MACROECONOMIC REVIEW: FY 2022-23
Domestic Overview
Real gross domestic product (GDP) rose by 7.2 per cent in FY 2022-23 as per the
provisional estimate, declining from the previous years (2021-22) level of 8.7 per cent.
During the early months of FY 2023, when the spillovers of the consecutive pandemic shocks
were fading, a global turmoil arose due to the Russia-Ukraine war. Despite these strong
global headwinds, the economy exhibited resilience and witnessed a sustained restoration
of domestic activity and consumer confidence. Real GDP for Q1 FY 2023 was recorded at 13.5
per cent on the back of the base effect and a healthy rebound in growth. During the second
quarter, the pace further gained momentum with the realignment of supply chains and
release of pent-up demand in contact-intensive sectors. However, higher price pressures
and a contraction in exports
amidst recessionary fears weighed on the growth, and the economy registered a GDP
growth of 6.3 per cent in Q2. The second half of the year continued to struggle against
the persistent challenges in the form of contraction in exports and industrial growth as
well as waning private consumption amid high inflationary pressures. Consequently, the
growth for Q3 and Q4 was registered at 4.4 per cent and 6.1 per cent respectively.
FY 2023 witnessed high inflationary pressures throughout the year, with the headline
inflation print surpassing the upper tolerance band of 6 per cent for several months. The
upsurge in prices, which was broad-based as well as sticky, was majorly on account of
persistent supply shocks and pass-through of input costs. The economy suffered from
elevated prices of crude oil and food in the first half of the fiscal year, with inflation
reaching its peak in April 2022 at 7.8 per cent. During the second half, moderating
commodity prices, realignment of supply chains and consecutive rate hikes by the Reserve
Bank resulted in easing of inflation numbers. The average headline inflation stood at 6.7
per cent in FY 2023 as against 5.5 per cent in FY 2022. Following a spike in inflation in
the early months of 2023, the MPC changed its stance to withdrawal of accommodation in
April 2022 and then raised the policy repo rate by 40bps in an off-cycle meet held in May
2022, after the March 2022 inflation print touched a level of 7 per cent. During FY 2023,
the MPC has cumulatively raised policy repo rate by 250 bps, from 4 per cent to 6.5 per
cent in order to curb inflation.
On the back of prolonged geo-political tensions and the global economic slowdown,
Indias trade deficit widened during FY 2023, however, the deficit narrowed towards the
second half of the year. Merchandise exports recorded
a growth of 6.7 per cent in FY 2023 over FY 2022 to reach at USD 450.4 billion. The
merchandise imports posted a higher growth during the first half, however, during the
second half, lower international commodity prices resulted in fall in imports. On account
of a robust demand in the service sector, service exports increased by 27.9 per cent
during FY 2023 on y-o-y basis. The Current Account Deficit (CAD) nearly doubled during FY
2023 to USD 67 billion (-2 per cent of GDP) as against USD 38.7 billion (-1.2 per cent of
GDP) in FY 2022. Beside a wider trade deficit of USD 122 billion, a 31 per cent decline in
financial flows (USD 58.99 billion) led to drawing down of reserves, amounting to USD 9.14
billion, as against an accretion of USD 47.51 billion in FY 2021-22.
During FY 2023, all major currencies experienced high volatility on the back of
prolonged geopolitical tensions and consecutive rate hikes by the US Federal Reserve. The
Indian rupee also witnessed sharp fluctuations during the year with a depreciating bias
amidst strong FPI equity outflows. Overall, INR closed at 78.97/USD on Q1 FY2023, and
further weakened by 3.22% during Q2 FY23 to close at 81.51/USD. The second half also
witnessed rupee a bearish trend in the rupee, due to a sharp appreciation in the USD
following the Fed rate hikes. The rupee closed the fiscal year 2023 at 82.18/USD,
recording a depreciation of around 8 per cent from the previous year. To curb this
heightened uncertainty and volatility revolving around the rupee, the Reserve Bank had to
intervene in the Foreign Exchange Market, which led to a loss of reserves, aggregating to
nearly USD 30 billion (till 24th March 2023) from its level of FY 2022 at USD 606 billion.
