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Government Urges Mutual Funds to Embrace PSU Stocks: A Shift Towards Balanced Investing

Government Urges Mutual Funds to Embrace PSU Stocks: A Shift Towards Balanced Investing

 

India’s mutual fund sector has witnessed rapid expansion in the last ten years, establishing itself as a significant player in steering market dynamics. However, one segment that continues to be underrepresented in mutual fund portfolios is public sector undertakings (PSUs). In light of this, the Secretary of the Department of Investment and Public Asset Management (DIPAM) has appealed to mutual fund managers to take a serious look at including more PSU stocks in their investment strategies. This call isn’t merely a suggestion—it’s a strategic push. The government is signaling that PSUs are not just legacy institutions, but evolving businesses with strong balance sheets, reliable performance, and untapped value.

 

Why Mutual Funds Have Avoided PSUs

Historically, mutual funds have been cautious about PSUs. The perception has been that government ownership leads to bureaucratic decision-making, limited innovation, and political interference. As a result, fund managers often preferred private sector companies that were seen as more agile and profit-oriented. But that narrative is changing. Many PSUs have improved operational efficiency, restructured their business models, and shown impressive financial results. Yet, the stigma lingers, and mutual fund exposure to PSUs remains lower than historical averages.

 

Financial Strength and Dividend Reliability

One of the strongest arguments for including PSUs in mutual fund portfolios is their dividend performance. In the current financial year, public sector companies distributed a record ₹1.5 trillion in dividends, with the government receiving over ₹74,000 crore. This reflects the robust financial position of many of these firms, especially in sectors like energy, banking, and infrastructure.

For mutual funds that prioritize stable income generation and long-term capital preservation, this level of dividend consistency is a valuable asset. It can also help reduce the overall volatility of a portfolio, particularly during uncertain market conditions

 

Undervalued and Overlooked

Despite their strengths, PSU stocks are often undervalued compared to their private-sector peers. This presents a potential opportunity for mutual funds to enter at attractive valuations. Many PSUs operate in capital-intensive sectors such as oil & gas, mining, power, and defence all of which are critical to the Indian economy and have strong long-term prospects. These companies often have predictable revenue streams, government-backed contracts, and a dominant market share. In an investment environment increasingly focused on long-term value and fundamentals, these are features worth considering.

 

Aligning With Government Reforms

DIPAM’s push comes at a time when the government is actively pursuing strategic disinvestment. The aim is not just to raise capital, but to increase efficiency, improve corporate governance, and bring in more accountability. By expanding the investor base and enhancing market liquidity, mutual fund involvement can add credibility to this process. Greater institutional involvement also supports transparent price discovery during public offerings or stake sales. This is vital for ensuring that the disinvestment process is not only successful financially, but also seen as credible and fair.

 

Encouraging Private Sector Accountability

Interestingly, the DIPAM Secretary didn’t stop at PSUs. He also highlighted the need for private corporations to be more accountable to minority shareholders—especially regarding dividend payouts. This indicates a broader push toward corporate governance reform across both public and private sectors, reinforcing the idea that all investors deserve fair treatment.

 

Mutual Funds as Market Leaders

Mutual funds don’t just allocate capital—they set trends. When they invest in a sector or company, it often sends a message to retail investors and market analysts. A renewed interest in PSUs from large fund houses could lead to a broader re-evaluation of the sector, improving sentiment and boosting investor confidence. Moreover, PSUs can add balance to portfolios that may otherwise be overweight on high-growth or tech-focused companies. Their stability, combined with consistent income, can help mutual funds manage risk more effectively.

 

Time to Rethink the Bias

The request from DIPAM isn’t just about supporting government-run companies. It’s about recognizing their evolving role in a modern economy. Public Sector Undertakings are evolving to be more financially robust, increasingly competitive, and better responsive to market demands. By ignoring them, mutual funds might be missing out on sustainable long-term gains. With the economy shifting gears, and infrastructure, energy, and defense spending on the rise, many PSUs are poised to benefit directly. It may be the right time for fund managers to reassess their assumptions and give this segment the attention it deserves.

 

 

 

 

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IREDA Q2FY25: Hydro and Solar Loans Lead Growth as India Targets 500 GW RE

IREDA Q2FY25: Hydro and Solar Loans Lead Growth as India Targets 500 GW RE

About the stock
➡️IREDA is PSU NBFC engaged in the business of financing green energy projects. Its finances project such as solar, wind power, hydro power etc. GoI has conferred the Navratna status upon IREDA in April 2024. Loan portfolio well diversified across the 23 states and 4 UT in FY24. It contributing major role in fueling the India’s RE taget of 500 GW by 20230.

Loan book up double digit 36% YoY /8% half yearly
➡️As on 30 sep 2024, loan book stood at 64,564 Cr represent growth of 36% YoY while half-yearly growth was moderate at 8%. This growth led by loan given to state utilities (43% YoY) followed by hydro power at 37%, solar 19% and wind at 7%.
➡️Along with loan book disbursement and sanction grew 44% and 240% to stood at 4,461 Cr and 8,650 Cr respectively.

Asset quality improved – GNPA down 17 bps/ NNPA jump 5 bps
➡️During the half year FY25, gross asset quality has improved by 17 bps declined in GNPA stood at 21.9% (1,415 Cr) in Q2FY25. While NNPA jump 5 bps to 1.04% (666 Cr) despite the surge in provision coverage ratio.

