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Investors should continue to seek higher risk premia from yields for holding higher duration over the medium term




It is evident now that economic growth is slowing appreciably around the world. While this is widely acknowledged by now, one suspects the extent of the eventual slowdown is still not. There seems to be momentum to the slowdown given the context of more restrictive fiscal policy now and the fact that central banks will widely keep monetary conditions tighter for longer.

While China is loosening policy on the margin, there are multiple constraints here both on the quantum of easing possible and the net effect of the same. Thus the only (temporary) respite to the downward momentum to global growth could potentially be from a possible cessation of war and a consequent sharp correction in energy prices (this is mentioned as a possible scenario here and not a view).

Barring that, one would expect the higher momentum data slowdown to eventually feed into the ‘stickier’ parts of the world economy. As one example of this, concurrent data on US housing sales has turned down significantly. Signs that this is percolating into new construction are very much there.

One would think it a matter of time that the housing slowdown starts showing up in house prices and from there as a negative wealth effect for consumers. This in turn may weigh further on discretionary consumption (including for services) which is already slowing. The construction slowdown alongside the ongoing manufacturing weakness would show eventually in the labour market and from there into wages.

The last of these is the slowest moving piece in the chain just described. However this is precisely the shoe the Fed is waiting to see drop, and that is the reason that policy rates will have to be held higher for longer. An implication of this also is that while sovereign rates may already have done the heavy-lifting, corporate bond spreads in developed markets (DMs) appear way too sanguine given the macro context described here.

One can think about India’s own growth momentum in context of slowdown spreading to stickier parts of the world. We have two distinct advantages going for us. One, a long period issue on local corporate and bank balance sheets is now behind us. This has been a significant cyclical drag over the past many years which has now turned into a tailwind.

Two, India’s total monetary and fiscal policy response to Covid has been measured and responsible. This implies that there is very little overhang to deal with of excess stimulus from the past unlike in the case of many developed economies. This is also the main reason behind our view that India needn’t follow the US lockstep in monetary tightening and that we can afford for our effective overnight rate to peak below 6 per cent in this cycle.

Returning to point, however, the cycle and policy tailwinds are ensuring that we now grow more robustly than many other nations around the world. The relative growth advantage will likely sustain going forward.

However, the absolute growth acceleration that we have witnessed over the past few months will have to slow reflecting the weakening global growth. This starts through the export channel, as it already has, and then proceeds to impact local consumption and investments down the line.

Stabler rate hike expectations in DMs from here

Global rate hike expectations were in constant iteration mode (read being continually revised upwards) for most of this year till mid-June. Post that things took a breather. For a while as signs of economic breakage started to become clearer, markets began running somewhat ahead of themselves by not just lowering their terminal rate forecasts but in some cases even building significant rate cuts for late 2023 in some developed markets. As an example, around mid-July approximately 80 bps rate cuts were being priced in for the US next year.

Over the past few weeks, on the back of active central bank pushes against this idea helped with continued upward pressure on European inflation, ‘sense’ seems to have returned. This has been evidenced in both terminal rate pricing going up as well as an expectation now that they will be at higher levels for longer.

This is now more consistent with the message delivered, as an example, by Fed Chair Powell in his recent Jackson Hole speech. In Europe, policy tightening expectations had built in significantly till mid-June but then unwound appreciably on the back of weaker economic data.

However, with inflation concerns going up further and with ECB seemingly showing firm resolve to contain it, rate hike expectations have sharply risen again. These gyrations are best reflected in the movement of German 2-year bond yields over the past few months. The UK has also seen very sharp recent additions to rate hike expectations from the market.

Given all of the recent building back of rate hike expectations, and with clear signs of economic breakage becoming more pronounced, it is unlikely that incoming data leads to more than, say, a 25 bps upward change in expectations from the current levels in most major DMs. Pricing is already for peak rates in this cycle being significantly higher than what are termed as long term neutral rates and thus incoming data needs to very sharply surprise for this to move even higher by a significant step.

Turning home, rate hike expectations with respect to RBI seem to also now be stabilising. To recap, these expectations had become quite unanchored post the inter-meeting hike in May. While we had held on to our view of peak effective rates in this cycle at sub-6 per cent (basis our reading of the current global macro cycle as well as India’s total, relatively modest, post Covid policy response), market pricing was far in excess of this at ‘peak fear’ after the May event.

