What happened in the markets this week?
This is the sixth weekly brief. We publish a new episode every day to help you understand the biggest stories in the Indian markets. But we understand that you may be busy and don't have the time to listen to the daily episodes. So don't worry, we've got you covered.
Every week, we'll publish a new episode simplifying the biggest stories of the week so that you can still look smart in front of your friends.
Check out the audio here:
And the video is here.
In this week's episode, we look at these stories:
- Why are the markets falling?
- Will gold continue to shine?
- SEBI chair’s comments
- Will UPI change how India borrows?
- Is Amazon going back to basics?
What do you think about the newsletter? You can tell us you don't read it; we'll try not to get hurt. But if you have any suggestions, please leave a comment. Unlike all those annoying "give us your feedback" messages, we really care what you have to say.
Why are the markets falling?
The markets are a strange place. Investors and traders crave certainty, yet that's the one thing you can't get in the stock market. Most traders and investors expect trends to continue. When times are good, they think the good times will last forever. When times are bad, they think the bad times will go on indefinitely.
Things have been pretty good this year. Despite some minor bumps, global markets have steadily risen. But now, trouble seems to be brewing.
August has started on a rough note. Yesterday, the Nifty 50 dropped by over 2.5%. Last week, US markets were down by 3%, but the real bloodbath was in Japan. Over the last five days, the Nikkei, which is Japan's equivalent of the Nifty, has plummeted by almost 18%.
So, why are the markets suddenly falling?
The honest answer is—nobody knows. We all hate uncertainty and crave explanations for every market event. But let’s take a moment to think about what the stock market really is. It’s a meeting place where millions of people come together to express their bullish or bearish views. What we see as a result is one single price on our screen.
How can we possibly say why the market goes up or down, not just yesterday but on any day?
That said, we can guess the probable causes for why the markets seem depressed if they do.
In the short term, markets move more on sentiment and flows rather than fundamentals. Since last week, sentiment has been absolutely terrible.
Possibly the biggest factor causing the markets to fall may be what’s happening in Japan.
Let me give you some quick background:
The Japanese real estate bubble burst in the 90s, and along with real estate prices, the Japanese stock market crashed as well. It took over 30 years for the Japanese stock market to recover from these losses. The crash also led to a prolonged period of low economic growth and low inflation or deflation. In response, the Bank of Japan started aggressively cutting interest rates. By 1999, interest rates hit zero, and they stayed near zero and sometimes even negative from 2000 to now.
This deflationary bust had a peculiar side effect. It led to the rise of something called ‘carry trades’. In simple terms, a carry trade is where a trader borrows money in a low-interest-rate currency and then invests in higher-yielding assets. For example, Japan has zero interest rates, and US government bonds yield 3%. You can borrow in yen at a low-interest rate and invest in US dollar assets like US government bonds. The difference is your profit.
Sounds simple and attractive, right?
Well, yes and no. This trade will do well as long as the Japanese Yen depreciates or if Japanese interest rates stay the same or fall. But if the Yen or Japanese rates rise, you make less money or lose money. On the flip side, if US interest rates or the dollar start falling, you lose money as well. For a carry trade to be successful, the currency in which you are borrowing should ideally remain stable or depreciate against the currency in which you are investing.
The Japanese Yen has been weak against the dollar for decades, barring occasional spikes. This made the yen the favorite borrowing currency for carry trades. Large traders, hedge funds, and other institutions would borrow in yen and invest in dollar assets like bonds and stocks. Some would even leverage these trades further.
The Yen was weak for much of this year but suddenly started weakening in the run-up to the Bank of Japan’s meeting on July 31st. In that meeting, the Bank of Japan increased interest rates for the first time in a long time, and the Yen appreciated dramatically after.
Now, if you remember, the Yen going up is bad for carry trades. Suddenly, all the people who had borrowed money in Yen were making less money on this carry trade and some were even losing money. So they were forced to close the trades, like going long on US bonds and stocks funded by Yen.
This puts further pressure on the yen. A rising yen is bad for an export-oriented economy like Japan. This negativity, along with deleveraging of Japanese domestic investors, selling by foreign investors in Japanese stocks, and further short positions by investors, is leading to a vicious feedback loop. I’m oversimplifying, of course, but this is the gist.
The other big factor causing turmoil both in Japan and globally is the perceived deterioration of the US economy. Last week, the US released disappointing jobs data. This is causing concerns that the US Federal Reserve might have made a mistake by keeping interest rates high, which will inevitably lead to a recession in the US. If the US sneezes, the rest of the world catches a cold.
And given that sentiment drives markets in the short run, the Indian markets are not immune to these bad vibes.
Will gold continue to shine?
We talk a lot about gold, and for a good reason—it keeps making headlines. If you remember, in the budget, the government slashed the customs duty on gold from 15% to 6%. This caused gold prices to drop sharply from about 7300 per gram to around 6700 per gram. Since then, prices have recovered to about 6900 per gram.
