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Informist, Monday, Jul 22, 2024

--Financial market value correction can affect household finances

--Financial market value correction can affect corporate valuation
--Financial market value correction can hit growth prospects

--Despite geopolitical issues India share market has been stable

--Must brace for vulnerability from rising capital markets role

--Financial cos must be ready if govt intervenes in capital market
--Outlook for India's financial sector appears bright
--Financial sector needs to support capital formation
--Financial sector needs to promote trade, invest in MSMEs

--Viksit Bharat opportunity for robust financial services sector

--Dominance of banking support to credit being reduced

--Future invest must be via multiple routes beyond banking

--Efficient corp bond market to aid with funding requirements

--India corp bond market lacks depth on limited investor base

--Financial intermediation costs must decline globally

--Role of capital markets is rising in extending credit

--GIFT IFSC banking ecosystem rapidly evolving

--Despite good rating, sovereign green bonds hardly got greenium

NEW DELHI – A correction in the elevated values of financial markets globally is a potential risk that could hurt India's growth, according to the Economic Survey for 2023-24 (Apr-Mar) tabled in Parliament today. 

"Global financial markets have scaled new heights, with investors betting on global economic expansion," the Economic Survey said. "However, any corrections in the elevated financial market valuations may have ramifications for household finances and corporate valuation, negatively impacting growth prospects."

The S&P 500, a benchmark US equity index, has hit nearly 40 record highs in 2024. Similarly, the National Stock Exchange's benchmark Nifty 50 index is also regularly scaling new highs, including one on Thursday. The fallout could be more severe as the linkage between India's households and financial markets has increased. Retail participation has tripled in four years to 920 mln registered investors on the NSE as on Mar 31, potentially translating to 20% of Indian households channelling money into financial markets, the report said.

"The significant increase in retail investors in the stock market calls for careful consideration, the survey said. "This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern."

India's GDP grew 8.2% in 2023-24, according to the government's provisional growth estimates. The Economic Survey has "conservatively" projected real GDP growth in the current financial year between 6.5% and 7.0%. The Reserve Bank of India's growth estimate for 2024-25 is slightly higher at 7.2%.

The outlook for India's financial sector is bright, with the share market remaining stable despite geopolitical challenges, the survey said. Among the areas needing focussed attention, the financial sector needs to support the banking system in addressing funding for capital formation. The broader sector also needs to grow in step with the economy, instead of running ahead.

"In particular, India can ill-afford the economy's over-financialisation at its current development stage," the survey said. It evoked the 2008 global financial crisis and the Asian crisis at the end of the 20th century as warnings against over-financialisation. The survey particularly flagged risks to retail investors in the equity derivatives markets.

Financial intermediation costs must decline globally as India moves towards its goal of becoming a developed economy by 2047. The 'Viksit Bharat' mission provided India an opportunity to build a robust financial services sector, strong public finances, and economic sovereignty, the survey said.

To achieve this, future investment must be through multiple routes beyond banking and draw upon a sustained high level of household savings. Chief among them is a more efficient corporate bond market, which is currently plagued by lack of depth, the survey said. The Indian corporate bond market scaled by GDP remains small compared with Asia emerging market peers, and is dominated by highly-rated issuers and a limited investor base of domestic institutions.

Regardless, the role of capital markets is increasing in India's growth story, on the back of technology and digitisation. Outstanding corporate bonds rose 9.6% in year ended March to around 6.5 trln rupees. Meanwhile, the government's Emergency Credit Linked Guarantee Scheme has helped boost credit availability to micro, small and medium enterprises. The development of new technologies such as Open Credit Enablement Network is also expected to boost credit flow to these industries, the survey said.

"As India's financial sector undergoes this critical transformation, it must also brace for likely vulnerabilities and prepare itself with regulatory and government policy levers to intervene and hedge, as required," the survey said."

India's International Financial Services Centre at Gujarat International Finance Tec-City, or GIFT City, is emerging as a dominant gateway for global capital inflows. The special economic zones offers tax benefits to investors and is treated as an international jurisdiction. The banking sector in GIFT City rapidly evolved in 2023-24, with IFSC Banking Units having assets in excess of $60 bln as on Mar 31, and the total transaction value near $800 bln.

As for the aircraft and ship leasing business, there are green shoots at GIFT City, the survey said. Twenty-eight registered aircraft lessors leased over 120 aviation assets in the jurisdiction by Mar 31. The 11 ship leasing companies registered there are off to a sluggish start, with only four leased assets. Budget focus over the past years will further enhance ease of doing business, the survey said.

Meanwhile, in its medium-term outlook for the Indian economy, the survey noted the poor flow of credit for environmentally positive infrastructure from capital-rich developed economies to emerging market and developing economies like India. India has issued sovereign green bonds maturing between five and 30 years since 2022-23. The 'greenium' on these bonds has been less than 10 basis points, and as low as 1 bp.

The 'greenium', or green premium, refers to pricing benefits based on the logic that investors are willing to pay extra or accept lower yields in exchange for its sustainable impact. The RBI had rejected all bids at an auction of a new 10-year green bond on May 31 as bidding was dominated by domestic investors, who did not bid at any 'greenium'.

"Despite securing a good rating on its green bond framework, Indian sovereign green bonds have hardly received any 'greenium' from private investors," the survey said. "It is more a 'wall of capital' than a 'flood of capital' that is waiting to fund energy transition in EMDEs. It just isn't mobile."  End

Reported by Aaryan Khanna

Edited by Ashish Shirke

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