Take Back The Reins
This week, we talk about the fall in India’s inflation rate what it means for the economy. We also talk about the war in Israel and its possible implications on India, as also about the less-than-encouraging numbers reported by the IT majors. Finally, we talk about another allegation against Adani Group.
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Welcome to Kuvera’s weekly digest on the most critical developments related to business, finance, and the markets.
“The first panacea for a mismanaged nation is inflation of the currency; the second is war,” American novelist Ernest Hemingway wrote, back in 1935. “Both bring temporary prosperity; both bring permanent ruin.”
This week, is all about inflation in India and war in West Asia.
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But first, we need to revisit another war – the one in Ukraine, which began almost 600 days back. The Russian invasion of Ukraine may have gone off the front pages, but the war continues to simmer.
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As Russia invaded its neighbour on 24 February last year, global crude prices surged, and commodity supply lines were disrupted, causing a spike in inflation, all over the world. This led central banks across the world to go into firefighting mode, in a bid to mitigate the cascading impact of steep rise in commodity and energy prices.
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Like most emerging economies, India too was not immune from this price shock and the central bank was forced to go into firefighting mode. Since May 2022, the Reserve Bank of India (RBI) went in for six interest rate hikes, upping the benchmark lending rate by as much as 250 basis points. Folks at the central bank knew they simply had to fend inflation off.
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And this week, this firefight finally seems to have yielded some results, as two high frequency indicators reflected a sudden positive turn for the economy. The consumer price index (CPI)-based inflation for September cooled down to 5.02 per cent as against 6.83 per cent in August, coming back into the RBIs tolerance band of 2-6 per cent. Simultaneously, industrial growth based on the Index of Industrial Production (IIP) surged to a 14-month high of 10.3 per cent in August.
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The main reason for the drop in inflation from 6.83 per cent in August was a fall in vegetable and oil prices. Industrial growth surged on account of strong manufacturing activity. Analysts and experts feel with these two indicators showing a positive turn, the pause on policy repo rate will continue well into next financial year.
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Does this mean we’re done with our fight against inflation for now? Not really. Even Finance Minister Nirmala Sitharaman thinks global and regional uncertainties combined with domestic disruptions may keep inflationary pressures elevated in the coming months.
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Experts feel that inflation could average around 5.6 per cent in the third quarter of FY24. For the full year, headline inflation is expected to average 5.3 per cent while core is expected to average below 5 per cent, according to an estimate by HDFC Bank. Economists at ICRA also feel that headline CPI inflation will remain volatile in a wide range until June 2024, with the outlook for food inflation remaining murky and crude oil prices remaining volatile. But any further interest rate hike is unlikely in the near term, they feel.
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So, even as you may be enjoying the Cricket World Cup and getting ready to revel in the festive season, do remember that we may not have seen the end of the price rise, just yet.
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West Asia and War
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While we in India may finally be winning the war on inflation, West Asia saw the beginning of what threatens to be a long drawn-out war, which could leave thousands dead and a pall of destruction in its wake.
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On Saturday, fighters belonging to the Palestinian militia group Hamas, which controls the narrow Gaza Strip, launched a fierce rocket attack into Israel. Hundreds of Hamas operatives went on a rampage in Israeli border towns on Saturday, slaughtering civilians and kidnapping them to Gaza. This triggered Israeli airstrikes on Hamas hideouts in Gaza strip, reducing neighbourhoods into rubble. Israel has amassed more than 300,000 ground troops and may be getting ready for a ground invasion of Gaza, vowing to eliminate Hamas for good.
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While the war in Israel has largely been shrugged off by the Indian stock markets, it could potentially impact several Indian companies, especially in the IT sector, that have exposure to the country. These include the likes of Tata Consultancy Services and Wipro.
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On the other side, news reports say that global tech companies operating in Israel could shift their businesses to India and other locations in West Asia or Eastern Europe, if this war escalates. Israel is home to as many as 500 top global tech companies including the likes of Microsoft, Google and Intel, many of which could consider shifting operations to other geographies.
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For now though, several countries including India are looking to safely evacuate their citizens from Israel. India has launched ‘Operation Ajay’ as part of which the first batch of 212 people returned home to safety.