Borrowing jump 10% H2FY25 – domestic rise while foreign declined
➡️During H2FY25 company’s borrowing increased by 10% to stood at 54,639 Cr. Dometic borrowing raised 13% to 45,691 Cr while foreign borrowings declined 4%.
➡️In domestic borrowing, bank loan weightage has declined to 49% in Q2FY25 vs 59% in Q2FY24. while money raised through bonds weightage rise to 51% in Q2FY25 vs 41% in Q2FY24. The rising chance of rate cuts will declined the borrowing cost for company as bank loan and bond both equal weight in borrowing.
➡️Within the foreign borrowing, un-hedged portion rise to 27% in Q2FY25 vs 22% in Q4FY24. While hedged portion has declined equally to increased in un-hedged. The surge in un-hedged portion increased the currency risk.

Valuation and key metrics
➡️During the quarter, Yield on loan jump 15 bps to 9.92% while Cost of borrowing decline by 5 bps to 7.8%. This result in surge in spread and NIMs by 20 bps and 17 bps to stood at 2.12% and 3.34% respectively. The cost of borrowinf can further decline in coming quarter as RBI ready to ease monetary policy. Capital Adequacy ratio stood at 20.24% which is above the guidance of RBI but decline by 68 bps YoY.

Q2FY25 Results updates
➡️Interest income increased by 37% YoY (6% QoQ) to 1,577 Cr while interest expense jumped 30% YoY (6% QoQ) to 1,030 Cr. This result in NII grew by 52% YoY (8% QoQ) to 547 Cr. The surge in NII led by Nims expansion and increased in new loan book.
➡️PPOP grew 36% YoY (11% QoQ) to 494 Cr due to rising Opex (411% YoY). While PAT surged by 36% YoY and moderate on QoQ basis at 1% to stood at 388 Cr. The Jump in provision off set with the reduction in tax expense makes PAT growth unchanged with Operating profit.

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India's Power Usage Rises 6% to 130.40 Billion Units in December

India’s Power Demand Set to Surge to 446 GW by 2030

India’s Power Demand Set to Surge to 446 GW by 2030

India’s power sector is at the brink of unprecedented growth as the country prepares for a significant increase in energy demand. According to the Central Electricity Authority (CEA), peak power demand is expected to reach 270 gigawatts (GW) in the next fiscal year, with a projection of soaring to 446 GW by 2030. CEA Chairperson Ghanshyam Prasad shared these insights during the “Brainstorming Session on Indian Power Sector Scenario by 2047.” The two-day event, hosted in collaboration with the Federation of Indian Chambers of Commerce and Industry (FICCI), focused on India’s evolving power needs and strategic measures to meet this surge.

Drivers of Rising Power Demand

India’s power demand is growing rapidly, driven by key factors such as industrialization, urbanization, and the increasing adoption of electric vehicles (EVs) and renewable energy sources. Over the next several years, the demand is expected to grow at a compound annual growth rate (CAGR) of 7-8%. Prasad emphasized that to meet this growing demand, robust capacity additions across various sectors of power generation will be crucial.

In line with the government’s focus on sustainability, much of this added capacity will come from renewable sources. The current plan includes the addition of 40 GW from a mix of thermal, solar, wind, hydro, and nuclear power. Of this, renewable energy, particularly from solar and wind, will make up a substantial portion, aligning with India’s broader efforts to reduce carbon emissions and transition to cleaner energy.

Capacity Expansion and Investment Requirements

To meet the expected demand, the Indian government is set to invest between ₹5-6 lakh crore over the coming years. This investment will focus not only on boosting power generation but also on expanding the country’s transmission capacity, ensuring that new energy resources are seamlessly integrated into the national grid.

The plan includes a 100 GW transmission expansion, which is key to supporting the anticipated growth in renewable energy. This expansion will enable the smoother integration of solar and wind power into the grid, which is crucial as India targets the installation of 500 GW of non-fossil fuel energy capacity by 2030. This ambitious goal reflects the country’s commitment to energy security while reducing its reliance on fossil fuels.

Strategic Distribution Planning for the Future

Prasad also highlighted the need for efficient distribution planning to meet the growing energy demand across both urban and rural areas. The CEA has submitted a 10-year distribution plan to the Ministry of Power, developed in collaboration with various state governments. This plan aims to address several pressing challenges in the distribution network, including power theft, distribution losses, and aging infrastructure.

Improving distribution efficiency is essential for ensuring that India’s energy system remains resilient. By focusing on these areas, the government hopes to reduce energy losses, ensure equitable distribution, and provide reliable power across the country. This will also help lower operational costs in the long run, enhancing the sustainability of the power sector.

Renewable Energy’s Role in Meeting Future Demands

India’s shift towards renewable energy is a central component of its strategy to meet future energy demands. The government is aiming for 500 GW of non-fossil fuel energy capacity by 2030, with solar and wind energy forming a significant part of this. The CEA’s projections reflect the increasing importance of renewables in the energy mix, not only for reducing carbon emissions but also for ensuring that energy demand is met sustainably.

The upcoming capacity additions will play a crucial role in achieving this target. Prasad stressed that the government is committed to ensuring that the growing power demands, both in urban and rural India, are met efficiently and sustainably. This involves collaboration between the CEA, industry stakeholders, and state governments to build a resilient energy infrastructure capable of handling the increasing load.

