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INDIA’S PASSIVE FPI OUTFLOWS MAY SOON BOTTOM AS USDINR NEARS 88-89

India’s Passive FPI Outflows May Soon Bottom as USDINR Nears 88-89 INDIA’S PASSIVE FPI OUTFLOWS MAY SOON BOTTOM AS USDINR NEARS 88-89 Summary Passive Foreign Portfolio Investment (“FPI”) outflows from India may soon turn as USDINR moves towards 88-89. Historical trends show a median depreciation of 6.6% in trough-to-peak cycles over the last decade, with an average of 7.9%. If this pattern holds, the rupee could reach 88-89 by Q1 FY26, possibly reversing passive FPI outflows. Historical patterns indicate that major depreciations in USDINR tend to follow phases of appreciation. The most notable depreciation in recent history occurred during the 2013-14 Taper Tantrum when the currency fell by ~16% within 3-4 months after FPI flows peaked at $14.8 billion. A similar decline was seen in 2018 due to trade war concerns, a 100-bps Fed rate hike, and domestic uncertainties linked to GST implementation, resulting in $25 billion in FPI outflows. Given past trends, if current factors affecting the exchange rate persist, USDINR could rise to 88-89 by April-May FY26 based on median bottom-to-peak moves observed in previous years. Cycles of USDINR and FPI flows show average peak depreciation of 8.3% The US Economy and FPI Inflows: A Surprising Correlation Contrary to common belief, a stronger U.S. economy does not necessarily drive capital outflows from India. Analysis of the Citi U.S. Economic Surprise Index (CESI) and India’s net FII equity flows since 2014 suggests a 25% positive correlation. Additionally, econometric modeling indicates that a 1% positive surprise in U.S. economic data has historically driven an inflow of approximately $82 million into Indian equities, with a lag of around one month. Growth Surprises in the US are Generally Positive for India Flows Correlation between US 10-Year Bond Yields and Indian (or Emerging) Markets Historical data suggests a strong inverse correlation between U.S. 10-year bond yields and emerging market equities, including India. These asset classes often move in opposite directions, with rising U.S. bond yields drawing capital away from riskier markets. When the U.S. 10-year yield exceeds 4.3% to 4.4%, it often marks an inflection point where investors reallocate funds into U.S. bonds. In September 2024, the U.S. 10-year yield was at 3.6%, but it has since risen to 4.6%. This surge has coincided with significant capital flows into U.S. assets, strengthening the dollar and contributing to large-scale FII outflows from India. A 4.5% risk-free return in U.S. dollars presents an attractive alternative, particularly as emerging markets continue to trade at elevated valuations. US 10-year bond yields and Indian (or emerging) markets have high negative correlation (Source: Vasuki Research) Source: Vasuki Research Conclusion: Volatility Ahead, but Structural Strength Remains Although short-term market conditions remain uncertain, India’s long-term fundamentals continue to provide a solid foundation. Fiscal consolidation efforts, steady forex reserves, and resilient domestic flows support economic stability. While USDINR may weaken to 88-89, the expected reversal in passive FPI flows will be a critical development for investors tracking the evolving macroeconomic environment. For more information, reach out to us at research@vasukiindia.com. Disclaimer This article is published for informational purposes only and does not constitute investment advice or analysis. The information presented has been sourced from public domains and has not been independently verified. Vasuki Group makes no representations or warranties regarding the accuracy, completeness, timeliness, or reliability of the content. Neither Vasuki Group nor its affiliates, directors, employees, or representatives shall be liable for any errors, omissions, or reliance on the information provided. This article does not constitute an offer, solicitation, or recommendation for any investment, securities transaction, or contractual engagement. Readers should conduct their own due diligence before making any financial decisions. Any views expressed are those of the author and do not necessarily reflect the opinions of Vasuki Group. Further, Vasuki Group may hold or take positions in the market that differ from the views expressed in this article. All rights reserved. Vasuki Group reserves the right to update or modify this article at its discretion.

