Happy New Year! For 2025, our New Year resolution is to send you a briefing every Monday to Thursday, with an in-depth essay every Friday. Stay tuned!

Welcome to Samosa Capital’s evening briefing — the best way to stay up-to-date on India’s financial markets. Here’s what’s in today’s newsletter:

• Banks are concerned about the declining Indian rupee,

• You’re not going to like finding out about QCOs,

• And, the new RBI Governor speaks out.

• Finally, we’ll close with Gupshup, a round-up of the most important headlines.

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—Shreyas, [email protected]

Market Update

The stock market was up nearly 2 percent due to short sellers covering their short derivative bets on automobile and software companies. The rupee worsened to 85.82 in continued sideways trading following reports that the RBI will halt intervention.

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Banks Are Concerned About Declining Rupee

Major Indian banks are urging the Reserve Bank of India to deploy foreign exchange swaps to address a liquidity crunch triggered by surging short-term currency financing costs. The proposed FX swaps would involve the RBI purchasing dollars from banks in exchange for rupees, with an agreement to reverse the transaction later. This mechanism could inject rupee liquidity into the financial system without altering the cash reserve ratio (CRR).  

Some concerning signals for liquidity are emerging, with tomorrow-next forward points reaching a four-year high and one-year implied forward yields approaching two-year highs. Forward points, which represent the difference between future FX prices and current ones, are particularly elevated in the shortest time frame, called “tomorrow-next.” These high points indicate increased difficulty in converting to dollars and reflect tighter funding conditions. Similarly, high forward yields suggest expectations of elevated future rates driven by financing challenges.

Key considerations with FX swaps: On the positive side, they can help reduce elevated financing costs, which have hit record highs, and strengthen FX reserves, currently at a seven-month low. However, challenges include the ongoing depreciation of the rupee and the risk of rising inflation. If lending accelerates, the increased velocity could further fuel inflation.

Move Over Tariffs, Enter QCOs

While Indian tariffs are often maligned, the real hurdle for trade lies in a less flashy but far more insidious mechanism: Quality Control Orders (QCOs). These regulations, which require imports to meet specific quality standards, have rapidly become a tool for restricting imports and shielding domestic industries from competition.

QCOs briefer: Initially framed as consumer protection measures against low-quality imports, QCOs have mushroomed in scope and application. India’s commerce minister announced over 700 QCOs in October, with plans to issue 2,500, covering diverse goods such as toys, steel, chemicals, and honey. While the stated aim is to protect consumers, in practice, QCOs target imports from all nations and often introduce arbitrary new requirements without warning. Unlike other nations, India offers no exemptions for goods already certified by stringent international regulators, such as the EU. This omission reveals the true intent: restricting imports without provoking global backlash by raising tariffs.

Why they can suck: They disrupt supply chains, inflate costs, and harm job-creating industries like garments and engineering exports. For instance, garment makers are forced to rely on monopolistic local suppliers, driving up input costs. Exporters of engineering goods face uncertainty as specialty steels sit stuck at ports, delaying contracts and tarnishing their global reputation. By prioritizing protection for capital-intensive sectors like steel, QCOs undermine labor-intensive industries that are the backbone of job creation. The policy discourages firms from scaling up for international markets, stifling competitiveness and growth.

New RBI Governor Malhotra Finally Speaks On the Economy

RBI Governor Sanjay Malhotra projects a rebound for the Indian economy in 2025, citing strong consumer and business confidence and improved corporate balance sheets. This is Malhotra’s first major outlook since taking office on December 11.

Domestic economic drivers include public consumption, increased investment, and robust service exports to offset the slowdown experienced earlier. Despite current projections for GDP growth of 6.5 percent this fiscal year — down from 8 percent last year — analysts expect the new governor to adopt a more accommodative stance. Economists predict an interest rate cut as early as February, a potential shift from the two-year pause under his predecessor.

While Malhotra emphasized brightening prospects due to slowing global inflation and easing financial conditions, he acknowledged medium-term risks. Geopolitical tensions, climate change, and rising debt levels remain key concerns.

Key financial points: Domestically, the Financial Stability Report warns of a likely rise in gross non-performing assets (NPA) from 2.6 percent in September 2024 to 3 percent by March 2026. This is attributed to stretched asset valuations and rising indebtedness, which could strain corporate profits and household incomes.

On the other hand, the report also highlights the resilience of India’s financial system. Strong capital buffers, low levels of impaired assets, and robust earnings underpin financial stability. Stress tests indicate that even under adverse scenarios no lender is expected to fall below the regulatory capital adequacy ratio of 9 percent.

Gupshup

Macro

• Microfinance companies have highly stressed assets. The number of payments 30 to 180 days past due rose to 4.3 percent in the past quarter compared to 2.2 percent at the beginning of 2024.

• India's December factory activity growth is at 56.4, the lowest since December 2023. A value above 50 still represents growth, meaning that while factory activity fell slightly, the industry overall is still expanding.

• Indian states' funding will likely get more expensive. States are looking to raise $55.5 billion (₹4.7 trillion) in the March quarter, along with the $32.9 billion (₹2.8 trillion) the central government plans to borrow.

Equities

• Short sellers covering Nifty options led to Indian stocks rallying 2 percent to start 2025. Overseas investors had created the largest bearish bets since June.

• Global funds became net sellers of Indian equities after poor corporate earnings reports in October. Global funds offloaded $750 billion (₹64.1 billion), most of which came in the December quarter. Poor earnings, Trump’s victory, bribery charges, a weak rupee, and a stronger dollar, contributed to selling pressure. Before the quarter, net inflow was positive at $12 billion (₹1 trillion). 

• SEBI alleges former stockbrokers are using insider info, making $7.7 million (₹657.7 million) in the process. The broker, Khetan Parikh, had been banned from trading back in 2003 for other violations but is now the face of this latest accusation.  

Alts

• Derivatives trading sinks 38 percent after a month of new regulations. Total daily turnover of contracts went down by 38 percent due to two new regulations and a softer stock market. The regulations ad banned certain options while raising margin requirements. Further regulations in February are going to include upfront premiums and decreased margins.

• India's satellite growth continues with space docking bids. Only the US, China, and Russia have space docking capabilities — the process of attaching different shuttles in space. India is planning a docking mission with two ships on January 7th. India’s space agency, ISRO, is partnering with SpaceX and NASA to launch more satellites as well.  

• India's NBFC body requests liquidity providers for agriculture, MSMEs, and green energy. NBFC, which represents non-banking finance companies, authored a letter emphasizing that their funds have not grown by a considerable amount relative to the economy or inflation, resulting in bankruptcy and liquidity challenges.

Policy

• Major tax changes could be announced this month under Finance Minister Sitharaman's simplification plan. The finance minister wants to reduce debt-to-GDP to 50 percent from the current 58 percent. To do so, she plans on simplifying the tax code; currently, the complicated tax law has caused $116.9 billion (₹10 trillion) of direct taxes to be stuck in litigation.

See you Friday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.