Conclusion

India’s power sector is on the verge of significant expansion, driven by rising demand and a strong focus on renewable energy. With a peak demand forecasted to reach 270 GW in the next fiscal year and a projection of 446 GW by 2030, the government is committed to making the necessary investments in power generation, transmission, and distribution.

The 100 GW transmission expansion and strategic distribution plan reflect the nation’s dedication to providing reliable, sustainable, and affordable power. As India continues its journey towards becoming a global leader in renewable energy, its efforts to upgrade and expand the power infrastructure will be crucial in shaping a sustainable energy future.

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GDP likely grew by a median 6.3% in Q3, slightly higher than RBI’s 6.2% estimate

India's GDP Growth to Slow in FY25, Manufacturing and Financial Sectors Pose a Drag

India’s GDP Growth to Slow in FY25, Manufacturing and Financial Sectors Pose a Drag

India’s gross domestic product (GDP) is set to experience slower growth in FY2025, according to Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services. Gupta predicts a deceleration in growth from the exceptional 8.2% recorded in FY2024 to approximately 6.1%, a figure notably below the Reserve Bank of India’s (RBI) projection of 7.2%. The economist attributes this expected slowdown primarily to challenges in the manufacturing and financial sectors, along with an unusual base effect from the previous fiscal year.

“The high growth in net indirect taxes, which was a key driver of the 8.2% GDP growth last year, is unlikely to sustain,” Gupta explains. In FY2024, the Gross Value Added (GVA) was 7.2%, significantly lower than GDP growth, indicating that the high GDP number was largely tax-driven. Gupta anticipates this gap will narrow in FY2025, with GVA growth expected to come in at around 6.3%, while GDP will likely trend closer to 6.1%.

The manufacturing and construction sectors, which benefitted from a deflator effect in FY2024 due to negative wholesale price index (WPI) inflation, are unlikely to see the same favorable conditions in FY2025. “The WPI deflator that boosted real growth last year will not be favorable this time around, especially for manufacturing,” Gupta notes. Additionally, services sector growth is expected to slow, as credit expansion may not be as robust as it was previously. However, agriculture could provide a buffer with better performance this fiscal year, following a weak showing in FY2024.

Consumption Patterns and the K-Shaped Recovery
Despite the overall slowdown in GDP growth, there is a positive trend in consumption. Gupta observes that real consumption growth, which was just 4% in FY2024—the slowest barring the COVID years—could pick up slightly to 5-5.5% this year. This growth, while modest, is still lower than historical levels, where aggregate consumption often expanded by 7-8%. However, Gupta believes that the direction of consumption growth is more important than the absolute number.

“The K-shaped recovery in consumption, where the wealthier segments of society benefitted disproportionately, might be narrowing,” he says. This recovery pattern was evident during the pandemic, where luxury goods and high-ticket items continued to perform well, while low-income groups struggled. Now, there are signs that this gap is closing, particularly in rural areas. Gupta anticipates that rural consumption, which has lagged behind urban consumption for the past two years, could outpace it in FY2025, driven by better agricultural output and improved income levels.

However, Gupta cautions that this narrowing of the K-shaped recovery is based on anecdotal evidence rather than concrete data. While it is clear that urban consumption has been strong, the real test will be whether rural consumption can sustain its momentum throughout the year.

Capital Expenditure and Long-Term Investment Growth
When it comes to capital expenditure (capex), Gupta offers a cautiously optimistic view. “Investment growth was significantly higher in FY2024, and we expect it to expand again in FY2025, albeit at a slower pace,” he says. Total investments as a percentage of GDP reached 33% last year, the highest in a decade, and this ratio is expected to remain flat over the next two years.

Capex, Gupta argues, is influenced by consumption trends but on a longer-term horizon. While consumption drives manufacturing investments, the effect is not immediate. “You cannot link capex to consumption on an annual basis,” he explains. Despite the expected slowdown in consumption and manufacturing growth, the overall investment environment remains positive, with infrastructure and public investments likely to support capex growth.

External Headwinds and Global Risks
One of the key risks to India’s economic outlook comes from external factors. Gupta highlights the uncertainty surrounding the global economy, particularly in the United States. “Everyone has been fearing a recession in the US, but so far, it hasn’t materialized,” he says. However, he remains cautious, noting that the prolonged period of high interest rates in the US has yet to fully impact consumer spending, capex, and employment trends.

While the US economy continues to defy expectations, Gupta warns that the effects of high borrowing costs could still materialize with a lag. “Higher mortgage costs should, in theory, reduce consumer spending and eventually impact investments, labor demand, and wage growth,” he explains. If this transmission mechanism begins to take hold, it could dampen global growth and, by extension, India’s export-driven sectors.

Geopolitical risks, particularly in the Middle East, add another layer of uncertainty. Rising oil prices, driven by geopolitical tensions, could increase inflationary pressures in India, which remains heavily dependent on oil imports. “If commodity prices, especially oil, start to rise sharply, it could create headwinds for both growth and equity markets,” Gupta warns.

Inflation and Rate Cut Trajectory
On the domestic front, inflation remains a concern. While inflation was below the RBI’s target of 4% in recent months, Gupta expects it to rise to around 4.5% by the end of FY2025. “This is still a manageable level, but it raises questions about whether growth can continue at the RBI’s projected rate of 7% with inflation hovering at these levels,” he says.

Regarding interest rates, Gupta forecasts a gradual easing by the RBI, with the first rate cut likely in early 2025, though a December cut cannot be ruled out. “Much will depend on the Q2 GDP data and global developments,” he adds. Gupta expects a cumulative rate cut of 100 basis points (bps) by the end of FY2026, with the first 25 bps cut potentially coming in FY2025.