However, now here as well market seems to be converging towards a peak repo rate of 6-6.25 per cent which is much closer to what we have been thinking. Our view of peak effective overnight rate of 5.75 per cent is consistent with a terminal repo of 6 per cent with overnight rates round the SDF, 25 bps below.

Tighter global financial conditions & possible implications

While DM sovereign rates may be more range bound from here, this doesn’t mean that we are done with tightening in global financial conditions. As rates stay tighter for longer in the face of economic breakage, this may get evidenced more in the usual risk off trades like stronger DM currencies and wider corporate bond spreads (DM corporate bond spreads are still relatively well behaved and seem to have significant room to expand).

Many emerging market (EM) bond yields are also like ‘spread’ assets for global capital. Thus a tighter for longer policy environment in DMs will entail stricter financial conditions and hence a widening of spreads. This may impact yields in many EMs as well.

Over the first half of the year when the world was readjusting its expectation of global monetary tightening, the linkage to Indian bonds was largely through interest rate swaps rather than outright bond selling by foreign investors in a big way.

Most of the capital outflows were instead from the equities markets. This probably reflects the fact that active foreign interest has been missing from Indian bonds over the past few years and hence the amount of rebalancing out may also consequently be lower. Portfolio rebalancing on possible another bout of risk aversion ahead may not impact India’s bonds significantly.

Also with spread between bond and swap having opened up (5 year government bond yields were around 60 bps over 5 year swap yields at the time of writing), there is room for this to compress without significantly impacting underlying bond yields.

However, this doesn’t mean that local bonds are immune to global financial conditions tightening. This needs to be still respected, in our view. As an example, lately the local bond market is abuzz with expectations that India is on the cusp of being included in at least one of the large global sovereign bond indices.

The argument heard is that this time around this is on ‘pull’ from investors desiring some diversification to their EM exposures. Hence it may go through even without associated facilitators that required leeway on taxation which apparently our policymakers were against.

The expectation is that the while flows associated with actual index inclusion may take some time, and the weight assigned to Indian bonds in the index itself would only gradually go up, other ‘fast money’ flow may pre-empt this and already start coming in.

Basis this expectation, one has seen a bull flattening over the past few sessions thereby further flattening the 5 to 10 year yield spread, as local participants have taken positions in longer duration bonds anticipating this announcement.

We have no idea how far this can stretch in the near term. However, nothing changes to our underlying view that if there’s one point of concern that bond markets ought to have over the medium term, it is the amount of duration supply.

This is both on account of higher than pre-pandemic averages on likely fiscal deficit over the next few years as well as a shift higher in annual bond maturities over the next many years from what was the case in the past.

Even adjusted for nominal growth in participant balance sheets, this is a significant step up in duration supply and likely needs support from a demand standpoint. Absent offshore investors, RBI would have eventually stepped in to buy bonds as a means to expand its balance sheet.

With index inclusion, offshore investors will buy bonds and RBI will get the dollars to expand balance sheet. Then RBI wouldn’t need to buy bonds. Either way, over the medium term, the eventual effect on bond yields may be similar.

Thus the issue of duration absorption may still persist after the initial euphoria on index inclusion subsides. Also this would be in what is a tighter global financing environment. In India too even as our peak rate expectations are in place, we would expect RBI to hold them there for longer.

Thus, investors should continue to want higher risk premia from yields for holding higher duration over the medium term. Also given how unforgiving the global environment is, we don’t want to be too ‘tactical’ with our portfolio strategies by trying to chase the bull flattening. All told then, we continue to find the most value in 4 -5 year government bonds.

(The author is Head-Fixed Income at IDFC AMC.)

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AIMRA accuses Apple India of retail favoritism, iPhone 15 Pro cashback sparks outrage



As the iPhone 15 series from Apple continues to be one of the best-selling premium smartphones, Apple India is now facing criticism from the All India Mobile Retailers Association (AIMRA) over its “discriminatory” cashback offers between larger and small retail stores. AIMRA, which reportedly represents over 1,50,000 mobile phone retailers in India, has accused Apple of engaging in anti-competitive practices with its iPhone 15 Pro and iPhone 15 Pro Max cashback offers.

