📰Markets React to Rate Cut Expectations

Good morning, 

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

• The rupee fell to new lows (again),

• India’s bonds rally,

• and, Modi faces his first major electoral test today.

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

Have a question you want us to answer? Fill out this form and you could be featured in our newsletter.

—Shreyas, [email protected]

Market Update.

Expert Panel & Networking Event in New York City

Seats are running out for our upcoming “Future of India” expert panel and networking event on Wednesday, February 12, 2025, in New York City.

Our keynote speaker is Dr. Viral Acharya, who served as the deputy governor of the Reserve Bank of India, during which he oversaw India’s monetary policy, financial markets, and the central bank’s research. Buy tickets here.

Rupee Falls to New Lows (Again)

This week, the rupee fell to another new low on expectations of a rate cut on Friday, the first in five years. Last Thursday, we discussed how the RBI has been allowing the rupee to slowly fall; it has now dropped 3 percent since the newly-minted Governor Malhotra took over. The RBI is still selling dollars to intervene in the currency, but far less than before. Businesses are in disarray, as they can no longer rely on the RBI’s foreign exchange interventions to hedge their currency volatility.

During the RBI’s period of heavy intervention to stabilize the rupee—which depleted much of the central bank’s foreign reserves—this allowed India to have the most stable currency of any emerging economy, encouraging foreign investment. However, it comes with a cost: keeping the currency at an exchange rate more expensive than its true free-market price is effectively a monetary policy-driven tax on Indian exports, making Indian companies relatively less attractive to the rest of the world.

The 10-year has already been flattening on monetary easing expectations, which will promote CapEx-heavy sectors like real estate, infrastructure, and manufacturing are expected to strengthen. 

Banks love the new rupee policy. Banks are massive beneficiaries of higher rupee volatility for two main reasons: 1) Higher volatility should result in greater hedging activity through derivatives which will demand higher commissions, and 2) Businesses that previously did not hedge will also be forced to work through banks more than before. Traders will also see several benefits with growth policies and long volatility trades. Domestic and foreign investors will see easier monetary conditions and more rapidly changing markets which could drive domestic and foreign fund action. Longer-term investors are also more likely to see higher FY25 Q4 earnings after mixed earnings reports over the last few weeks in Q3.

India’s Bond Rally Can’t Stop

Indian bond traders largely shrugged off concerns about increased government borrowing, as expectations of an RBI rate cut fueled demand for debt. Yields on the 10-year government bond dipped two basis points to 6.68 percent, even after the budget projected $171 billion (₹14.8 trillion) in debt sales for the next fiscal year. If you're wondering how debt sales are rising despite a falling deficit, remember that the RBI is delivering a record surplus transfer to the government, helping bring the deficit down to 4.4 percent of GDP.

Rate relief ahead? Analysts expect the RBI to cut rates at its Feb. 7 policy meeting—its first move in two years. The central bank’s recent liquidity injections, including an $18 billion (₹1.6 trillion) cash infusion through bond purchases, have already pushed yields to their lowest levels in nearly three years.

Lingering risks: India’s borrowing needs remain high, with net borrowings for the upcoming fiscal year estimated at $132.6 billion (₹11.54 trillion). Global trade policies could also present challenges. That said, strong institutional demand from pension funds, insurers, and foreign investors—particularly after JPMorgan added India to its emerging market debt index—has helped absorb supply.

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The First Electoral Test for Modi’s Budget

Delhi’s local elections on Wednesday mark a significant political showdown between Modi’s BJP and the Aam Aadmi Party (AAP), which has governed the capital since 2015. With 15 million voters set to cast their ballots for 70 assembly seats, the election outcome will serve as a key indicator of voter sentiment, particularly following Modi’s record tax cuts aimed at winning middle-class support.  

AAP, led by Arvind Kejriwal, has built its electoral success on education and healthcare reforms, gaining strong support among Delhi’s low-income groups. However, Kejriwal and other top party leaders are battling corruption allegations, with multiple members, including ex-Deputy CM Manish Sisodia, having spent time in jail without trial. AAP has dismissed these charges as a political witch-hunt by the BJP, which controls federal investigative agencies.  

BJP, emboldened by recent state election victories, hopes its tax relief measures and promises of financial aid will sway urban voters in Delhi, a city where the middle class holds significant influence. However, analysts suggest that while BJP may make gains, AAP’s entrenched welfare model still holds strong appeal.  

The importance of local elections now: Success for Modi will further embolden the BJP to drive India’s growth through raising consumer and business spending. A victory would also spur FDIs on the sideline who would see renewed confidence in the current administration. Given the prior AAP/BJP tension, an AAP victory would also signal further division in the country’s capital and regulatory ambitions.

Gupshup.

Macro

• SEBI has introduced rules to approve algorithmic trading by retail traders. Brokers can provide algo trading capability to individuals after gaining permission. All algo trades will have a unique identifier to provide a paper trail for SEBI to follow in case their policy goes awry. In 2024, algos made up 97 percent of traders’ profits in futures and options. 

• India's palm oil imports dry up to 14-year low amid soy oil popularity. Palm oil refining margins have recently turned negative due to palm oil prices spiking. Indonesia, Malaysia, and Thailand saw weaker harvests this year, resulting in a 46 percent drop in imports m-o-m in January.  

Equities

• Equity selling streak for global funds hits a record 22 trading days. Monday saw another $416.5 million (₹36.3 billion) in outflows capping off a $9 billion (₹783 billion) run over the month.

• Ambani helps Shein return to India, hitting Trent's shares. Shein, the fast fashion brand, has partnered with Reliance to return to India. Shein is looking to take share in one of the world’s largest clothing markets while Reliance wants to build on positive Q3 momentum. Trent operates Zudio stores selling similarly priced fast fashion. 

• Indian shadow bank Authum is now worth $3.3 billion (₹287 billion). Authum invests in small and midsize companies (SMID-caps) and also owns two other shadow banks—both are former Reliance assets.

• Bankers predict a $20 to $25 billion (₹1.7 to ₹2.1 trillion) IPO market in 2025. A greater focus on equity raises versus debt is likely to increase the number of $1 billion (₹87 billion) IPOs.

• Jaguar-Land Rover, owned by Tata, expects Indian demand to rise rapidly after tax cuts. However, the tax burden of India’s middle class has not significantly changed.

Alts

• Domestic and foreign satellite companies are looking to provide service to rural India. The Telecom Regulatory Authority of India (TRAI) is drafting rules on how to operate in the industry given the looks being given by SpaceX, Amazon, Airtel, and Reliance. The BJP wants to utilize low-Earth orbit (LEO) satellites which all the interested companies are capable of producing. 

• The NaBFID plans to enhance credit facilities for local companies that produce energy with waste material. While the municipal bond market has been small in India, the initiative provides a first step to addressing slow infrastructure private investment.  

• ​​Bajaj Finserv is in talks with German insurer Allianz to part ways in their joint venture. Bajaj wants to gain greater ownership in their partnerships where Allianz currently owns 26 percent. The reasons for sale are due to the new budget which should drive higher consumption of various bespoke insurance products. Additionally, the government would prefer domestic funds to own ‘upper-layer’ shadow banks. That being said, FDI long-term capital gains going up to 12.5 percent could result in a slower or smaller divestiture.  

Policy

• Modi is setting India up to avoid US tariffs through immigration and tariff concessions. Modi has taken back thousands of illegal Indian immigrants in addition to tariff removal. Additionally, India has promised that the dollar will remain its primary currency of trade.

See you Thursday.

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.