During FY 2022-23, the fiscal position of the Central Government improved on the back
of higher revenues receipts. The gross fiscal deficit for FY 2023 stood at 6.45 per cent
as against 6.75 per cent for FY 2022. The Centres gross tax revenue increased during the
year as corporate tax, income tax and GST collections posted robust growth. the
governments revenue expenditure increased by 2.6 lakh crore against the Budget estimate
amid soaring commodity and energy prices. Governments fiscal position is treading a path
of fiscal consolidation and the FD to GDP ratio is projected at 5.9 per cent for FY
2023-24.
Government Dated Securities
Primary Market
During FY 2023, the gross borrowings through dated issuances stood at 14.21 lakh crore
as against 11.27 lakh crore during FY 2022. Devolvements were observed with market
anticipating RBI policy actions during FY 2023. The weighted average maturity of issuances
stood lower at 16.05 years as against 16.99 years during the previous year. The weighted
average yield of dated securities issued during FY 2023 rose to 7.32 per cent as against
6.28 per cent in FY 2022.
Secondary Market
During Q1 FY 2022-23, the government securities — market witnessed firming up of
yields on account of
a) monetary policy tightening across major global economies amid persisting
inflationary pressure, b) higher crude oil prices and c) fiscal pressures due to rise in
subsidies and reduction in excise duty on petrol and diesel. Q2 however, witnessed a bit
of easing of yields on account of easing of crude oil prices and rising expectations over
likely inclusion : of Indias bond in global bond indices. Thus, the I 10-year yield
closed H1 at 7.43 per cent vis-a-vis 6.90 per cent at the beginning of the FY 2022-23.
The second half of the year witnessed a steep rise in yields on account of adverse
global and domestic factors. At the beginning of Q3 FY 2023, G-sec yields hardened taking
cues from the sharp surge in US treasury yields following the 75 bps
rate hike by the US Fed and its hawkish forward guidance. The policy repo rate hike by
the Reserve Bank also firmed up bond yields. Subsequently, the market sentiment was also
dented after JP Morgan held off the inclusion of Indian government bonds in its widely
tracked emerging market bond index. However, the end of Q3 saw bond yields extending a
softening bias in tandem with the easing of US treasury yields and the decline in
international crude oil prices. Q4 FY 2023 saw the 10-year benchmark G-sec yield ease in
response to the commitment to fiscal consolidation in the Union Budget 2023-24 and the
announcement of lower than anticipated gross market borrowings. In March, the yields
softened, taking cues from US yields following bank collapses, which drove investors to
safe assets, which had a salutary impact on Indian yields as well. Overall, the 10-year
yield closed H2 at 7.31 per cent vis-a-vis 7.47 per cent at the beginning of H2.
COMPANY PERFORMANCE
Primary Market
In the primary market, the Company continued to comply with all the regulatory
requirements of bidding under Minimum Underwriting Commitments (MUC) and Additional
Competitive Underwriting (ACU) for Primary Dealers. During FY 2023, the Company earned an
underwriting commission of 3.03 crore as against the previous years commission of 15.49
crore. During the year, government securities aggregating 1201 crore were devolved on the
Company.
In treasury bill auctions, during H1 of FY 2023, GOI raised 7,05,000 crore as against
6,89,000 crore in the corresponding period of last fiscal. In the second half, GOI raised
7,16,000 crore through T-bills as against 6,54,000 crore raised in the corresponding
period of last fiscal. Against these issuances of T-bills, Company submitted bids
aggregating to 1,14,825 crore against the commitment of 70,313 crore (being 5 per cent
of notified amount). Out of this, bids amounting to 28,888 crore were accepted.
Fulfilling its primary market commitment, Company achieved a success ratio of 40.96 per
cent and 41.21 per cent in H1 and H2 respectively in FY 2022-23, as against the statutory
requirement of 40 per cent.
Secondary Market
During FY 2022-23, total secondary market outright turnover registered by the Company
stood at 6,12,608 crore as against 5,08,782 crore in FY 2021-22. The Central Government
security segment recorded a turnover of 5,05,669 crore followed by SDLs which registered
a turnover of 38,782 crore. Treasury bills recorded a turnover of 37,113 crore. Company
achieved an outright turnover of 2.98 per cent for FY 2022-23, as against the outright
turnover target of 1 per cent prescribed by RBI.