The association alleges that Apple has allowed its own stores and large retailers to offer cashback of up to Rs 10,000 on these models, while smaller retail channels are only allowed to offer Rs3,000 cashback, as per a Financial Express report. In a letter to Ashish Chowdhary, the Managing Director of Apple India, Navneet Pathak, the national joint secretary of AIMRA, highlighted the issue. The letter stated that this discrepancy poses a significant risk of loss in sales for the retail channels and raises concerns about unfair competition, further emphasizing that such actions would make customers lose trust in small retailers.

“This is purely an anti-competitive move favouring few…This discrepancy not only poses a significant risk of loss in sales for the retail channels but also raises concerns of unfair competition. Such actions undermine the trust and confidence we have diligently built with our customers over time,”. AIMRA has urged the iPhone maker to resolve the cashback offer quickly in order to ensure that all the retailers are treated equally and to prevent the rise of unhealthy competition in the market.

The association has stressed the need for fair competition and trust in the retail ecosystem, the report further added. The iPhone 15 series was launched in September last year, with the iPhone 15 priced at Rs79,900, the iPhone 15 Plus at Rs 89,900, the iPhone 15 Pro at Rs 1,34,900, and the iPhone 15 Pro Max at Rs 1,59,900.

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Vistara CEO: Operations stable, worst behind us



The worst is behind us and we have stabilised our operations,” said Vinod Kannan, CEO of Vistara on Thursday which at the start of this month.

Following recent significant flight disruptions, Vistara CEO Vinod Kannan assured airline staff on Thursday that the worst has passed, and operations are now stable. Pilot challenges have led the Tata Group airline to temporarily reduce capacity by 10%, equivalent to 25-30 flights daily. While acknowledging that things should have been planned better, Kannan said it has been a “learning experience”. He also said it has been a challenging start to the new financial year and the airline faced significant operational disruption from March 31 to April 2.

“The anxiety and frustration felt by our customers was matched in even measure to the pain that all of us felt in seeing our much-loved brand drawing negative commentary from various quarters… I assure you that the worst is behind us, and we have already stabilised our operations, with our on-time performance (OTP) increasing to 89 per cent on 9 April 2024 (second highest among all Indian airlines),” he said in a message to the staff. The full-service carrier has around 6,500 people, including about 1,000 pilots. In the wake of the disruptions, the top management of the airline had held a virtual meeting with the pilots. One of the reasons for the disruptions was also that some section of pilots reporting sick to protest against the new contract that will result in pay revision.

According to Kannan, there were a multitude of reasons for the disruptions, including ATC delays, bird hits, and maintenance activities early last month. “We were stretched in our pilot rosters and there was not enough resilience to withstand injects that we would otherwise have weathered. We could and should have planned better, and this has been a learning experience for us which we will review thoroughly,” the Vistara chief said. Most of the cancellations were in the domestic network and the carrier is working on plans for May and beyond.

“While the events of the last week may seem like a setback, the hallmark of our organisation has always been that we have bounced back from tough situations ‘ and emerged stronger. “… I trust each of you to continue to put in all efforts to ensure that we do not let our brand, and our customer, down,” Kannan said. As we emerge from this difficult phase, he said it is this commitment to being a customer-oriented airline that will help it bounce back stronger. The airline has also reached out to customers impacted by the cancellations and delays over the affected period.

“We have provided the necessary compensation as per the regulatory mandate, and have also offered additional service recovery vouchers for passengers whose flights were significantly delayed,” the Vistara chief said.

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Tobacco firms’ mthly returns accepted till May 15 via spl registration



The Central Board of Indirect Taxes and Customs (CBIC), through a notification, extended the date of implementation of this special procedure by 45 days till May 15.

On Thursday, the government has extended the deadline for implementation of special procedure for registration and monthly return filing for manufacturers of pan masala, gutkha, and similar tobacco products to May 15th. Earlier, in January 2024, the Central Board of Indirect Taxes and Customs (CBIC) announced the rollout of a new registration and monthly return filing process, effective April 1, 2024. The decision to revamp the registration, record-keeping, and monthly filing procedures for such businesses was aimed at improving GST compliance for manufacturers of pan masala and tobacco products.