Agriculture Scenario in India and Future outlook

Agriculture Scenario in India and Future outlook El Niño and La Niña are climate patterns that affect the weather globally. El Niño refers to warmer ocean temperatures in the central-east equatorial Pacific, leading to various impacts like increased flooding and changes in marine life. On the other hand, La Niña involves cooler ocean temperatures in the same region, leading to effects like droughts and heavy rains in different parts of the world. India, along with asian countries faces low and scattered monsoon in El Niño and abundant to heavy rainfall in La Niña. Historical Impact of El-Niño: Past Challenges and Resilience In the past, El-Niño has caused difficulties for farming in India. It led to problems like less rain, affecting crops like rice and sugarcane. Historical data shows that during El-Niño events, agricultural production in India faced setbacks. Crops like rice and sugarcane were particularly impacted by El-Niño. Current Scenario: Facing Water Scarcity and Crop Challenges Currently Western, Central, and Southern regions in India are experiencing water scarcity which is affecting crops such as sugarcane and off-season plantations. Farmers are working hard to adapt to these conditions and find ways to sustain their crops. Water reservoir levels in many regions are lower than previous year as well as long term average. Water scarcity is significantly impacting regions like Northen, Eastern, and Southern India. However, Central region water reserves are at 10 year average while Western India has water availability at levels better than 10 year average but lower than last year. Sowing in Sugarcane, vegetables and pulses are facing challenges due to the scarcity of water. Future outlook: Anticipating Better Monsoon and Agricultural Growth According to initial forecasts by Sky met & IMD, India is likely to witness La Niña phenomenon i.e. return of normal monsoon 2024. The expectation of better rainfall brings optimism for increased agricultural production & fertilizer usage. This positive outlook signals a potential resurgence in agricultural productivity. Agriculture theme can be played in stock markets through sub segments like Seeds, fertilizers, Agrochemicals, Agri equipment’s manufactures & rural consumer products producers. Chart data source:India Meteorological Department Ministry Of Earth Sciences Government Of IndiaReserve Bank of IndiaSkymet Weather