Foreign fund flows into India are likely to remain strong, provided that India’s growth and corporate earnings continue to outpace other major economies. However, Gupta cautions that rising geopolitical risks and inflationary pressures could create volatility in equity markets, particularly if commodity prices surge.

In conclusion, while India’s growth prospects for FY2025 are expected to slow compared to the previous year, the economy remains resilient. Consumption trends are improving, particularly in rural areas, and investments are likely to remain stable. However, external risks, inflation, and the global economic outlook will continue to pose challenges in the months ahead.

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Surge in adoption of EV in quick commerce led to expansion in business for battery-swapping companies

Consumer Durables Set for 11% CAGR, to Hit ₹3 Lakh Cr by 2029

Consumer Durables Set for 11% CAGR, to Hit ₹3 Lakh Cr by 2029

India’s consumer durables sector is poised for substantial growth, with a projected compound annual growth rate (CAGR) of 11%, expected to reach ₹3 lakh crore by 2029, according to a report by EY Parthenon and the Confederation of Indian Industry (CII). Currently contributing 0.6% to India’s GDP, the sector is anticipated to significantly increase its contribution as it benefits from rising domestic consumption, a shift towards indigenization, and a growing focus on sustainability.

Growth Trajectory and Key Drivers
EY Parthenon’s report highlights the sector’s ambitious target to become the fourth-largest global market for consumer durables by 2027. By 2030, India could emerge as a global leader in the sector, creating an estimated 5 lakh new jobs. The expanding domestic market, particularly driven by urbanization, rising incomes, and changing lifestyles, presents a unique opportunity for manufacturers to ramp up production and innovation.

Angshuman Bhattacharya, partner and national leader for consumer products and retail at EY Parthenon, emphasized that India’s growing consumer base and favorable government policies are laying the foundation for this transformation. “Progressive government initiatives like Atmanirbhar Bharat, Make in India, and the Production Linked Incentive (PLI) scheme are creating a favorable environment for the sector’s growth,” Bhattacharya noted. He stressed that leveraging emerging opportunities, enhancing value chain integration, and addressing current challenges will be key for the sector to become a cornerstone of India’s economic growth.

Premiumization and Technology Adoption
One of the core trends driving growth in India’s consumer durables market is the shift towards premium and value-added products. Consumers are increasingly spending on discretionary items, prioritizing household upgrades and adopting smart, energy-efficient products that offer greater convenience and sustainability. Notably, air conditioners (ACs), once considered a luxury, have become a necessity for a broader segment of the population, reflecting a shift in consumer priorities.

Technological advancements are also accelerating demand for smart appliances, further shortening product replacement cycles. With the increased penetration of high-speed internet and improved connectivity, consumers are now more inclined to invest in devices that are not only energy-efficient but also smart and interconnected. The growing middle class, in particular, is driving this shift, with a clear preference for appliances that integrate sustainability and technology.

The report highlighted the increased adoption of televisions, which saw household penetration rise to 60% in 2023. This is indicative of a broader trend of rising consumer aspiration, where technology-driven products such as smart TVs, refrigerators, and washing machines are becoming more commonplace in Indian households.

E-commerce and Supply Chain Expansion
Despite the growing demand for smart and premium products, India currently lags behind many other countries in terms of online sales, with e-commerce accounting for only 14% of overall consumer durable sales. However, online channels are expected to grow rapidly, driven by greater brand choice, home delivery options, and a widening consumer base.

The government’s Open Network for Digital Commerce (ONDC) initiative is expected to play a pivotal role in boosting e-commerce adoption, especially in smaller cities and rural areas. By democratizing access to a wide range of products and enhancing consumer choice, ONDC aims to broaden the market base and accelerate the penetration of consumer durables across tier-2 and tier-3 cities and rural regions.

This rural expansion, coupled with the growth of online retail, is likely to be a significant driver of growth in the coming years. The report forecasts that the supply chain will deepen its reach into these markets, offering consumers access to a wider array of products, including premium and value-added items.

Policy Support and Industry Recommendations
The EY Parthenon report underscored the importance of collaboration between government and industry stakeholders to further boost domestic demand for consumer durables. Recommendations include increasing incentives for the PLI schemes, particularly for critical components such as controllers, compressors, and motors, which are key to the manufacturing process. Additionally, harmonizing the GST slabs across different product categories could enhance affordability, making consumer durables accessible to a broader audience across various income groups.

Another significant recommendation involves incentivizing the ownership of energy-efficient products. Providing tax breaks or on-bill financing to consumers purchasing energy-efficient appliances can help reduce the energy burden while promoting sustainability. These incentives could drive a multi-fold circular benefit for both the industry and consumers by lowering energy consumption and contributing to environmental goals.

Conclusion
With strong policy backing, increasing consumer demand, and technological advancements, India’s consumer durables sector is on track to become a global powerhouse. As manufacturers capitalize on these growth opportunities and adapt to the evolving market dynamics, the sector is set to play a pivotal role in driving India’s economic growth and job creation over the next decade. By 2029, with continued investment and strategic collaboration, India’s consumer durables market will likely cement itself as a critical player in the global arena.

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RBI's Surprise Rate Cut Sends Realty Stocks Tumbling: Is It Time to Reassess?