This sharp fall in prices predictably increased the demand for gold. The best sign of this is the fact that the Indian gold premium compared to international gold prices has disappeared. Over the past few years, Indian gold traded at a discount due to poor demand and high customs duties. But suddenly, the premium has vanished.
The fall in gold prices has led to an increase in demand for jewelry and other forms of gold. A recent Economic Times article reported that several jewelers are seeing double-digit increases in footfall since the prices dropped.
The cut in gold import duty comes just as India heads into the festive and wedding seasons. While it's hard to pinpoint the exact number of weddings in a given year, a recent Jefferies report estimated it at 80 lakh to 1 crore. The period from November to December tends to be one of the busiest for weddings, which also account for the bulk of jewelry purchases.
But the budget isn't the only tailwind for gold. Central banks have been one of the biggest sources of gold demand ever since the Russian invasion of Ukraine.
Source: SSGA
The World Gold Council recently released data for June, showing central banks bought 12 tons of gold. The RBI was one of the largest buyers, purchasing 9 tons and adding to the 800 tons it already holds.
To date, RBI is the second-largest buyer of gold after China, with nearly 38 tons purchased. Since 2022, central banks have bought nearly 2,500 tons of gold.
Source: World Gold Council
The World Gold Council also surveyed central banks, asking if they would add more gold to their reserves. Almost 30% of central banks said they would increase purchases, while 68% said they would make no changes. The three big reasons why central banks are buying gold are interest rates, inflation, and geopolitical concerns.
Source: World Gold Council
Gold will remain in focus this year because it typically has a negative relationship with interest rates. Also, remember that gold prices are set in dollars. The US Federal Reserve is widely expected to cut interest rates in September, if not sooner. So, if US interest rates fall, gold prices will get another boost.
More importantly, gold is seen as a hedge against geopolitical instability. If the Middle East continues to become more unstable or if outright war breaks out in the region, gold prices may continue to rally.
With all these factors in play, it’s clear that gold will remain a hot topic.
SEBI chair’s comments
SEBI Chairperson, Mrs. Puri-Buch, recently spoke at a conference, shedding light on various stock market issues and SEBI's efforts to address them. One key topic she covered was SEBI's initiatives to improve the ease of doing business in India.
To tackle this, SEBI has set up 16 working groups, involving diverse market stakeholders like exchanges, clearing corporations, depositories, brokers, listed companies, AMCs, and alternative investment funds.
SEBI's larger goal is to help businesses by:
Reducing compliance burdens
Streamlining complicated processes
Improving investor protection
Facilitating faster access to capital
When it comes to faster access to capital, Mrs. Puri-Buch emphasized that while India leads globally in the number of IPOs and new issuances, our IPO processing time of 3-4 months is still relatively slow compared to global standards.
Source: EY
To address this, SEBI is focused on reducing IPO processing times by creating a "demystified IPO document." This document will be a template or fill-in-the-blank style format, covering all essential details of a company. The idea is to make the process less intimidating for companies and more informative for investors. The standardized format should also help reduce the processing time for IPOs.
Now, why is faster IPO processing important? A shorter timeline lowers the risk of market conditions changing between IPO filing and listing. Given the market's unpredictability, this is crucial.
More listings are essential because, as Ananth Narayan, the whole time member of (WTM) of SEBI, pointed out at a recent conference, there's a mismatch between the demand and supply of securities:
While we celebrate the steady transformation of the Indian saver into an investor and the consequent increase in market capitalization, we must consider the current mismatch between the demand for securities & the supply of securities. The INR 3.1 lakh crore of net demand for paper brought in by MFs, DIIs and individuals into the secondary market every year the past 3 years, far exceeds the roughly INR 2 lakh crore of annual primary market issuance spanning IPO, FPO, Preferential Allotment, QIP, Rights Issue, and even OFS.
Prolonged mismatch of this nature can leave us with more of asset price inflation, rather than capital formation. Anecdotally, the price of over 30% of midcap and small stocks have more than tripled over the last 3 years. While there can be any number of arguments to justify prices, we need issuers – including many members of FICCI - to step up to the opportunity, raise risk capital from our willing investors, deploy it and create new businesses and household savings, and hence ensure that capital formation sustains as a virtuous cycle. This is clearly a larger point for debate and discussion.
This means that the flows are chasing a limited number of securities, leading to an increase in existing stock prices without significant business growth to support it, which isn't healthy for market growth or the larger economy.
Ambit research echoed a similar sentiment, noting that the Availability Factor (AF) of Indian equities, which measures the ratio of available stocks to mutual fund demand, has been shrinking over the past seven years. The demand for Indian stocks from domestic mutual funds has grown faster than the supply of freely tradable shares. This effect is most pronounced in large-cap stocks, where the AF has decreased by 48%, compared to 33% for mid-caps and 27% for small-caps. In the last year alone, the large-cap AF dropped by about 9%. This trend has led to higher stock prices as more money chases a limited supply of shares, particularly in the large-cap segment of the Indian stock market.
Will UPI change how India borrows?