Daljeet Singh Kohli explains why he is overweight on metals

Daljeet Singh Kohli explains why he is overweight on metals Daljeet Singh Kohli to ET Now – featured on 18th Mar, 2024 “Right now, we believe there is a lot of potential there mainly because valuation-wise they are not obscenely high. Second, the way the Indian government is putting focus on infrastructure development and especially after the elections, we expect a lot more push coming on to the infrastructure, so the demand from our side will remain very strong and currency, local as well as international, is in favour. All these factors make a conducive environment for metal stocks and therefore we are exposed to them.” One section of the market believes that the US economy may not be doing that badly. The macro data from China is also supportive. So, metal is the place to be. They are beaten down. There is also a view that if the slowdown continues in these two economies, this metal long trade may be very short lived. Do you believe in this trade or is it just a point A to point B and not worth making it a large part of the portfolio yet?   See, we are right now very much overweight on metals. As of now, almost 8% to 10% of our portfolio is exposed to metals and normally metals is a technical call. So, metal is never a three-year, five-year lock-in story that you buy and forget and your next generation will look at it like that. We do not buy metal stock like that because there are so many things which work. There are so many moving parts there. Either it is global macros, it is local macros, then company specific issues. So, metals normally are a trading opportunity only and we have also taken that view. Right now, we believe there is a lot of potential there mainly because one is that valuation-wise they are not obscenely high. Second, the way the Indian government is putting focus on infrastructure development and especially after the elections, we expect a lot more push coming on to the infrastructure, so the demand from our side will remain very strong and currency, local as well as international, is in favour. All these factors make a conducive environment for metal stocks and therefore we are exposed to them.https://youtu.be/F0PA0rXotOw   I want to draw your attention to Reliance Industries because even in the recovery that played out post Wednesday, Reliance had a big contribution. What do you think is fuelling the move on Reliance? This is the rotation towards large caps basically. If you have to take money out and there is so much talk about froth being built up in various segments. So, if the institutions are forced to or if they have to get out of certain smaller and mid stocks, then where does that money go? The natural progression is that it has to go to some largecap and within the largecap, probably Reliance is the first choice because it is valuation-wise not very costly. There are a lot of trigger points for the stock to perform. After quite a few months of consolidation, the stock had come out of that phase and started moving to the new highs. So, normally, people would want to go with a stronger stock when they are rotating out of some stocks and especially locking out their profit from those stocks. It is just that rotation which is happening. Trigger points for Reliance remain as it is. The new energy initiatives that they are taking, is a three-four years kind of call. It is not immediate that the profitability will start flowing in, but these days just a hint is enough. Semiconductor stocks are trading at 100 multiples. So yes. At least these guys are spending Rs 75,000 crore on new energy. The market is willing to give them that benefit.   How would you play the capex theme right now? What are your favourite capital goods stocks or engineering ones that you have in your portfolio? We are adding some of them. As of now, I do not think we have any capex stock right now. Infrastructure, we have added two-three months back, some road project companies and those we have added. But machinery or cap goods per se, now we are evaluating three-four ideas there. Basically, we tend to go to the mid-end, the smaller ones, instead of just going to the L&Ts of the world and we try to find the niche areas. So, I think there are a couple of ideas which we are working on, maybe in the next one month or so we will be adding some.   What about hospital stocks? There is the entire story brewing on how treatments would be regulated and it will be at par with the public sector hospitals. The entire space went through a correction and some of them started trading at 60-70-time one-year forward, still way off the mark from recent peaks. Would you be comfortable getting back there? I am very bullish on the sector as such because this is a place where we see a lot of potential for many years to go. We have such a huge population, penetration levels are so low and there is a huge scope for expansion for all these companies. Now of course you have to be mindful of valuations. Incidentally, in the last two-three years this sector has seen a lot of PE investments, a lot of private investments coming in which have just inflated the valuation to a very large extent. So, probably this Supreme Court ruling actually become a trigger point for people to take some profit out and bring back some sanity in the valuation. I think still valuations are on the frothy side. So, we will have to be very choosy amongst all these stocks. I am very bullish as I said on the sector, but one has to be very choosy while selecting the stock where at least some kind of

Looks like Gold is poised to shine the brightest!!!

Looks like Gold is poised to shine the brightest!!! What really moves gold prices? Real Rate of Return – A combination of Inflation & Interest Rates – moves Gold prices. What is a real rate of return? Real Rate of Return in simple language is: Interest Rate – Inflation If bank fixed deposit is paying 6% interest rate & inflation is 7%, the real return is 6% – 7% = -1% If inflation is 4%, your real return is 6% – 4% = 2% What’s the relationship between real rates & gold prices? Negative Real Rates (-1% in the above example) is supportive of gold prices Positive Real Rates (2% in the above example) works against gold prices Why is this so? Gold is a non interest-baring instrument i.e. does not pay any fixed interest. Hence, whenever rates drop, you make less fixed interest by investing incremental money in fixed income & hence it moves to Gold & When rates go up, you want to invest incremental money in Fixed income & not gold Hence, assuming inflation to be constant, you will invest more in Gold when Interest rate falls to 4% & inflation is 6% = -2% real rate and you will invest less in Gold when interest rate rises to 7% & inflation is 6% = 1% real rate Positive Real Rates (2% in the above example) works against gold prices Apart from Interest Rate & Inflation, does $(DXY) affect gold price? Yes. Gold is traded in $ terms. When $ increases/ strengthens, gold becomes expensive & hence demand is expected to fall & hence the price comes down. But when $ drops/ weakens, gold becomes cheap & hence demand is expected to rise & hence the price is expected to go up. Globally interest rates are expected to top out. Market is expecting rates rate cuts starting middle of 2024; & hence fixed income investors would lean more towards Gold as against fixed income assets When interest rates go down, the currency (Dollar in this case) is expected to soften as well. With this view, the expectation also is that softening dollar will be positive for gold.