RBI Signals Shift to Neutral Stance, Market Anticipates Rate Cut

RBI Signals Shift to Neutral Stance, Market Anticipates Rate Cut

The Reserve Bank of India (RBI) has taken a pivotal step in monetary policy by shifting its stance from “withdrawal of accommodation” to a more neutral position. This move, announced following the latest meeting of the Monetary Policy Committee (MPC), opens the door for potential rate cuts if inflation remains within a favorable trajectory. For months, the central bank had been in tightening mode, focused on reining in inflation. With the latest inflation print of 3.7% in August, comfortably below the 4% target, markets are already anticipating a rate cut in December. But as the RBI takes this cautious approach, a deeper examination reveals that several risks still loom large.

Stance Shift: A Prelude to Rate Cuts?
The change in stance signals the central bank’s readiness to shift gears in response to evolving macroeconomic conditions. By adopting a neutral stance, the RBI is essentially indicating that it is no longer in a mode of withdrawing liquidity but stands prepared to act as necessary to sustain growth and keep inflation in check. This is a marked change from its previous focus, where containing inflation at any cost was the top priority.

The markets have taken this as a strong signal, with expectations now leaning toward a rate cut as early as the December meeting. Bond yields have eased, and equity markets have welcomed the news, buoyed by the prospect of cheaper capital and a more accommodative monetary policy.

However, the key question is not just whether the RBI will cut rates, but how aggressive it will be in doing so. Some market participants are already wondering if this could lead to a series of rate reductions, or whether the central bank will adopt a more cautious approach. The decision will likely depend on a host of factors, both domestic and global.

Governor Das Flags Key Risks
Despite the markets’ optimism, RBI Governor Shaktikanta Das was quick to temper expectations. In his policy statement, he highlighted significant risks that could derail the inflation trajectory. “Even as there is greater confidence in navigating the last mile of disinflation, significant risks – I repeat, significant risks – to inflation from adverse weather events, accentuating geopolitical conflicts, and the very recent increase in certain commodity prices continue to stare at us,” Das warned.

The governor’s caution stems from a series of unpredictable factors that could easily upset the RBI’s inflation outlook. Geopolitical tensions, particularly in the Middle East, pose a major concern. The conflict between Israel and Iran has caused a surge in crude oil prices, which recently crossed $80 per barrel. For a net importer like India, rising crude prices could stoke domestic inflation, making it more difficult for the RBI to ease monetary policy without jeopardizing price stability.

Additionally, adverse weather events, such as prolonged heat waves and erratic monsoon rainfall, have impacted agricultural output. While the RBI expects a robust kharif and rabi harvest, there is always the possibility that unpredictable weather conditions could disrupt supply chains and drive up food prices, a key component of headline inflation in India.

Balancing Growth and Inflation
The RBI’s decision to keep its inflation and growth projections unchanged reflects its delicate balancing act. The central bank expects GDP growth for FY25 to hold steady at 7.2%, driven largely by strong investment activity. Governor Das noted that both consumer confidence and business sentiment are on the rise, with private investments playing a pivotal role in boosting the country’s economic prospects.

While the outlook for growth remains positive, the RBI is aware that risks to inflation could quickly derail progress. Das’s analogy of inflation being akin to a “horse brought to the stable” illustrates the central bank’s cautious stance. “We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under tight leash, so that we do not lose control,” Das said, emphasizing the need for vigilance.

Rate Cut Expectations: Cautious Optimism
While one of the MPC’s external members voted for an immediate rate cut, the overall tone of the committee remains cautious. Many analysts believe that even if the RBI does initiate a rate-cutting cycle, it will likely be shallow and gradual, with the first cut possibly in December or early next year. Much will depend on how global commodity prices and domestic inflation evolve in the coming months.

Upside risks, such as crude oil price shocks, geopolitical tensions, and weather disruptions, remain largely outside the control of the RBI. As a result, any rate cut is likely to be reactionary rather than preemptive, with the central bank taking a wait-and-see approach before committing to deeper monetary easing.

Conclusion
The RBI’s shift to a neutral stance has generated excitement in the markets, with expectations of an upcoming rate cut in December. However, the central bank is navigating a complex landscape of inflationary risks and external uncertainties. While growth prospects remain solid, the RBI is unlikely to aggressively cut rates, opting instead for a more measured approach to ensure that inflation remains under control. Governor Das’s message is clear: while the door to rate cuts is now open, the central bank will tread carefully to avoid upsetting the balance between growth and inflation.

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Shriram Finance Q3FY25: Strong Loan Book Growth, PAT Boosted by Exceptional Gain, NIMs Contract

Private Banks See Deposit Revival but Face Margin Pressures Amid Rising Costs

Private Banks See Deposit Revival but Face Margin Pressures Amid Rising Costs

The Indian banking sector is witnessing significant changes, particularly in the dynamics of deposits and credit growth. With private banks showing signs of a catch-up in deposit growth, there’s cautious optimism. However, this comes with a stark warning: interest margins are likely to compress further. While banks are striving to regain lost ground, especially in the private sector, challenges such as elevated credit-to-deposit (C/D) ratios and a shift in retail investment preferences are weighing heavily on their profitability.

The War on Deposits
Indian banks, especially private sector players, have been caught in a fierce competition to attract deposits. The deposit war has intensified as retail investors increasingly prefer capital markets over traditional banking products. This shift has created a dual challenge for banks: not only are they losing their core deposit base, but they also need to pay higher interest rates to secure incremental deposits. The result is a hit on their net interest margins (NIMs) and, consequently, their profitability.