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We certainly hope that the war does not escalate.
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IT faces slowdown
Meanwhile, back home the Indian IT industry has been clocking some rather dismal numbers of late, taking some of the sheen off an industry that employs hundreds of thousands of engineers and is one of the biggest foreign exchange earners for the country.
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TCS, India’s biggest IT company reported a rise of 8.7% in its consolidated net profit for the July-September quarter to Rs 11,342 crore, as against Rs. 10,431 crore in the same quarter last year. But more importantly, the company reported its first decline in US Dollar revenue in over three years or 13 quarters. While TCS declared a share buyback, it failed to enthuse experts.
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TCS’ competitor Infosys said its Q2 net profit rose 3.17 per cent to Rs. 6,212 crore, compared to Rs. 6,012 crore in the corresponding period last year. The Bengaluru-based company has narrowed its revenue growth guidance for the full year at the upper end to 1-2.5 per cent.
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HCL Technologies though fared much better than its bigger rivals as its net profit for the second quarter rose 10% to Rs. 3,832 crore, on an 8% revenue spike.
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But what may be even more significant for middle class Indians is the fact that these IT giants have all said that their net headcounts have declined and the hiring outlook does not look very promising. While TCS saw its headcount dip more than 6,300 in the second quarter, HCL Tech said its net headcount addition was down by 2,299. Infosys saw the worst decline in the number of employees with its headcount shrinking by 7,530 in the July-September period. This is Infosys’ third consecutive quarter of decline.
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This is clearly not good news from an employment perspective, especially for the thousands of engineers India churns out each year.
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More heat on Adanis
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The Adani group, it seems, cannot remain out of the crosshairs of the international media. This week was no different.
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The Financial Times reported that that Gautam Adani-led group was allegedly over-invoicing imported coal prices to enrich itself and to make electricity consumers in India pay more.
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The FT said in its report that the Adani Group appeared to have “imported billions of dollars of coal at prices well above market value”. It had cited customs records reviewed by it. “Records show that over the past two years, Adani used offshore intermediaries in Taiwan, Dubai and Singapore to import $5 billion worth coal at prices that were at times more than double the market price,” FT said in the report. “One of these companies owned by a Taiwanese businessman who was recently named by FT as a substantial hidden shareholder in the Adani companies,” the report further said.
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The Adani Group in a statement issued last week, much ahead of publication of this report had rejected the allegations.
Meanwhile, India’s market regulator, too, seems to investigating the Adani Group. The Securities and Exchange Board of India (SEBI) is reportedly investigating the Adani Group’s connections with the Gulf Asia Trade & Investment fund based in the British Virgin Islands. The probe aims to determine whether there have been violations of share ownership regulations, following allegations of accountancy fraud and stock manipulation made against the Adani Group.
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The Gulf Asia fund, reportedly owned by Dubai-based businessman Nasser Ali Shaban Ali, allegedly invested in Adani’s listed companies after SEBI’s directive in June 2013, which required companies to increase public shareholding to at least 25 per cent of their total floats.
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The SEBI probe follows allegations made in a January report by short-seller Hindenburg Research which accused the Adani Group of governance risks, asserting that offshore shell firms clandestinely owned stakes in Adani’s publicly-listed companies.
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Market Wrap
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Markets this week remained volatile, but despite the war in Israel and the less than impressive numbers from the IT majors, both the Sensex and the Nifty ended the last five trading session comfortably in the green.
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Both the Sensex and Nifty rose by about 0.5%.
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The stocks that led the Nifty’s rally included government owned energy and power companies like Coal India, GAIL India and NTPC, while also others like Grasim, Bajaj Finserv, Maruti Suzuki and IndusInd Bank. Other Nifty counters that also ended in the green were ITC, Tata Motors, Vedanta, UPL and JSW Seel.
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Apart from the IT pack that included Infosys, TCS and Tech Mahindra, other stocks that ended the week in the red included Asian Paints, the State Bank of India, Adani Ports, Axis Bank and Larsen & Toubro.
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Other headlines
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That’s all for this week. Until next week, happy investing!