations of the sectors.

India’s Purchasing Managers’ Index (PMI)
The HSBC PMI compiled by S&P Global states that in the month of December PMI tone down to 56.4 from 56.5 in the month of November. It indicated a muted improvement in operational conditions. Despite the fall in December, the average PMI for the year 2024 increased to 57.5 from its earlier average record of 56.8 in the year 2023. It implies that even after falling from 56.5 in the month of November, it remained above its average growth in the long-run of 54.1, indicating a strong rate of growth. In the second quarter of the fiscal year 2025 recorded a slow growth in the manufacturing sector. In the September quarter, it fell to 2.2 percent against 14.4 percent in the previous quarter of the same period and 7 percent in the June quarter.

In the September quarter, India’s GDP growth slowed down to 5.4 percent. In the first quarter of the fiscal year 2025, India’s GDP growth was around 6.7 percent compared to 8.2 percent in the same period of the previous year.

Despite the joint-slowest in a year which is equal to September growth rate, the latest expansion is certainly sharp. The survey’s qualitative data hints that growth was mainly hampered due to competition and price pressures. Also, the output levels increased at a substantial pace even in the situation of slowest growth in the year 2024. This was mainly due to favorable demand acting as the main determinant of production growth.

As per the data of the month of December, the sector observed the least extent of improvements in the year 2024 in the situation of slower rise in output, new orders and purchase stocks. The growth rates remain substantial and aided in giving support to expansion in purchase and employment levels. The survey also stated that cost pressures went mild due to fall in cost burdens, however inflation in prices charged on consumers remains historically high.

This survey is formulated on the basis of the responses collected from the questionnaires given to 400 firms in the manufacturing sector and 50 point mark threshold which separates expansion from contraction.

The Economist at HSBC Ines Lam states that the Indian manufacturing sector ended the strong year 2024 with signs of moderate cooling trend. The new orders observed the slowest rate of expansion in the year, indicating weaker growth in future production. Despite this, the new export orders observed a rise in growth at faster speed from the month of July. Although an increase in overall prices of input has tone down slightly, the cost pressures on Indian manufacturing firms is still high. In the month of December , the input costs kept on rising due to firms recording an increase in container, material and labour costs. While the selling price was high due to firms continuously raising selling prices at a faster rate for the last 11 years. This is the reason for customers facing hiking in prices higher than the range of rise in cost pressures.

Impact on employment levels and infrastructural output
In case of employment levels, the sector observed a rise in job creation level for the 10th month in a row. Also the rate of employment level is the most rapid in four months. It accounts to one out of the ten companies employing extra employees compared to less than 2 percent of the firms that are doing layoffs. It is quite significant that infrastructural output in India, which accounts for about two-fifths of industrial production, observed a surge to a four-month high in the month of November. As per the data released, the reason for this was due to a rise in six out of the eight core constituent sectors during the month.

Other aspects such as level of input inventories, purchasing growth and smaller lead times supported the monthly rise in growth. Sharp accumulation level was observed, but the weakest since December 2023.

Perspective of the Manufacturing firms
The outlook of manufacturing firms is optimistic in terms of rise in output levels. This optimism can be seen in advertisements, investment and expectation of favorable demand. However, this perspective is certainly affected by concerns such as inflation and competitive pressures.

While the manufacturing sector hit a slump to a 12-month low in December, service sector has significantly regained momentum in the last month after facing a mild moderation in the month of November. This is due to new orders and output levels rose to a four month high in service sector activity.

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India’s $30 Billion Sulfur-Cutting Program: A Strategic Review

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India Readies Rs 25,000 cr boost for its electronics components industry
Business, Equities, Market News, Markets - January 7, 2025

India Readies Rs 25,000 cr boost for its electronics components industry

India Readies Rs 25,000 cr boost for its electronics components industry

To stimulate domestic local manufacturing of electronic components in India, the Finance Ministry approved about Rs. 25,000 crore fund which is nearly $3 billion. Before implementation of the scheme in the month of April, it will probably gets its approval from Cabinet in this month. The scheme aims to produce around $50 to $60 billion worth of electronics components in the next five to six years of the tenure. It focused on an increase in demand for electronics components from $240 billion by 2030 which was $45.5 billion in the year 2023. As per the report of Confederation of Indian Industry, one of the key drivers is increased domestic production of mobile phones.

