Saturday August 27, 2022

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting.

Why Russia Playing Tough with Europe Affects India

The West turned against Russia after its invasion of Ukraine and how. Sanctions blocked out trade of essential commodities to an extent were it was suicidal for the West.

What’s the point of banning Russian oil when you’re already struggling with high inflation, countering which will slow your economy down? But that wasn’t it.

Europe, with a bloated chest, chalked out a plan to get rid of dependence on Russian natural gas. It even cancelled the Nord Stream 2 pipeline. And all this aggression when it depended on Russia for nearly half its natural gas.

In India, we don’t quite get the importance of natural gas - it constitutes to only 6% of our energy basket. But for the West, a quarter of electricity production depends on natural gas. Moreover, electricity usage is seasonal - the winters get cold and you can’t really live without gas.

The flexing did cost Europe a fair bit. First Russia reduced the supply of gas from its main pipeline - Nord Stream 1. It then shut it completely for a few days for ‘maintenance work’. This maintenance game (intentional or not) resulted in natural gas prices shooting up 14x in Europe. With energy costs that high, a severe recession becomes very likely.

Why should India care?

1. Whenever Europe speaks about reducing dependence on Russian gas, it ends up importing coal to generate electricity. India’s dependence on coal is very high (55% of our energy mix), and our beloved Coal India comes under pressure, in turn clogging freight networks, crunching supply chains and causing a logistical domino effect, other than higher energy costs of course
2. India has a massive subsidy bill, especially on fertilisers, and that’s expected to increase by 60% in FY23, thanks to rising raw material prices. For all that urea that India is guzzling, natural gas has to be imported. We know how higher costs plus a strengthening dollar work for us. The fiscal deficit pressure the natural gas situation alone can add can be to the tune of 1pp, on an already overshooting deficit

<aside> 💡 Our view: India’s inflation dipped a little causing a great deal of respite on the markets. But lets not forget that the recent inflation-moderation has been a result of demand-anticipation, and that supply-side issues continue to remain. While we’re positive on the India story, we do see room for near-term hiccups in the form of high inflation, fiscal tightness, and higher rates to counter inflation and/or dollar strength.

</aside>

An idea - Federal Bank

Neobanks Jupiter and Fi recently crossed a million users each. Of course they burnt a lot of money in doing that. But their backend is with Federal Bank. Federal gets a share of the revenues that neobanks make, but doesn’t have to spend a penny in acquiring those millions of users. In short, the perks of a start-up without the cash burn!

The growth in neobanks is so high that 75% of the 4.5 lakh accounts opened at Federal every month are from this channel. Moreover, Federal expects for these to contribute to 25% of the incremental deposit growth and 50% on the lending side. Federal is the only bank to have grown 2.5x in size by opening all of 20 branches.

Of course, it isn't all rosy. Despite the account openings being so high, neobanks account for all of 1% of Federal’s book. So, like all start-ups, this looks like a big show with very little substance.