The GST law was also amended via Finance 2024, to say that manufacturers of pan masala, gutka and similar tobacco products will have to pay a penalty of up to Rs 1 lakh, if they fail to register their packing machinery with the GST authorities with effect from 1 April. However, this penalty provision is yet to be notified. The procedure was to be applicable for manufacturers of pan-masala, unmanufactured tobacco (without lime tube) with or without brand name, ‘Hookah’ or ‘gudaku’ tobacco, smoking mixtures for pipes and cigarettes, chewing tobacco (without lime tube), filter khaini, jarda scented tobacco, snuff and branded or unbranded ‘Gutkha’, etc.

The CBIC, through a notification, extended the date of implementation of this special procedure by 45 days till May 15. The manufacturers of such tobacco products were required to furnish the details of packing machines being used for filling and packing of packages in Form GST SRM-I, electronically within 30 days of the notification coming into effect i.e., April 1, 2024. Also a special statement of return filing GST SRM-II was to be filed by the 10th of the succeeding month. Moore Singhi Executive Director Rajat Mohan said neither the GST Network has issued any advisory on the new procedure nor released new filing utilities.

As a result, the government has decided to defer the implementation of the new procedure by 45 days to 15 May. “This delay by the GST ecosystem has led to challenges for the industry in implementing the new scheme mid-year. Ideally, any new scheme should be implemented at the start of a new financial year to allow for smoother transitions and better compliance,” Mohan added. In February last year, the GST Council, chaired by the Union Finance Minister Nirmala Sitharaman and comprising state counterparts, had approved the report of a panel of state finance ministers on plugging tax evasion in pan masala and gutkha businesses. The GoM had recommended that the mechanism for levy of compensation cess on pan masala and chewing tobacco be changed from ad valorem to a specific rate-based levy to boost the first stage collection of the revenue.

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Apple warns users of 92 countries about possible ‘mercenary spyware’ attack



Apple has warned its users in India and 91 other countries that they may have been the victims of a “mercenary spyware” attack, according to multiple media reports. Apple has warned users that they are being attacked by mercenary spyware that is trying to gain remote access to their iPhones. Mercenary spyware attacks like NSO Group’s Peagusus are ‘exceptionally rare’ and ‘vastly more sophisticated’ than a regular cybercriminal activity or consumer malware, Apple stated in the threat notification.

The Cuperino-based company also explained that these attacks cost millions of dollars and are individually deployed against a very small number of people. “Apple detected that you are being targeted by a mercenary spyware attack that is trying to remotely compromise the iPhone associated with your Apple ID -xxx-. This attack is likely targeting you specifically because of who you are or what you do. Although it’s never possible to achieve absolute certainty when detecting such attacks, Apple has high confidence in this warning — please take it seriously,” the threat notification by Apple was quoted as saying by The Indian Express.

Apple also advised users not to open links or attachments from unknown senders and to be cautious about any links they receive. However, the company declined to provide further information about the spyware, saying that this could help attackers adapt their behaviour and avoid detection in the future. Notably, Apple also updated its support page on Wednesday, adding tips for users who have been victims of a possible mercenary spyware attack.

“Such attacks are vastly more complex than regular cybercriminal activity and consumer malware, as mercenary spyware attackers apply exceptional resources to target a very small number of specific individuals and their devices. Mercenary spyware attacks cost millions of dollars and often have a short shelf life, making them much harder to detect and prevent. The vast majority of users will never be targeted by such attacks,” the updated Apple support page reads.

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Cola, Beverage, Ice Cream makers expect Sales Skyrocket as temperature soars



As temperatures rise and a heatwave settles in, FMCG (Fast-Moving Consumer Goods) and dairy companies are gearing up for increased sales of cola-based fizz drinks, juices, mineral water, ice creams, and milk-based beverages. They have ramped up production and stocked up to meet the expected surge in consumer demand.

Executives from beverage and ice cream companies are launching new products to align with changing consumer preferences. Additionally, they are heavily investing in promotions and expanding distribution channels for the upcoming season.

The firm which owns brands as — Pepsi, 7up, Mirinda, Mountain Dew, Slice, Gatorade & Tropicana, has launched campaigns taking on board leading stars such as Ranbir Kapoor, Rashmika Mandanna, Hrithik Roshan, Mahesh Babu, Kiara Adani and Nayanthara to woo consumers.