Decision about Scheme’s Amount
As per the discussions between the finance ministry of India and ministry of electronics and IT (MeitY), the expenditure plan for the scheme was originally around Rs. 30,000 to 40,000 crore. However, the finance ministry of India decided to lower the fund amount after evaluation of investments, demand and production from the industry. Another reason was the finance ministry does not want funds to remain underutilized like funds approved for production-linked schemes (PLI) for smartphones and IT hardware. Also the funds allocated for boosting the local electronics components industry in India can be revised in case of complete utilisation of the funds. Despite the approval of a lower amount, this shows that the progress of the component scheme will not be hampered due to fund constraints.

Distinct features of the Component scheme
Apart from the fund revision scheme on the basis of its utililisation, the incentives given to the companies will depend on the products offered by the company. In the PLI scheme regarding smartphones, four to six percent incentives were given to companies who accomplished the production threshold. The production threshold is the minimum requirement or the product benchmark to be achieved to be eligible for smartphone PLI scheme. On the other hand, incentives on the component scheme depend on the product and its manufacturing constraints and localisation achieved.

In the component scheme, more incentives are given to the products with a higher disability or manufacturing constraints as compared to the manufacturing of similar products in China and Vietnam. These challenges in production could occur due to higher production costs, challenges in sourcing material and other manufacturing related constraints. Also the amount of incentives is approved on the basis of how much the company has achieved localisation for the production process of the product. It refers to how much manufacturing of the product is done within the country rather than being dependent on imports. Higher localisation implemented in the production process leads to an increase in the amount of incentives given to the particular product.

The scheme takes into account an important point that big investments are required to be made for development of a component manufacturing ecosystem. It understands that manufacturing requires big investment due to components and subassemblies being capital intensive, unlike small investment in smartphones. For this reason, the scheme offers different incentive structures based on components and subassemblies. The scheme also focuses on reducing custom duties on some selected smartphone parts. The ministry believes that duties and incentives on components cannot be implemented at the same time as it leads to the existence of disability in manufacturing issues. For this purpose, the electric component industry of India has asked the finance ministry of India to evaluate and select duties on components in the next Budget Plan.

The government of India’s target is to promote value addition in manufacturing of electronics components by 35 to 40 percent in the scheme’s period and to gradually cover around 50% of the entire non-semiconductor production which is currently 15 to 18 percent. The production of components like camera module, printed circuit boards, lithium-ion cells, speakers, display-sub assembly, vibrator motor and mechanics, etc are expected to be included in the scheme. These electronic components together are required to make a mobile phone or a laptop and it constitutes to around 50 %. Also as per the report of CII, electronic components like components and sub-assemblies of batteries, camera modules, displays, mechanicals and printed circuit boards are a high priority requirement in India. As all these components account for 43 percent demand for components in 2022. Also their value is expected to increase by $51.6 billion by the year 2030. Also as per the June 2024 report of CII, these components have nominal production in India and are highly import dependent. India can barely afford this ongoing situation. The scheme focuses on reducing this pressure and making electronic component production self-sustainable in India.

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Bank Deposit Rates Unlikely to Decline Amid Strong Loan Demand

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Business, Equities, Market News, Markets - January 7, 2025

Automotive Leasing in India Likely to Reach 8% of Total Sales Within 5-8 Years

Automotive Leasing in India Likely to Reach 8% of Total Sales Within 5-8 Years

ORIX Corporation India Ltd, a mobility solution and financial service provider, anticipates that India’s automobile leasing market will experience 7 to 8 percent of the overall vehicle sales in the next 5 to 7 years. The company provides services such as self-drive rentals, leasing, and financial services. The Managing Director and CEO of ORIX Corporation, Vivek Wadhera states that the overall vehicles in the automobile leasing market will rise more than the current 2 percent in these 5 to 7 years. It is due to more young generation coming into the workforce. It indicates that car leasing is gaining popularity in India because of its convenience and cost-effectiveness facility. The leasing provides benefits such as lower monthly payments, no down payments, and gives the opportunity to change cars in a few years only. This is the reason that makes automotive leasing attractive for the younger generation coming into the workforce.