Portfolio Size and Composition
During FY 2022-23, dated securities (central and state government) holding level in
face value terms under FVTPL portfolio averaged at 10,744 crore (11,447 crore in FY
2022) with peak holding level of 14,558 crore (17,274 crore in FY 2022). Daily average
holding in T-bills during FY 2023 stood flat at 2,460 crore (1,774 crore in FY 2022)
whereas the peak holding in T-bills stood at 4,357 crore (3,115 crore in FY 2022).
Companys holding under Amortized Cost portfolio as on March 31,2023 stands at 3,409.27
crore.
Liability Mix
During the year, the Company judiciously utilized different sources of borrowings viz.
Call Money, TREP, Repo, LAF, etc. for active fund management. The average gross borrowings
from all sources during FY 2023 amounted to 17,897 crore as against 14,964 crore in FY
2022. During FY 2023, Company did not raise any funds through issuance of Commercial Paper
whereas, in FY 2022, it had raised funds of 200 crore through the issuance of Commercial
Paper at a rate of 3.82 per cent with a tenor of 1 month. The average leverage during FY
2023 was 13.16 times against 10.86 times in FY 2022, while the maximum leverage for the
year stood at 16.29 times the NOF. The average cost of funds during FY 2023 stood at 5.43
per cent, higher than 3.41 per cent during FY * 2022 as successive rate hikes by RBI
resulted in surge in overnight money market rates.
Trading Stance & Financial Performance
During FY 2022-23, the market witnessed significant deterioration and firming up of
yields due to reasons explained in the section on the secondary market. The two-year trend
in the main financial parameters is tabulated as below:
(in Crore)
Particulars |
FY 2021-22 |
FY 2022-23 |
per cent change |
Net Owned Fund |
1425.64 |
1238.06 |
-13.16 |
Profit Before Tax (PBT) |
210.15 |
-85.07 |
-140.48 |
Profit After Tax (PAT) |
165.71 |
-77.22 |
-146.60 |
Capital Adequacy Ratio (per cent) |
66.41 |
31.83 |
-52.07 |
Debt to Equity Ratio |
10.18 |
15.27 |
50.00 |
Debtors Turnover Ratio |
9.68 |
6.66 |
-31.19 |
Interest Coverage Ratio |
1.41 |
0.91 |
-35.46 |
Current Ratio |
1995.35 |
700.34 |
-64.90 |
Operating Profit Margin (%) |
21.09 |
-6.93 |
-132.86 |
Net Profit Margin (%) |
16.63 |
-6.29 |
-137.82 |
Company operated in an unprecedented monetary policy environment during FY 2022-23 with
RBI raising policy rates successively (total 250 bps rise in policy repo rate) and
maintaining a hawkish guidance. Companys performance during the year was affected by
sharp rise in bond yields, which resulted in, marked to market losses as well rise in
borrowing cost due to sharp and quick rise in overnight money market rates, which resulted
in compression of the net interest income. During the year, the short end of the G-sec
term structure responded adversely to the steep hike in policy rates by RBI, with 1 year
and 2 year yields surging by 265 bps and 200 bps respectively over March 2022 closing.
Nonetheless, Company endeavored to contain the losses by adopting an agile investment
strategy and a dynamic balancing of portfolio along with an active liability management.
Under the aforementioned circumstances, Company posted a PBT of (85.06) crore and a
PAT of (77.22) crore as on March 31,2023. The Companys trading income stood at (303.23)
during FY 2022-23 as against (234.09) crore during FY 2021-22 while net interest income
stood at 248.75 crore during FY 2022-23 as against 460.30 crore during FY 2021-22. Due
to the loss booked during FY 2022-23 and dividend payout amounting to 90 crore (for
dividend announced for FY 2021-22), Companys NOF reduced by 13.16 per cent from 1425.64
crore as on March 31, 2022, to 1238.06 crore as on March 31, 2023. Decreased
profitability resulted in a lowering of Return on Net-worth for FY 2022-23 to (5.80) per
cent as against 12.13 per cent for FY 2021-22. The overall debt to equity ratio stood at
15.27 as on March 31,2023 as against 10.18 as on March 31,2022. Debt to equity ratio was
higher on account of increased portfolio size maintained to capture net interest income.