The decline in the core deposit base is particularly concerning as it forms the backbone of a bank’s funding structure. The shift of surplus liquidity away from banks toward capital markets has forced banks to revise interest rates upward to stay competitive. This trend has led to a squeeze in margins, especially for those banks that rely heavily on term deposits. With lower-cost CASA (current and savings account) deposits stagnating or declining, many banks are finding it increasingly difficult to maintain healthy interest margins.

Deposit Catch-Up in Q2
The quarterly business updates of several banks provide insights into how they are navigating these challenges. A closer look at 11 commercial and small finance banks reveals that eight of them reported a higher growth rate in deposits compared to advances on a quarter-over-quarter basis. This trend is particularly evident among private sector banks that were previously operating with very high C/D ratios.

At the system level, deposit growth has seen a slight recovery. By the end of Q2 FY25, overall deposit growth stood at 11.5 percent year-on-year (YoY), compared to 10.6 percent at the end of Q1. On the other hand, advances registered a 13 percent YoY growth, a moderation from the 13.9 percent growth seen in the previous quarter. The gradual moderation in the C/D ratio is a positive sign, as it suggests that banks are becoming more cautious in managing their lending portfolios in the face of deposit challenges.

Despite this improvement in deposit growth, the bigger issue remains: declining CASA deposits. With the rising cost of term deposits and stiff competition in the lending market, many banks are seeing stagnation or a decline in their share of low-cost deposits, leading to margin compression.

Impact on Interest Margins and Profitability
The resurgence in deposit growth is not without its challenges. For many banks, the increased cost of term deposits has already started to weigh on their interest margins. This is a trend that is expected to continue as competition for deposits intensifies and the overall cost of funds rises.

The moderation in interest margins is compounded by a rise in operational costs. Banks are spending more on technology upgrades, branch expansions, and hiring, all of which are necessary to attract deposits in a more competitive environment. As these expenses rise, banks are also facing pressure on their return on assets (RoA). The bottoming out of credit costs has provided some relief, but it is not enough to offset the rising cost-to-income ratio that banks are grappling with.

Outliers and Opportunities
Amid these challenges, a few banks have managed to outperform. Bank of Baroda, a large public sector player, reported robust growth in advances, outpacing deposit growth, thanks to a relatively better C/D ratio. This trend positions the bank well to capture a larger share of the lending market, even as others struggle to balance the deposit and credit equation.

Federal Bank also stands out, with an improving CASA share that signals some stability in its interest margins. Despite a tepid deposit performance in Q2, the bank’s strong growth in advances and its efforts to maintain a healthy CASA ratio are encouraging signs. CSB Bank is another exception, benefiting from the buoyant gold loan market, which forms nearly 45 percent of its loan book. The bank managed to achieve strong growth in both deposits and advances, setting it apart from its peers.

Outlook
Looking ahead, the gradual weakening of bank RoAs seems inevitable as interest margins compress, costs rise, and credit costs stabilize. However, there remains value in many frontline private sector banks. The upcoming earnings season will be closely watched to see how banks navigate this challenging environment and whether they can continue to offer value to investors despite these headwinds.

In conclusion, while private sector banks are seeing some revival in deposits, they face significant challenges in maintaining profitability. With rising costs, stagnant CASA growth, and increasing competition, the road ahead may be tough, but there are still opportunities for well-managed banks to thrive.

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Expansion of capex to tackle global issues and decline in economic growth

India Set for Capex Boost as Domestic Demand Grows: CII

India Set for Capex Boost as Domestic Demand Grows: CII

Private capital expenditure (capex) by Indian companies is likely to see a notable rise in the near term, driven by strong domestic demand despite facing external challenges like a weak global environment and rising shipping costs. This optimistic outlook comes from a recent survey conducted by the Confederation of Indian Industry (CII) among over 200 firms of varying sizes, offering insights into the business confidence and investment plans of India Inc.

Business Confidence on the Rise
CII’s Business Confidence Index for the second quarter of FY25 (July-September) reached a robust 68.2, marking its highest point since March 2024. This is a notable uptick from the previous quarter’s 67.3 and a further improvement from the 67.1 recorded in the same quarter last year (Q2 FY24). The index reflects the sentiment of businesses across sectors, underlining the growing optimism despite ongoing concerns in the global economy, including geopolitical risks and slower-than-expected recovery in some international markets.

According to the survey, improving domestic demand is seen as the primary driver of this optimistic environment, with companies expressing renewed confidence in expanding their investments. “Improvement in domestic demand has created a more optimistic business environment, encouraging companies to invest and expand,” the survey noted.

Private Capex Expected to Rise
One of the standout findings from the survey is that 59% of the respondents anticipate an increase in private capital expenditure during April to September 2024 compared to the previous six months. This rise in capex is a positive indicator for future economic growth, as it reflects businesses’ willingness to invest in expanding their capacity, innovating, and responding to the heightened demand in the market.

Moreover, the survey revealed that a significant portion of respondents expect the trajectory of private capex to remain unchanged for the first half of the fiscal year, with only 6% anticipating a decline in their investment levels compared to the second half of FY24. This indicates that while the global outlook may remain subdued, domestic factors like strong consumer demand and sectoral growth are pushing companies to continue investing.