The company expects profits to be 30-35 percent higher in this current fiscal year as compared to the previous year and also considering good traction in its business operations. The profit of last year was around USD 12 million. While, the company is expecting to make a profit of 16 to 18 million in this current fiscal year.

Vivek Wadhera also states that compared to the western automobile and automobile leasing market, the Indian leasing market accounts for only 1 to 2 percent of the total number of automobile sales. According to the industry estimate, the passenger vehicle sales in India in the year 2024 were around 43 lakh units. While in western markets such as the US market and also the Japanese and Chinese market account for 30-40 percent.

ORIX corporation and its performance
ORIX India is a subsidiary of ORIX Corporation Japan. The parent company is a global leader with a network of over 38 countries and has 9 trillion yen worth of assets. In India, ORIX has two subsidiaries known as ORIX Auto Infrastructure Services Limited (OAIS) and ORIX Leasing and Financial Services India Limited (OLFS). ORIX corporation has collaboration with original equipment manufacturers (OEMs) such as Maruti Suzuki, Kia, Volkswagen, FCA, Honda, Skoda, Nissan, Tata Motors and Mahindra and Mahindra for subscriptions. The company has car leasing facilities in Mumbai, Bangalore, New Delhi, Hyderabad, Kolkata, Chennai, Pune, Jamshedpur, Ahmedabad, Gurgaon and Noida. He also states that many customers do not purchase vehicles, but Indians prefer to buy vehicles. However, it only accounts for 1 to 2 percent of total automobile sales via leasing or subscriptions. One of the growth drivers for the industry is to consider the type of younger generation entering the workforce. According to him, the younger generation entering the workforce now focuses more on rentals than ownership. They focus more on experience and travel. This type of mindset is observed in the real estate segment as well. In the eight-months of this fiscal year, the company was able to outperform its 12 months’ performance in the previous fiscal year. This performance was observed when RBI had not cut rates till now. It is a good sign indicating that the company will face good profits at the completion of this fiscal year.

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Bank Deposit Rates Unlikely to Decline Amid Strong Loan Demand

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India: Infrastructure Set to Outpace IT as the Growth Engine
Business, Equities, Market News, Markets - January 7, 2025

India’s Economy: Resilient Amid Global Uncertainties and Poised to Lead Emerging Markets in 2025

India’s Economy: Resilient Amid Global Uncertainties and Poised to Lead Emerging Markets in 2025

In recent years, despite economic and global insecurities and turbulence, India’s economy has consistently been standing its ground on resilience and development. In recent times, two reliable reports have been staged to bolster this connotation, one published by Goldman Sachs and the other by Morgan Stanley.

Goldman Sachs Report
A new Goldman Sachs report published on 10th December 2024, forecasts the reaffirmation of India’s economy to remain firm. This report comes despite of numerous uncertainties owing to India’s solid macroeconomic fundamentals and strategic reforms. This positive posture has been reflected by various financial institutions thus positioning India as a strong leader among the emerging markets in 2025. At the core of this stability, India has been able to achieve sound macroeconomic management. The Reserve Bank of India has managed fairly well in terms of controlling inflation while ensuring overall financial stability. Governor Shaktikanta Das, in this way, noted that India is, in his opinion, “well positioned” to cope with external shocks due to the country’s policies, decent levels of foreign exchange reserves, and external debt.
Economists at Goldman Sachs predicted that India’s GDP would increase by an average of 6.5% between 2025 and 2030. Their 6.3% projection for 2025 is 40 basis points lower than the consensus of analysts polled by Bloomberg. The slowing growth rate is due, in part, to diminishing public capital expenditure growth. According to budget predictions, the Indian federal government’s capex growth fell from a CAGR of 30% per year between 2021 and 2024 to mid-single digits in nominal terms in 2025.
Credit is slowing