PepsiCo, a major player in the beverage industry, is optimistic about its brand portfolio’s performance during the summer months. They have launched campaigns featuring popular celebrities like Ranbir Kapoor and Hrithik Roshan to attract consumers.

Dabur India expects a robust summer season, particularly for its beverage and glucose product lines. They are strengthening inventory and expanding production capacity at their plants to meet the anticipated demand surge.

Coca-Cola India is also increasing production and distribution as summer approaches, aiming to stay connected with consumers during this critical period.

The India Meteorological Department predicts prolonged heatwaves between April and June, further reinforcing companies’ preparations for increased demand.

Havmor Ice Cream, now under LOTTE Wellfood Co, anticipates continued momentum in the ice cream category due to the expected warm weather. They are expanding production capacity and introducing new flavors to meet growing demand.

Meanwhile, Mother Dairy Fruits and Vegetables Pvt Ltd plans to launch 30 new products, focusing on ice cream and yogurt categories, to meet the anticipated 25-30% surge in consumer demand.

Baskin Robbins India, through its master franchise Graviss Foods, is prepared to meet consumer expectations with strategic innovations and new plant capabilities. They are introducing new flavors and formats to cater to the increasing demand for high-quality ice cream products in the market.

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India to grow 7 % in FY24, 7.2 % in FY25, driven by robust investment, services exports



The 2024-25 growth estimate is, however, lower than 7.6 per cent projected for the 2022-23 fiscal. The ADB’s growth forecast for FY25 is in line with projections made by the RBI.

After a slew of upgrades in growth projection , the Asian Development Bank (ADB) on Thursday raised India’s gross domestic product (GDP) growth forecast for fiscal year (FY) 2024 from 6.7 per cent to 7 per cent and 7.2 per cent in FY2025, attributing the robust growth to public and private sector investment demand, gradual improvement in consumer demand and strong services sector.

The 2024-25 growth estimate is, however, lower than 7.6 per cent projected for the 2022-23 fiscal. The ADB’s growth forecast for FY25 is in line with projections made by the RBI. Strong investment drove GDP growth in the 2022-23 fiscal as consumption was muted, the ADB said and expects India to affirm its position as a major growth engine within Asia, driven by strong investment, recovering consumption, and gains in electronics and services exports.

While in the rest of developing Asia, faster growth will be driven by domestic demand and some improvement in semiconductor and services exports, including tourism. Stronger growth in South Asia and Southeast Asia will offset lower growth in other subregions. “Notwithstanding global headwinds, India remains the fastest growing major economy on the strength of its strong domestic demand and supportive policies,” said ADB Country Director for India Mio Oka. “The Government of India’s efforts to boost infrastructure development while undertaking fiscal consolidation and provide an enabling business environment will help in increased manufacturing competitiveness to augment exports and drive future growth,” said Oka.

With inflation moderating to 4.6 per cent in FY2024 and easing further to 4.5 per cent in FY2025, the ADB suggests monetary policy may become less restrictive, which will facilitate rapid offtake of bank credit. Demand for financial, real estate and professional services will grow while manufacturing will benefit from muted input cost pressures that will boost industry sentiment. Expectations of a normal monsoon will help boost growth of the agriculture sector. The report lauds the government’s focus on fiscal consolidation, with a targeted deficit of 5.1 per cent of GDP for FY2024 and 4.5 per cent for FY2025, which will enable the government to reduce its gross marketing borrowing by 0.9 per cent of GDP in FY2024 and create further room for private sector credit.

India’s current account deficit will widen moderately to 1.7 per cent of GDP on rising imports for meeting domestic demand. Foreign direct investment will be affected in the near term due to tight global financial conditions but will pick up in FY2025 with higher industry and infrastructure investment. Goods exports will also be affected by lower growth in advanced economies but pick up in FY2025 as global growth improves.

On the regional front, growth in developing Asia will remain healthy at 4.9 per cent in 2024 and 2025, despite a slowdown in China. In fact, while growth in the PRC will decline from 5.2 per cent in 2023 to 4.8 per cent this year and 4.5 per cent next year, it will accelerate in the rest of developing Asia—from 4.8 per cent in 2023 to 5.0 per cent this year and 5.3 per cent in 2025. The slowdown in the PRC will be driven by the weak property market and amplified by fading domestic consumption growth after last year’s reopening.

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