Inflation and Interest Rates Outlook
Inflation expectations are another critical factor shaping business sentiment. The survey shows that 78% of respondents believe inflation this year will remain below 5%, reflecting optimism about price stability, which is crucial for sustaining demand. Within this group, 33% of firms expect inflation to hover between 4.5% and 5%, while 35% see it slightly lower, in the range of 4% to 4.5%. These expectations are aligned with the Reserve Bank of India’s (RBI) inflation projection of 4.5% for the year.

In addition, more than 60% of the survey respondents anticipate that the RBI will begin a rate-cutting cycle within this fiscal year. Of these, 34% expect the central bank to initiate rate cuts in the October-December quarter, while another 31% foresee it happening during the January-March quarter of 2025. With banking liquidity in surplus, some companies believe that the central bank may ease interest rates or at least signal a policy shift in the upcoming monetary policy review.

Capacity Utilization on the Upswing
Driven by improving domestic demand, especially from rural India, companies have reported stronger capacity utilization levels. According to the survey, 46% of the respondents stated that their capacity utilization levels ranged between 75% and 100% during the April-June period, with an additional 6% operating above 100%. This marks an improvement from the previous quarter, when only 45% of companies reported capacity utilization in the same range.

As businesses operate closer to full capacity, it further reinforces the need for increased private capex to enhance production capabilities and meet rising demand, particularly in sectors experiencing higher consumption from rural markets and infrastructure development.

Profitability and Employment Prospects
The survey also highlights a favorable outlook on profitability, with 45% of companies expecting their profits to improve in the July-September quarter, slightly up from 42% in the previous quarter. This optimistic profitability forecast ties in with the expectations for increased capex and capacity expansion, as companies look to leverage favorable market conditions to improve margins.

On the employment front, the survey indicates a marginal improvement. Around 49% of companies reported an improvement in their employment situation during the quarter, while 41% said there was no change. This suggests that while employment opportunities may rise, the gains are expected to be moderate.

International Investment Plans Remain Cautious
Despite the encouraging domestic scenario, companies remain cautious about international investments, reflecting concerns over global uncertainties. The survey revealed that 40% of firms expect their international investment plans to remain unchanged, underscoring the cautious approach of businesses amid rising geopolitical tensions, trade disruptions, and slowing demand in key export markets.

Conclusion
The CII survey paints a promising picture for India Inc.’s private capital expenditure, with strong domestic demand driving business confidence and capacity expansion. While external challenges persist, Indian companies are betting on a favorable domestic environment, bolstered by stable inflation expectations, potential rate cuts, and rising profitability. However, international expansion plans remain muted as firms navigate the complexities of the global economic landscape.

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RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

India’s Monetary Policy Committee (MPC) is set to reconvene this week, marking the first meeting for its three new external members: Ram Singh (Director, Delhi School of Economics), Saugata Bhattacharya (veteran economist), and Nagesh Kumar (Director, Institute for Studies in Industrial Development). Given their fresh appointments, all three are expected to follow the Reserve Bank of India’s (RBI) house view on rates, at least initially, as noted in a recent Bank of America report. While the new members lack any known rate biases, newcomers traditionally adopt the majority stance in their early days.

This is significant because it suggests that the RBI is likely to maintain the status quo on rates for the tenth consecutive policy meeting. This pattern aligns with Governor Shaktikanta Das’ cautious stance, particularly on inflation, which remains a key concern for the central bank’s policymakers.

Despite headline inflation falling below the RBI’s medium-term target of 4%—with CPI inflation at 3.65% in August, slightly up from July’s 3.6%—the central bank continues to exercise caution. The RBI’s reluctance to declare victory over inflation stems largely from persistent food price pressures. Governor Das, in the minutes of the August MPC meeting, underscored that while the base effect has helped lower headline inflation, food prices continue to pose challenges, and inflation expectations among households are rising. Therefore, monetary policy needs to remain vigilant to the risk of food price pressures spilling over into core inflation.

Adding to these inflationary concerns are risks posed by the geopolitical tensions in the Middle East. India is one of the world’s largest importers of crude oil, and escalating conflict in the region, particularly between Israel and Iran, could disrupt oil supplies and send prices skyrocketing. This could increase India’s oil import bill, which would, in turn, fuel inflation. Although crude oil is currently trading below the RBI’s assumed $85 per barrel average for FY25, any significant upward movement could complicate the inflation outlook. The central bank will undoubtedly factor this geopolitical risk into its deliberations.

Inflation is not the only concern for the MPC, however. Economic growth, while improving, remains below potential. Although India’s economy has shown some signs of recovery, unemployment continues to rise, and small businesses are grappling with high borrowing costs. Small and medium-sized enterprises (SMEs), in particular, are struggling with rising interest payments, and there are growing concerns about asset quality in the SME sector. In light of these challenges, there is a strong case for the RBI to begin cutting interest rates to stimulate growth.

The RBI, however, faces a dilemma. On the one hand, inflation pressures, especially in food and core inflation, suggest the need for a cautious approach to rate cuts. On the other hand, the economic reality on the ground—rising unemployment, underwhelming growth, and financial strain among small businesses—argues for the central bank to shift its focus toward supporting growth.

The recent 50 basis point (bps) rate cut by the US Federal Reserve will also be a topic of discussion at the upcoming meeting. While the RBI Governor has consistently maintained that the Fed’s actions do not dictate India’s rate policy, the reality is that central banks around the world, including India’s, cannot fully ignore rate moves in major economies like the US. The Fed’s rate cut may influence the MPC’s thinking, particularly if global economic conditions continue to weaken.