Credit is also shrinking. Total private sector loan growth in India peaked in the first quarter of the 2024 calendar year and has slowed in the past two quarters. The slowdown was primarily caused by a decline in bank credit growth to roughly 12.8% as of October, down from more than 16% in the first quarter of this year. In particular, household credit growth in unsecured personal loans slowed after the Reserve Bank of India tightened retail loan standards in November 2023.
Inflation Factor

Headline inflation in India is predicted to average 4.2% year on year in 2025, with food inflation at 4.6%, significantly lower than our analysts’ prediction of 7%-plus for 2024, thanks to ample rainfall and robust summer crop sowing. Food supply shocks caused by weather-related interruptions remain the most significant risk to this prediction. So far, excessive and erratic food inflation, primarily driven by vegetable prices due to weather shocks, has prevented the RBI from relaxing monetary policy. Core inflation should be around the RBI’s objective of 4% year on year in 2025, with the likelihood of inflation falling if US tariffs force Chinese firms to reallocate products to regional markets. The RBI has managed fairly well in terms of controlling inflation while ensuring overall financial stability. Governor Shaktikanta Das, in this way, noted that India is, in his opinion, “well positioned” to cope with external shocks due country’s policies, decent levels of foreign exchange reserves, and external debt.

Market Outlook
A separate analysis from Goldman Sachs Research predicts that India’s equities would perform substantially in the medium future. In the short term, however, sluggish economic growth, high beginning values, and negative earnings-per-share revisions may keep markets rangebound. Goldman Sachs equity experts believe the benchmark NIFTY index will reach 27,000 by the end of 2025. They also predict MSCI India earnings to expand by 12% and 13% in 2024 and 2025, respectively, falling short of consensus expectations of 13% and 16%. The MSCI India index of companies is trading at a 23x forward P/E multiple, which is much higher than the 10-year average and higher than our strategists’ top-down fair value estimate of 21x, implying more de-rating risk.

Further, the report remains neutral on Indian stocks in the short term, but sees potential in local sectors such as automobiles, telcos, insurance, real estate, and e-commerce, which may have a better path to higher profitability.

Morgan Stanley Report
According to Morgan Stanley’s India Equity Strategy Playbook, India will be among the top emerging markets by 2025. As a result, the BSE Sensex is expected to reach 93,000 by December 2025, a growth of around 18%. The researchers deem India’s value multiple high because over the next four to five years India is expected to record profits growth at an average rate of 18-20% on a yearly basis coupled with macroeconomic stability and a large pool of domestic risk capital. A gradual increase in the level of protection against global market volatility is verified by the fall in the correlation between the returns on India’s equities and the world’s stock markets.

Market Sentiment
Factors that determine the sentiment such as Morgan Stanley’s in-house sentiment index portray a neutral to buy market, which coincides with the bullish perspective of the team. Domestic mutual fund sources remain robust, especially SIPs, although other sources not belonging in that category are slowing down. On the other hand, foreign equity portfolio inflow is favorable, while outflow in debt portfolio is unfavorable. Sensex earnings are predicted to expand at an annualized rate of 17% through FY27, with corporate profits as a percentage of GDP on the rise. Profitability measurements like return on equity (ROE) show a positive cycle. Corporate debt is expected to reach 58% of GDP by 2025, with a positive nominal growth outlook notwithstanding market expectations for low growth.

US- India Relations
The gap between real GDP growth and the 10-year bond yield points to a positive prognosis for stocks. Indicators such as the policy certainty index, which has declined from pre-election levels, and the favorable real policy rate gap with the United States also help equities performance. Short-term interest rate and yield curve trends suggest that equities returns may moderate in the next 24 months, while earnings growth in the high teens is predicted during the next year. Global investors are likely to find relative safety in India’s financial markets as a result of Donald Trump’s economic plans, especially any protectionist trade policies that may cause emerging market turbulence. However, investors and analysts believe that India’s strong economic growth, minimal exposure to the Chinese and US consumer markets, healthy local appetite for equities, and a central bank committed to currency stability will boost the country’s appeal in the face of global uncertainty.

Conclusion
Thus according to these reports, India’s share of the EM and global indices is increasing, and its performance relative to China is improving. Household savings are shifting towards shares and away from gold, indicating increased confidence in financial assets.