The Red Sea issue and what it meant for India Inc

The Red Sea issue and what itmeant for India Inc The Red Sea crisis, also known as the U.S.-Iran proxy war, originated from Houthi rebels’ attacks on Israel in October 2023, causing significant disruptions to global trade via the Red Sea. This includes attacks on commercial vessels, leading to:  Increased shipping costs: Ships are taking longer routes, raising fuel consumption and operational costs. Delays in delivery Rerouting adds significant time to shipments, impacting supply chains and potentially leading to shortages. Higher insurance premiums War risk insurance for the Red Sea has soared, adding to costs for businesses. The potential for further escalation remains, which could result in the shutdown of key trade routes, leading to price increases and economic instability worldwide. It’s important to note that the situation is ongoing and its full impact on global trade is still unfolding. However, the potential for significant disruptions and economic consequences remains high. Key point to note: The crisis predominantly affects trade between Europe and Asia, with India particularly vulnerable – with a large portion of its trade reliant on the Red Sea. India Inc – In Q3 2024 management discussion calls, the term ‘Red Sea’ was mentioned 48 times, primarily impacting industries such as Mining and minerals, Manufactured products, chemicals, plastics and rubber materials. Discussions revolved around: Increased freight costs Affecting export-oriented industries, notably steel, pharmaceuticals, and oil. 2. Delays in deliveries due to rerouting, especially impacting exports. 3. South African coal offered at discounted rates due to EU delivery disruptions, benefiting Indian industries. Delays in deliveries Due to rerouting, especially impacting exports.   South African coal offered at discounted rates Due to EU delivery disruptions, benefiting Indian industries.   As of Q3, the impact on most companies is marginal, with ongoing monitoring for potential future actions. Note: only the companies whose concall transcripts were available on Factset database as on February 8, 2024, are considered

Unravelling the US Banking Puzzle: The Commercial Real Estate Dilemma

Unravelling the US Banking Puzzle: The Commercial Real Estate Dilemma In the world of US banking, the spotlight has turned on the Commercial Real Estate (CRE) portfolio, stirring discussions following the acquisition of Silvergate Bank last year by New York Community Bank. The announcement of increased provisions in its CRE portfolio during the fourth-quarter results on January 31st resulted in a significant 57% decline in its stock and 8% fall in the regional banks index since the result date, as of the closing price on February 7th. This has prompted a closer look at the challenges faced by the sector. Other banks with high exposure to CRE including Zions Bancorp, Valley National Bancorp and Western Alliance Bancorp have also borne the brunt. What is driving this? High-Interest Rates The low-interest rate party of the past decade is officially over. The Federal Reserve’s decision to crank up the federal funds rate has thrown a curveball at the commercial property market. Loans taken at rock-bottom rates now need a refinance makeover at significantly higher rates. Office Vacancy Trends The surge in remote work, born during the COVID era, has elevated office vacancy rates to 19.6%. This shift has adversely affected property demand, potentially leading to defaults on associated loans. Anticipated Impact Delinquency rates are expected to rise as loans mature for refinancing, especially for banks heavily invested in the CRE rollercoaster. What is driving this? The drama seems to be localized, with major banks like JP Morgan and Bank of America sporting less than 5% exposure to the CRE theatrics. The impact appears to be concentrated among regional banks and select foreign banks having high exposure to CRE loans. Despite the CRE challenges, commercial property prices have managed to weather the storm, providing some stability in uncertain times. Also, CRE loan repayments are evenly distributed from 2023 to 2028, with the majority not falling due this year. Conclusion – Finding Balance: As US banks grapple with the intricacies of the CRE market, the overall impact on the economy appears to be manageable. Proactive measures, staggered repayments and the limited exposure of major institutions indicate a more localized challenge than a widespread economic crisis. Relevance in Indian context Indian banks are sipping their chai, unfazed. Stable interest rates, sustained demand for commercial property and a mere 3% exposure mean they’re not hitching a ride on this rollercoaster.

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