In summary, while the October meeting is likely to result in a rate status quo, the groundwork is being laid for a potential rate cut in the next few months. With inflation pressures still present but stabilizing, and economic growth faltering, the RBI will likely need to pivot toward growth support soon. However, much will depend on how inflation, particularly food prices, evolves in the coming months, and how global risks, such as the Middle East conflict and US monetary policy, unfold. If inflationary pressures subside, a rate cut could be on the horizon by the end of the year.

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Kaynes Technology Acquires Iskraemeco India to Strengthen Presence in Smart Meters

Kaynes Technology Acquires Iskraemeco India to Strengthen Presence in Smart Meters

Kaynes Technology, a leading player in India’s Electronics Manufacturing Services (EMS) market, is positioning itself for rapid growth across several high-potential segments, including smart meters, semiconductors, and printed circuit board (PCB) manufacturing. The company has recently acquired a 100 percent stake in Iskraemeco India, a subsidiary of a Slovenian company, which is a strategic move aimed at strengthening its foothold in the smart meter market.

The acquisition deal, valued at Rs 43 crore, gives Kaynes full control of Iskraemeco India, a company that generated Rs 65 crore in turnover in FY24. While Iskraemeco India is still operating below break-even levels, the enterprise value (EV)/sales ratio of 0.7 times makes the deal attractive, especially given the long-term potential of the smart meter market in India. This acquisition aligns with Kaynes’ broader strategy of leveraging new growth opportunities in the evolving smart meter ecosystem, driven by the Indian government’s ambitious Smart Meter National Program (SMNP).

Tapping into the Smart Meter Opportunity
The Smart Meter National Program, part of the government’s larger power sector reform, seeks to replace 25 crore traditional electricity meters with prepaid smart meters over the next five years. The initiative includes modernizing infrastructure such as feeders and transformers, with an estimated total capital expenditure of Rs 1.5 lakh crore. With smart meter penetration currently standing at just 2-3 percent, there is substantial room for growth. The goal is to bring more transparency and efficiency to India’s power sector, and Kaynes sees this as a major area of opportunity.

To capitalize on this demand, Kaynes has set up a dedicated manufacturing plant for smart meters in Hyderabad. The facility has a current production capacity of 1 million units, but the company plans to scale this up to 4 million units in the near future by adding additional assembly lines. This move will allow Kaynes to ramp up its production capabilities to meet the growing demand from government projects and utilities across India.

The acquisition of Iskraemeco India further solidifies Kaynes’ position in this market. Iskraemeco India has secured a significant order from Power Grid Corporation of Gujarat to install 3.5 million smart meters over the next 12-18 months. This deal provides a strong revenue stream in the near term and reflects the high demand for smart meters, driven by government mandates and infrastructure upgrades. Kaynes is also expecting additional orders from the central government as well as from various state governments, which could provide further tailwinds for its smart meter segment.

The smart meter business currently contributes 2-3 percent of Kaynes’ total turnover, but management expects this to increase to 10 percent by FY25, bolstered by its strong order book and recent acquisitions. Over the medium term, the company also plans to expand its portfolio to include gas and water meters, thereby broadening its market presence in utilities.

Deploying Capital for Expansion
Kaynes Technology has been actively deploying capital to fuel its expansion plans. In 2023, the company raised Rs 1,400 crore through a qualified institutional placement (QIP). These funds have been allocated toward expanding its presence in both domestic and international markets. In January 2024, Kaynes acquired Digicom Electronics, a California-based EMS company, for $2.5 million. This acquisition marks Kaynes’ entry into the U.S. market, a key growth area for the company as it seeks to diversify its revenue streams.

Additionally, Kaynes acquired a minority stake in Mixx Technologies, an electronics manufacturing and PCB assembling services company, for $3 million. This acquisition is in line with its strategy to enhance its capabilities in PCB manufacturing, a key area of growth for the company.

In September 2024, Kaynes received cabinet approval to set up a semiconductor manufacturing plant in Gujarat, another significant step toward building a diversified electronics manufacturing portfolio. This new facility will allow Kaynes to tap into the growing demand for semiconductors, both in India and globally.

Strong Order Book and Growth Outlook
Kaynes Technology currently boasts an order book of over Rs 5,000 crore, with a book-to-bill ratio of 2.5x, offering strong growth visibility over the medium term. The management has reiterated its revenue guidance of Rs 3,400 crore for FY25, with an operating margin target of 15 percent. Over the longer term, Kaynes has set a revenue target of Rs 8,000 crore by FY28, of which 75 percent is expected to come from its core EMS business. The remaining 25 percent will be driven by growth in semiconductors, PCBs, smart meters, and the Kavach project (an indigenous safety system for railways).

The acquisition of Iskraemeco India is expected to be margin accretive over the medium term as Kaynes ramps up smart meter production and secures new orders. The company’s strategy of acquiring complementary businesses, deploying capital for capacity expansion, and entering new markets is poised to fuel its growth trajectory in the coming years.

Valuation and Investor Outlook
At its current market price, Kaynes Technology trades at an FY26 price-to-earnings (PE) multiple of 71 times, with a price/earnings-to-growth (PEG) ratio of 1.4x. While the company’s robust growth outlook is priced into the stock, investors may want to wait for better entry points given the elevated valuations. However, for long-term investors, Kaynes’ strong order book, aggressive expansion strategy, and growing presence in high-potential markets like smart meters and semiconductors make it a compelling play on India’s rapidly growing electronics manufacturing sector.

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