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Auto Sector Eyes 5% Growth in 2025

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Business, Equities, Market News, Markets - January 6, 2025

Auto Components Industry Maintains Capex Plans Amidst Growth Moderation

Auto Components Industry Maintains Capex Plans Amidst Growth Moderation

The Indian Auto component industry is projected to have high single digits growth in the financial year 2025 by the Rating Agency ICRA. To estimate this growth rate of the Indian Auto component industry, ICRA used a sample of 46 auto ancillaries with total annual revenue of over Rs 3,00,000 crore in the financial year 2024. It is supported by the 14 percent growth recorded in the industry in the financial year 2024. It is important to point out that more than half of the Indian auto component industry sales is done by the domestic original equipment manufacturers (OEM) in India. In the current quarters, the automotive sales are observed to be slowing down. This could adversely impact the demand for auto components from the domestic OEMs.

Not only does the demand for automotive components for the manufacturing of vehicles slow down but also the demand for components in the after-sales markets. After having a strong growth for like two to three years, it is forecasted to slow down by five percent to seven percent in the financial year 2025.

The Indian automotive component industry close to one-third of the revenues comes from the export of automotive components. The export segment is also expected to face slowdown in growth due to fall in growth in consumer markets. Despite this, supplies to new platforms will rise due to vendor diversification steps taken by the global OEM companies and rise in outsourcing. The new platform refers to companies which incorporate the latest technologies and promote innovations. The OEM supplying the latest technologies models will be able to align better with the changing dynamics in the automobile industry and will also be able to generate growth. While vendor diversification will help companies to not remain dependent on a single entity and can diverse risk and make a more resilient supply chain. Both outsourcing and vendor diversification is a good opportunity for Indian auto component companies to increase their growth and become competitive with the global world.

In the European Union region, automotive companies announced shutdown of plants and big layoffs. This could be an opportunity for Indian auto components manufacturers in metal casting and forgings. The Indian companies will have opportunities in the international replacement or after-sales market segment due to ageing of vehicles and sale of used vehicles in the global markets.

The ICRA reports that the Indian auto components players will have opportunities in electric vehicles (EV), vehicle premiumisation and localisation of auto components. The growth for the auto components players will be supported by the changes in the regulatory norms. Currently, supply chanin of Electric Vehicles is 30 percent to 40 percent localised. Chassis components are produced locally which need minimum technological progress. Also considerable localisation is observed in control units, battery management systems and traction motors over the period. The battery cells are still imported and it accounts for 35 percent to 40 percent of the vehicle cost. Although it seems like localisation is a key advantage for growth of domestic OEMs, low level of localization can also act as an advantage for them. For instance, technological advancement can occur for the parts used in internal combusion engine (ICE) vehicles as well as production of components for vehicles which use alternate fuels.

While considering the growth of the auto component industry, it is important to take its profitability into consideration. As per the reports of ICRA, the sector’s operating margins are anticipated to remain in the range of 11 percent to 11.5 percent in the financial year 2025. One of the reasons for this is double and for some routes triple container rates due to disruption in the Red Sea route in the year 2024 as compared to the previous year. India’s auto components are exported around two-third to North America and Europe and around one-third of auto components are imported from these regions only. The considerable increase in freight rates would adversely impact profit margins for upcoming few quarters. The margins in the medium term will get advantage from good operating leverage, increased in value or components in the vehicle. However, it will also remain vulnerable to any kind of sharp volatility in foreign exchange rates and prices of commodities.

Despite moderate growth, ICRA forecasts the auto component industry to continue with its capital expenditure plans (Capex). The plan for the financial year 2025 will be around 15,000-20,000 crore and for the financial year 2026, it will be around 20,000-25,000 crore. It is expected that mostly internal accruals will be used for operating income of around 7 to 8 percent in the medium term. While funding for larger projects like battery cells localisation is through debt initially. Aside from capex used for capacity building and coming regulatory changes, the incremental investment will be used for development of advanced technology, products and EV components. Also according to ICRA, the industry’s liquidity position will remain in a good position especially for Tier-1 Suppliers due to stable cash flows and earnings. Also the coverage metrics will remain good due to stable internal accruals and low incremental debt financing despite rise in the cost of borrowings.