Despite the challenges faced by the company during FY 2023, company remained adequately
capitalized with a capital adequacy ratio (CAR) of 31.83 per cent as on March 31,2023
(66.41 per cent as on March 31,2022), against RBIs minimum stipulation of 15 per cent.
Robust risk management systems kept the Companys risk profile in check throughout the
year.
The debtors turnover ratio was lower in FY 2022-23 as compared to FY 2021-22 as the
arranger fee receivable as a percentage of the arranger fee income earned during the year
was less. Interest coverage ratio was lower in FY 2022-23 as profit was higher in FY
2021-22 as compared to FY 2022-23 whereas the interest costs were higher during FY 2022-23
as compared to FY 2021-22. Current ratio declined during FY 2022-23 as Current liabilities
were higher as on March 31,2023 than as on March 31,2022. Operating profit margin declined
due to operating losses as on March 31,2023 as compared to profits earned during FY
2022-23. Net profit margin stood lower as there was a net loss as on March 31,2023 as
compared to March 31,2022.
Risk Management
Company maintained a balanced composition of securities with an aim to maximize net
interest income and also facilitate better trading opportunities. Risk management is a
critical element of the Companys trading business. The Companys mid-office is primarily
responsible for formulating, reviewing, and implementing the risk management policies,
Value-at-Risk (VaR), PVBP limits, sensitivity analysis, and cut-loss policies form the
core of the market risk management system. The impact of interest rate movements on the
business and earnings profile, is mitigated by operating within a well-defined proactive
stop-loss limit and value-at-risk (VaR) limit. The Company also conducts sensitivity
analysis of its portfolio to assess the impact of parallel and non-parallel shifts in the
yield curve on its earnings profile. Counterparty exposure limits and instrument-wise
exposure limits were the primary tools used for managing the credit risk in the business.
Similarly, well-established systems and procedures provided adequate defense against
operational risk.
Human Resource Development
Human resource development is given high weightage and Company employs the best HR
practices to ensure a healthy and motivating work environment for its employees. Employee
skills are constantly upgraded by providing training suitable to individual requirements.
Besides, in-house lectures and workshops are also conducted on a regular basis to
stimulate a healthy exchange of ideas. Apart from skill enhancement training, emphasis is
laid on exercises that re-engage, rejuvenate the employees and develop better bonds
between co-workers translating into better team dynamics in the Company. Employees morale
is also boosted by recognizing and rewarding their consistent efforts and dedication to
their work with STAR Employee Award bi-annually.
The details regarding employees are given in the Boards Report. Total number of
employees of the Company as on March 31,2023 were 52 (including 1 employee on deputation
from the parent bank). The Company has maintained
peaceful and harmonious relations with all its employees. There were no material
developments recently in the PD Industry.
Internal Control Systems
The Company considers the internal control systems to be a very significant part of its
Corporate Governance practices. Our Board has adopted the policies and procedures for
ensuring the orderly and efficient conduct of its business, including adherence to the
Companys policies, the safeguarding of its assets, prevention and detection of frauds
etc. The Companys internal control systems are commensurate with the nature, size and
complexity of business of the company. The controls have been designed to provide
reasonable assurance with regard to recording and providing reliable financial and
operational information, compliance with applicable statutes and corporate policies etc.
The Company has well defined delegation of power with authority limits for approving
transactions/ contracts including expenditure. Batra Deepak and Associates, the statutory
auditor of the Company has audited the financial statements and have also issued a report
on our internal control over financial reporting. As a part of this control system, our
Board also appoints Internal Auditor, Concurrent Auditor and other auditors as well.
Accordingly, these controls are routinely tested and certified by the auditors. For the
year 2022-23, the Board appointed M/s Lodha & Co., Chartered Accountants as the
Concurrent Auditor of the Company. The scope of Concurrent Audit included audit of
treasury transactions on a monthly basis and reporting to the Audit Committee of the Board
that the Company has operated within the limits of various risk parameters laid down by
the Board, Reserve Bank of India and other statutory authorities. Besides, the said firm
also audited and reviewed the related party transactions on a monthly basis and key
business processes, including IT systems of the Company on quarterly basis. All the
reports of the Concurrent Auditor were submitted to the Audit Committee for necessary
action. The Audit Committee reviews the adequacy and effectiveness of the Companys
internal control environment and monitors the implementation of audit recommendations and
suggestions. As a third line of defense and in line with the RBI guidelines, the Company
had also setup an Internal Audit Department and appointed an Internal Head of Audit during
FY 2022-23.
