đź“°Bond Purchases Fuel Rate Cut Expectations

Three big stories in Indian markets you can't miss.

January 29, 2025

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:

  • Credit card use grows explosively,

  • The government may pause privatization efforts,

  • and, bond purchases have fueled rate cut expectations.

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

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—Shreyas, [email protected]

Market Update.

Future of India: Expert Panel & Networking

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.

Credit Cards Data.

India’s love for credit cards continues to grow, with the active number of cards doubling to 108 million and transaction values tripling to $2.4 trillion (â‚ą207.6 trillion) in the last five years, according to the RBI Payments System Report.  

Some other key stats: Credit card transactions surged to 4.47 billion in 2024 from 2.09 billion in 2019. The value of the average transaction is now $536 in 2024 but was $382 in 2019. The increase in value and transactions has led to credit card debt $3.5 trillion (â‚ą302.8 trillion) which is a 19 percent rise y-o-y. Public sector banks interestingly have dropped their share in debit cards to private banks now dominating the cards space to 71 percent. 

The cause: Credit cards are now the preferred option for online transactions and big-ticket spending with debit cards mostly used for cash withdrawals and daily expenses. Digital payments like UPI have reshaped the payment landscape, especially for small businesses like rickshaws, but private banks leveraged co-branded partnerships and digital innovations through points to expand their market. 

The darker cause is that new personal loan originations have slowed to the point that consumers are relying on credit card debt for their financial needs. Private lenders have also seized personal credit solutions to meet rising demand.

The Government Might Pause Privatization.

India is shifting away from its aggressive privatization drive, opting instead to pour billions into reviving state-owned entities (SOEs), according to government sources and a reviewed document. This marks a significant policy reversal from Prime Minister Narendra Modi’s 2021 strategy to reduce government involvement in business. Specifically, the privatization of at least 9 SOEs was put “in abeyance” including Madras Fertilizers, Fertilizer Corp of India, MMTC, and NBCC. 

Part of this is because of financially struggling firms:

  • $230 to $350 million (â‚ą19.9 to â‚ą30.3 billion) investment planned for helicopter operator Pawan Hans to modernize its fleet after four failed sale attempts  

  • $1.3 billion (â‚ą112.5 billion) bailout announced for Rashtriya Ispat Nigam, a debt-laden steel company  

  • $924.8 billion (â‚ą80 billion) was allocated for bond repayments of struggling telecom firm MTNL, which has been facing defaults  

All in all, the government is injecting $1.5 billion (â‚ą129.8 billion) into financially struggling SOEs that failed to attract private buyers.

Other complicating factors: Political pressure from regional allies has made privatization harder since there are so many guaranteed employee unions from Modi’s newfound allies. Additionally, privatization sales have missed this past year to the tune of $1.2 billion (₹100 billion) due to a lack of interest in various logistics companies. The lack of sales is not very surprising from a fiscal policy standpoint either: the fiscal deficit being only 4.9 percent of FY25 GDP reduces the urgency to sell assets especially when there can be more cash flow earned.

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Bond Purchases Have Fueled Rate Cut Expectations.

The RBI’s unexpected bond purchases have fueled speculation about a possible interest rate cut in February, as investors see these moves as an effort to inject liquidity into the banking system. Alongside daily overnight repo auctions, the RBI’s decision to buy government bonds signals a shift toward easing monetary conditions. 

How much did they buy? In a significant move, the RBI purchased $1.2 billion (₹101.8 billion) in government bonds in the week ending January 17, marking its first such action in over three years. This intervention led to a drop in India’s 10-year bond yield, which briefly touched its lowest level in nearly three years at 6.67 percent, just 17 basis points above the central bank’s key policy repo rate of 6.50 percent. The market response indicates growing anticipation that the RBI will adopt a more accommodative stance, addressing the liquidity deficit while supporting economic expansion.

Market experts believe that a rate cut is becoming increasingly likely, particularly in light of declining inflation, slower economic growth, and the government’s expected commitment to fiscal consolidation in the upcoming February 1 budget. 

With the next MPC meeting scheduled for early February, all eyes are on the RBI’s decision-making. Inflation will be released within the next two weeks, and if inflation remains under control and the government adheres to its fiscal consolidation roadmap in the upcoming budget, the case for monetary easing could gain further strength. 

Gupshup.

Macro

Equities

Alts

Policy

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.