UPI is growing massively in India, and with it, we're also seeing a surge in credit transactions. These transactions have now hit about 10,000 crore rupees per month on UPI.
There are currently two ways credit transactions work on UPI:
RuPay credit card transactions
Bank credit lines
Of these, credit card transactions make up the majority, while credit line transactions account for a smaller portion, around 100-200 crore rupees.
RuPay credit cards are gaining popularity due to their convenience, now making up a quarter of all new credit cards issued in India. A credit line, on the other hand, is essentially a pre-approved loan or overdraft facility provided by a bank that can be accessed through UPI without needing a physical card.
Both credit cards and credit lines offer similar benefits to users: a free credit period of 30-45 days before interest is charged on the borrowed amount. However, the key difference is that credit lines don't require a physical card, which could make them more convenient for users.
Yet, credit line usage on UPI is still low compared to credit cards. The main reason for this is the MDR or Merchant Discount Rate.
MDR is a fee that merchants pay when they accept certain types of payments. For RuPay credit card transactions, there's a 2% MDR, with 1-1.5% going to the card-issuing bank. This helps banks cover the costs associated with providing the interest-free period.
The issue today is that there's no MDR for credit line transactions on UPI. This means banks don't earn any fees from these transactions, making them less profitable than non-UPI credit card transactions.
Because of this, only a few banks currently offer credit lines on UPI, and even then, it's mainly to stay competitive in the market. As more banks and users adopt this feature, competition might increase, potentially lowering prices and reducing banks' earnings from credit card MDR.
It's possible that credit line transactions will eventually include an MDR to make them more financially viable for banks.
Is Amazon going back to basics?
There's been some drama unfolding in Amazon's India operations recently. Manish Tiwary, who has headed Amazon's India operations since 2020, has decided to step down. According to an article by The Arc, two main reasons have led to his departure. First, Tiwary had disagreements with Amit Agarwal, his predecessor and senior, over Amazon’s India strategy. Second, Amazon has been losing market share in top Indian cities to quick-commerce companies in some categories.
Tiwary will remain with Amazon until October, which is crucial because of the festival sales season. Interestingly, Amazon hasn’t announced a replacement for him yet.
So why does this matter? Well, Amazon has recently been facing a significant threat of losing market share to quick-commerce players like BlinkIt and Zepto. These companies have started to sell not just groceries and daily needs but also electronics and apparel. Electronics, by the way, make up between 40% to 50% of all sales on Amazon and Flipkart.
Quick-commerce players are betting that Indian consumers will soon prefer quicker deliveries over traditional e-commerce. While this shift is already happening with groceries, it's still uncertain if consumers will prioritize convenience and higher prices over the lower prices they get on Amazon for other categories.
Although this is still a hypothesis, the rise and adoption of quick commerce have been impressive and can't be ignored. A leadership change at this point could be a significant blow for Amazon.
So far, Amazon has invested over 7 billion dollars into the Indian market, but its revenues are starting to flatten out. In FY23, Amazon’s business saw only a 3.4% revenue growth, while their marketplace entity saw losses increase by 33% to almost 5000 crores.
But it's not just about the numbers. Amazon is currently facing intense competition in both urban and rural India.
In urban areas, quick-commerce companies like BlinkIt, Swiggy Instamart, and Zepto are squeezing Amazon with their super-fast delivery promises. Meanwhile, in smaller towns, Flipkart and Meesho have established stronger footholds.
Meesho, especially, has seen phenomenal growth in the last few months. It recently surpassed Amazon in terms of monthly active users on its mobile app, meaning more Indians are spending time on Meesho’s app than on Amazon's.
According to Money Control, a top seller on Amazon recently said, “Amazon India's hunger to do business is nothing like it used to be earlier. The company has become extremely bureaucratic, and it no longer enjoys the edge it once had.”
However, it’s not all bad news for Amazon. With e-commerce getting tougher, they're shifting their focus toward their cash-generating cloud computing business, AWS. This is reflected in the numbers—AWS India's revenue grew by 43% in FY23, crossing 12000 crores.
For context, AWS is the world’s largest cloud-computing company with over 30% market share, and Amazon globally makes close to 100 billion dollars in revenue from it every year.
Despite the current challenges, Amazon remains bullish about its prospects in India. They plan to invest an additional 15 billion dollars into the country by 2030, with a massive 12.7 billion dollars dedicated to AWS alone. If the media reports are accurate, Amazon is also considering buying Swiggy's Instamart business to enter the quick commerce market.
Right now, it seems Amazon is leaning on its cash cow, AWS, to weather the storm while it figures out how to navigate the complexities of the Indian market.
There's a lot of excitement brewing in this space, and these business wars are likely to continue.
Excellent writing
You folks are doing a brilliant work! Respect for doing such a diligent work in not just getting these stories for us, but also making sure it's neither too long nor too condensed and just making sure we get the insights. Can only imagine the massive efforts behind this! Just a thank you wouldn't suffice, but here goes. Thanks a lot to each and everyone behind this ❤️ God bless you!