Registration obtained from other financial sector regulators
During the FY 2023, Company has not taken membership from any regulator. During the
current fiscal that is, 202324, the Company has received permission from RBI and it has
authorised your Company to act as an ‘Authorised Dealer - Category III”, subject
to certain conditions. Under this authorization, the Company may offer all foreign
exchange market-making facilities to users, as currently permitted to Category-I
Authorized Dealers, subject to adherence to the prudential regulations and other
guidelines of RBI.
Corporate Social Responsibility
The Companys CSR initiatives focus on creating social values by contributing to the
field of education, healthcare, environmental conservation, etc. During the FY 2023,
Company undertook several initiatives, contributing 6.48 crore towards various trusts and
agencies.
Strengths, Weaknesses, Opportunities and Threat Analysis
Strengths and Weaknesses
The Company is the only listed Primary Dealer in the country and has consistently
displayed healthy financial performance over the years. The Company operates with a
substantial Capital Adequacy Ratio (CAR) with comparatively low operational costs. CAR
stood at 31.83 per cent for the year ended March 31,2023. The Company has efficient risk
management and research department responsible for monitoring, analysis, and compliance
with the latest IT infrastructure through which prudent analysis of the portfolio is done
on a regular basis. A strong compliance culture prevails across the organization, pursuant
to its strategic goals of transparency and trust, among all its stakeholders. However,
there are some constraining factors for Company like volatility in earnings because of
interest rate movements and lack of diversity in revenue.
Opportunities and Threats
The FY 2023-24 started on a positive note witnessing resilient economic activity due to
improved demand and supply conditions but due to sticky inflation in place, the central
banks around the world have continued to either temper their rate hikes or have taken a
pause. The RBI decided to keep the Repo rate unchanged at 6.50 per cent in both April
and June 2023 Monetary Policy meetings and focused on withdrawal of accommodation to
make sure that inflation gradually aligns with the target. The Repo rate has increased by
250 bps since May 2022 and thus, these policy actions are still working through the
system, following which the MPC kept the policy rate unchanged. The Indian banking system
at present is stable and resilient, has a robust credit growth and domestic financial
markets have evolved in an orderly manner. The CPI inflation lowered in Q1 FY 2023-24
owing to monetary policy tightening and supply side measures.
Going forward, MPC has pointed out that economic activity might decelerate in FY
2023-24 due to inflation remaining sticky and above the 4% inflation target of RBI, tight
financial conditions and weak external demand. Also, volatility in global financial
markets, continued geopolitical issues, crude oil pricing and the intensity impact of El
Nino pose upside risks to inflation and interest rate movements. Thus, these factors might
have an impact on the Companys earnings in FY 2023-24. However, the cumulate rate hike of
250 bps is gradually transmitting through the economy and MPCs resolution to keeping a
close vigil on the inflation and growth outlook should keep inflationary pressures
contained in the coming months.
Though much of the pain is behind us, the macroeconomic and policy environment is
expected to remain uncertain in the ensuing period. The expected slowing of economic
growth and inflation may provide opportunities for the bond markets to stabilize in the
current year. This augurs well for Companys performance. Nonetheless, the macro economic
environment remains highly uncertain, and Company would remain vigil in its approach. A
dynamic and highly agile strategy will be deployed in order to ensure healthy returns from
Companys core business operations. Company will also deploy astute derivative strategies
to hedge against rising interest rates and exploit trading opportunities. Besides, Company
will also explore opportunities in the non-core business, especially foreign exchange
market (post granting of foreign exchange license by the regulator), and other segments
such as equity market as well as fee generating business segments in order to bring in
diversity in income.
|
On behalf of Board of Directors |
|
^ |
Date : July 21,2023 |
(Kalyan Kumar) |
Place: New Delhi |
Chairman |
|
DIN:09631251 |
+91-9892691696