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Liquidity Deficit in the Banking System

Liquidity Deficit in the Banking System

India’s banking system liquidity slipped into a deficit in December of 2024, making it the first shortfall since June of the same year even after easement of the CRR by RBI which infused Rs. 1.16 lakh crore. The banking system liquidity deficit reached Rs. 2.43 trillion as of 23rd December, 2024. This meant that banks did not have sufficient funds to lend and sustain day to day operations.

There are numerous reasons as to why despite RBI efforts, banking system liquidity has reduced significantly. One of the pressing reasons for this reaction would be the issue of advance tax payments, that is, businesses have made sizable amounts of tax payments which reduced the cash in circulation within the banking system. Another major factor is the RBI’s regular interventions in the foreign exchange market. Recently, the RBI sold U.S. dollars to stabilize the rupee which then led to the erosion of rupee liquidity in the near term with crossing new lows multiple times reaching Rs. 86.51 to a dollar this tuesday (31st, December, 2024). Furthermore, the factor that influenced banking system liquidity is the festive spending season which led to increased cash withdrawals by individuals, decreasing the deposits held with banks. This type of seasonal demand is typical but can put stress on liquidity during peak times. Another factor linked to liquidity crunch is the decline of currency in circulation in the economy, which increased to more than Rs. 500 billion in 2024 which further limited the available funds with banks.

The liquidity shortfall comes after many fluctuations in liquidity in the past one year. The RBI addressed this deficit by way of policy actions which included a 50 basis point cut in the CRR to 4% from 4.5% in December which injected around Rs. 1.16 lakh crore but this is not enough to offset the cash withdrawals and interventions. This CRR requirement came into implementation in two tranches of equal basis points, one from 14th December and 28th December.

Despites the liquidity shortfalls, RBI utilized variable repo rate (VRR) auctions to stabilize borrowing costs close to policy repo rate. During the month of December, average call rate has been around 6.55% which happens to be just 5 basis points above the repo rate. On the other hand, experts have stated managing call rates through VRR auctions is only a temporary solution in handling liquidity in the economy.

While commenting on the liquidity issue, Siddhartha Sanyal, chief economist at Bandhan Bank, stated that for the situation to improve, government spending should increase significantly in Q4. Further, the CRR requirement rate cut would also impact liquidity in a positive manner. In the near term it would be important to meticulously eye the trends in USD-INR and the near possibility of RBI intervention in the foreign exchange market which is possible in upcoming weeks/months.

Coming to the journey of rupee so far this year, rupee’s trajectory has been weakening from the past few months, with rupee slipping below record lows at numerous occasions. Furthermore, India’s foreign exchange reserves have depleted by almost USD 60 million by 20th December, 2024 which shows RBI continuous intervention in the foreign exchange market.

Additionally, to counter persistent liquidity crunch in the banking system, RBI has already hinted on further rate cuts in the first half of 2025. Market experts have stated that liquidity deficit can affect the credit flow which limits the impact of any further rate reductions. Another tool the RBI could employ to ease the liquidity is the Open Market Operations (OMO). RBI could do this by announcing the open market bond purchases which would further induce liquidity directly into the economy by way of government bond issuance. Looking ahead, market participants expect spending to expand by about ₹1 billion from January to March 2025. This increase in demand will be driven by other sources, inflation and other monetary factors are involved and thus the demand for funds may increase, whereby the liquidity of the system becomes tight again.

In conclusion, the deficit in the Indian banking system by December 2024 is a significant development, which means that sustainable measures are needed to ensure liquidity in the coming months, though RBI has already taken steps to address the issue, including reducing CRR and variable rate repo auctions. The idea is to stabilize the monetary environment by implementing innovative measures such as market bond purchases and further reductions in CRR necessary as the monetary system faces ongoing pressures from financial flows, currency circulation and foreign currency intervention, therefore to ensure access to funds appropriate, it will be critical to the successful delivery of monetary policy and overall financial health.

