A solar power plant in Tuticorin, India, on Wednesday, March 20, 2024.
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This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.
The big story
Emerging markets have been on tenterhooks for the better part of this year as the Federal Reserve has been dangling the prospect of an interest rate cut.
Historically, as U.S. interest rates fall, the allure of the mighty dollar fades to the benefit of other currencies.
Yet, any hope of such relief was dashed last week after forecasts for the first rate cut were pushed back to September, with a decent chance of a further delay to December.
India Inc might not care this time.
“All of this increase in interest rates has, in fact, not actually impacted us at all on a business standpoint,” Sumant Sinha, chief executive of ReNew, India’s largest clean energy producer and a Nasdaq-listed firm, told CNBC’s Inside India.
Despite the Reserve Bank of India hiking rates alongside its global peers, Indian companies have continued to grow like never before. ReNew, for instance, reported positive sales momentum in its latest full-year results. Strikingly, it also became profitable as a public company for the first time.
ReNew appears to be straddling both U.S. and Indian markets cleverly. The $2.3 billion firm operates entirely out of India, yet its largest shareholders are U.S. and Canadian institutions. It raises U.S. dollar-denominated debt, but it’s careful to hedge against any depreciation in the rupee.
Being savvy has paid off, and lenders have taken notice. Societe Generale, the French bank, recently agreed to lend it up to $1 billion in the current market environment over the next three years. That’s on top of the billions more non-bank financial institutions are offering the company that currently has the capacity to produce about 10 gigawatts of clean power.
“Over the last 18 months, we’ve actually refinanced almost a billion dollars’ worth of our international bonds through the rupee market,” Sinha said. “Actually, we’ve been able to bring down our borrowing costs by almost 60 basis points by having done some of that.”
It’s not the only one. Across the country, many businesses and industries continue to grow, as if the rise in rates doesn’t matter and that current levels are normal.
Indeed, unlike most developed economies, India’s interest rate regime in 2024 isn’t any different from that of 2018.
This is in stark contrast to the negative rates that the euro zone has contended with, or the challenges faced in Japan even today. During the Covid-19 pandemic, interest rates in India were only as low as 4%.
Yet, the GDP growth of the world’s fifth-largest economy has only sped up since. Credit ratings agency Fitch raised its forecast this week and expects India’s economy to grow by 7.2% this year.
But what if financial conditions tighten further? Shouldn’t corporate borrowers start to default in a higher-for-longer scenario?
“We’ve not seen any episodes of bad loans being formed,” says Rahul Jain, head of India research at Goldman Sachs.
ReNew Energy’s shares are off 16% this year despite forecasts of a two-fold increase in earnings per share over the next two years. The stock has sold off alongside others in the industry that face unique fundamental problems. Meanwhile, the iShares Global Clean Energy ETF lies in the doldrums while the S&P 500 reaches new highs.
There lies the disconnect between the economy, the stock market, and a single stock.
While companies are able to grow and even make a buck when rates are high, their share prices don’t always reflect that.
Perhaps there’s a case to be made on whether Wall Street needs a rate cut more than Main Street.
When asked whether he’s counting down the days to a cut, Sinha said: “Not just counting down, but waiting very, very eagerly and have been for quite some time.”
Need to know
India and U.S. vow to boost trade ties. National security advisor Jake Sullivan was in the country this week — the first visit from a high-ranking U.S. official since the election result. After meeting Modi, the two sides pledged to strengthen defense and tech cooperation, among other announcements.
Four critical areas Modi can’t ignore with his growth target. Prime Minister Narendra Modi has an ambitious goal to make India a developed economy by 2047, a century after its independence from Britain. CNBC’s Charmaine Jacob highlights four areas that Modi must focus on if he intends to make it a reality.
Decade-high bond inflows. Foreign investors will be buying $2 billion worth of Indian government bonds this month — a decade-high — when they will be included in a widely-tracked JPMorgan index. More than $200 billion in assets track the benchmark in which allocation toward India will gradually rise to 10% over the next 10 months.
India records ‘longest’ heatwave. Delhi is facing a severe water crisis as some parts of the second-most populated city in India soared above 45 degrees Celsius (113 degrees Fahrenheit). CNBC has compiled pictures taken from around the country as the dry spell is expected to continue over the next four to five days.
What happened in the markets?
Indian stocks are making slow progress, but are holding on to their year-to-date gains since the general election results were revealed. The Nifty 50 index is heading for a 0.4% gain this week. The index has risen 8.45% this year.
The benchmark 10-year Indian government bond yield has remained relatively subdued, with the yield falling below the 7% mark and closing in on record lows.
On CNBC TV this week Raamdeo Agrawal, chairman of one the largest Indian stockbrokers and asset manager Motilal Oswal Financial Services, said private investment will pick up when consumer growth kicks in over the next six months. He expects the benefits of rising capital expenditure, which isn’t reliant on government spending, to be seen over the next two years.
Meanwhile, Goldman Sachs’ Head of India Research Rahul Jain told CNBC’s Tanvir Gill that the “goldilocks” period for Indian banks has ended as they come under pressure. Shares of lenders such as HDFC have underperformed the broader market this year as investors focus on the credit losses on their balance sheets. Despite the caution, Goldman’s Jain prefers Indian private banks to state-owned lenders.
What’s happening next week?
India will play against Bangladesh this weekend in the T20 World Cup cricket tournament. India will also face Australia on Monday.
Non-bank lender Akme Fintrade India and engineering firm DEE Development Engineers will debut on the stock market on Wednesday.