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UPI transactions rise 8% to 16.73 billion in December

UPI transactions rise 8% to 16.73 billion in December

Digital transactions in India observed an upward trend in the month of December. The data provided by National Payments Corporation of India (NPCI) states that the financial transactions carried through the Unified Payments Interface (UPI) registered 16.73 billion transactions in the month of December, 2024. It increased by 8 percent month-on-month as compared to the 15.48 billion transaction in the month of November, 2024. It recorded the highest volume for the digital transaction since it came to function in April, 2016. NPCI is a public sector company responsible for operating the retail payments and settlement systems in India. As per the data of NPCI, the growth for December, 2024 was 39 percent in terms of volume of transactions compared to the previous year of the same period. While in terms of value in transaction, it increased 28 percent against the value of transaction in the month of December, 2023.

The data of NPCI released on 1st January states that the value of the UPI transaction was Rs. 23.25 lakh crore in December as compared to Rs. 21.55 lakh crore value of the previous month’s UPI transaction. While the count of the average daily transaction in December surged to 540 million from 516 million in November. Also the overall volume of digital transactions increased by 46 percent which accounts for 172 billion transactions compared to 118 billion transactions in the year 2023. In terms of value of transactions, it rose by Rs. 247 trillion during the year 2024 as compared to Rs. 183 trillion in the year 2023, indicating an increase in volume by 46 percent. The increase in transactions is mainly due to the rise in person-to-merchant transactions or the buying of goods and services.

Even though the App-wise data for the month of December is yet to be available, PhonePe, owned by Walmart, is observed to be leading the market. This is based on the data available for the month of November where PhonePe contributes to 47.8% of the shares in UPI transactions. It is followed by Google Pay and Paytm. NPCI has extended the deadline by two years for UPI providers to fulfill the obligation of 30 percent market share. This extension of the deadline indicates that it is not probable for the shift in market concentration in the near future. The predetermined date for the new deadline is now 31st December, 2026. This is for the second time NPCI has extended the deadline regarding this subject. This provision by NPCI is based on the regulation in 2020. Its purpose is to prevent more than 30 percent share of any third-party app provider in the total UPI transaction volumes. The main reason for this is to prevent excessive control of a single entity as well as to mitigate concentration of risk. It also aims at giving relief to market leaders in UPI providers such as PhonePe and Google Pay. As both of them contribute for UPI volume transactions around 47.8 percent and 37.02 percent respectively in the month of November based on the report of NPCI. This action of NPCI to limit the large market share of a single entity led to growing concerns among UPI providers about limitations in their growth as well as growth of the digital transactions in India.

The Immediate Payment Service (IMPS) provides users with the facility to transfer funds in real-time between banks. As per the report of NPCI, IMPS registered 441 million transactions in the month of December and the value of transactions is Rs. 6.02 lakh crore. While the transaction through Aadhar-Enabled Payment System (AEPS) is around 93 million in December. As compared to previous month, the transaction activities remain flat for AEPS. On the other hand, Fastag recorded a transaction volume of 382 million in December which accounts for a surge of 6 percent as compared to the volume of 359 million and 345 million in November and October respectively. In terms of value of transaction, it increased by 9 percent which was around Rs. 6,642 crore in December against the value of Rs 6,070 crore and Rs 6,115 crore in November and October respectively.

NPCI made a formal statement in its press release on 31st December, 2024 about the removal of the user limit on Whatsapp Pay which was earlier limited to 100 million users. Now Whatsapp Pay can be facilitated to its entire users in India. Its aim is to bring Whatsapp payment in the mainstream of UPI provider ecosystem and make UPI ecosystem more inclusive and competitive in nature. At present, the total users of Whatsapp messaging service in India is over 500 million users. According to the report of NPCI, the fiscal year of 2024 observed a 37 percent surge in net profit which accounts for Rs. 1,134 crore.

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Credit Growth Expected to Slow as Provision Costs Rise

Credit Growth Expected to Slow as Provision Costs Rise

Recently, the credit rating agency ICRA, an affiliate of Moody’s Investor Services slashed credit growth rate outlook for the Indian banking sector. The newer revised outlook for credit growth predicts that the loan growth would witness a slight slowdown to 10.5% to 11% for the fiscal year ending March, 2025. The revision is a reduction from the previous forecast of 11.6% to 12.5%. Primarily, the cause behind this alteration includes a sharp decrease in the lending segment in particular sections such as unsecured retail borrowers and NBFCs. When it comes to NBFCs, the credit growth decelerated to 7.8% year-on-year when compared to 19% for the previous year. RBI in November, 2023, increased risk weights on bank credit to NBFCs, prompting these institutions to diversify the source of their funding. Therefore, as these specific segments carry higher yielding returns but at the same time carry even higher risks, banks have become increasingly cautious when it comes to their lending practices.

Lending or credit growth by Indian banks slowed for the fifth consecutive month in November, up 11.8% year-on-year from 16.5% in November 2023. Including the impact of the HDFC Bank merger, credit growth stood at 10.6% compared to around 21% for the previous year. This moderation in credit growth follows the actions of the Reserve Bank of India to curb excessive lending on unsecured loans. Credit growth had also slowed in the previous months (October, July, August and September). Despite this slowdown, banks continue to report double-digit growth, supported by high retail demand and urban infrastructure. Furthermore, banks are now focused on improving their already high credit-to-deposit (CD) ratio. ICRA has stated that the loan growth will further decrease to 9.7% to 10.3% in the fiscal year ending March, 2026. This reduction would be a result of trimming CD ratios by the banks and the alteration in the implementation of changes in the liquidity coverage ratio framework which would kick in next fiscal fiscal year.

Bank margins would take a hit with consistently higher interest rates and a gradual slowdown in credit growth, said Sachin Sachdev from ICRA. As the primary source of bank margins are through disbursing of personal loan and other unsecured loan products, a significant reduction in the volume of such loans would definitely impact overall profitability of the bank. Further if the interest rates continue to decline in the future, banks could suffer with stagnant profit figures as the range between the lending and borrowing rate would grow narrower.

ICRA further stated that bank margins would be impacted by rate cuts which accelerate yield transmission. On the other hand, banks’ return on asset (RoA) is expected to stay in good health lying in the range of 1.1% to 1.2% for FY2026 and 1.2% to 1.3% for FY2025 when compared with 1.3% for FY2024. Additionally, with slower credit growth, banks would witness enhancement in loss absorption capacity with bolstering growth needs. Thus, banks would lend less aggressively and improve their reverses and manage high risks associated with high risk lending segments.

Banks’ balance sheets would be further stretched by the impact of the implementation of expected credit loss (ECL) framework and increased provision for medium term project financing. The ECL framework would require banks to set aside provisions for bad loans way earlier than they currently do. This would significantly improve transparency and risk management but at the same time increases financial burden on banks for short-term. Additionally, banks would be required to set aside higher provisions for project finance, particularly in infrastructure and large-scale projects. As a result, these provisions put pressure on banks’ financial resources, affecting the overall profitability including bank margins.

To handle and offset these challenges in the banking space, Indian banks are turning to the bond market to raise funds. Sachdev further elaborated that due to difficulties in attracting deposits, banks are now shifting strategies for fundraising and are expected to issue bonds at an increasing rate in the near future. Sighting this, banks are expected to surpass their previous high and could touch Rs. 1.3 trillion for FY2025 when compared to Rs. 1.02 trillion for FY2024.

Coming to the retail space, with the increasing stress, the fresh slippages by banks are on the rise while recovering are expected to slow down. The gross fresh NPA generation by banks is expected to increase slightly to 1.6% in FY2025 from 1.5% in FY2024 which still remains way lower than previous years. Eyeing this situation, gross NPAs would rise and correlatively GNPA ratio would also rise in FY2026.

Lastly, ICRA emphasized that although NPA generation rate is set to pick up, credit costs would likely only rise slightly due to lower legacy net NPAs. To improve banks’ bottomline, with higher current provision coverage ratio (PCR), banks would have more room to lower incremental provisions. Coming to numbers, credit expenses account for upto 21% to 23% of the operating profit of the banking sector in FY2025 and 27% to 30% in FY2026

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