The Stories Hidden In Rbis Annual Report A Tricky Quarter For Tyres Daily Brief 483

TITLE: GxjO0R9bZGY CHANNEL: Unknown DATE: ---TRANSCRIPT--- In today’s episode, we’ll break down two important stories. First, we look at five hidden stories from RBI’s annual report, and then we talk about why the fortunes of the tire industry changed last quarter. Welcome to the Daily Brief Show by Zerodha, where we cut through the noise to help you understand what’s actually happening in the most important stories from business and markets. I’m your host Krishna, and today is witness day, 10th June. Towards the end of last month, the RBI came out with its annual report. It’s a 250page monstrosity filled with reams of data, income statements, schedules, payment volume tables, footnotes on how gold is valued. Most people wouldn’t read something this dense. We wouldn’t either if we weren’t trying to cover it for you. If you can brave it, however, this dry report is filled with fascinating nuggets about India, its economy and its financial system. Some of its headline numbers have made the news, such as the 2.86 lakh cr check the RBI handed over to the government. We won’t repeat those for you. Here are five things you probably didn’t see in the headlines. However, between April and December last year, the amount banks lend to small businesses grew 23.5% on a year-on-year basis. The sector’s outstanding credit to micro, small, and medium enterprises went up from 29.8 lakh crores to 36.8 lakh crores, a difference of 7 lakh crores in a single year. Now, by all accounts, this was a huge boom year. But there’s a twist. Even though the money being lent grew immensely, it went to a smaller set of borrowers. Now over the years, the number of micro businesses receiving financing was roughly flat. The sector small and medium accounts meanwhile actually fell. At the very same time, however, the average borrower across categories had received more money. Now, why would these two trends play out at once? We have a few theories. For one, it’s just harder to lend to a new small business. Chances are a new microborrower has no credit history, no audited accounts and nothing to pledge. Giving them loans takes work. The effort of underwriting a 5 lakh rupee loan to an unknown kirana shop is not very different from that in giving a 5 crore rupee loan to an established company. The returns meanwhile are smaller. India’s priority sector lending laws make banks direct a substantial amount of their lending to small firms. Their targets, however, are linked to the rupees they give out and not how many borrowers they serve. Together, these incentives push banks to reach for firms already on their books, handing them bigger checks rather than finding new borrowers. Now, what could change this picture? A major bottleneck many borrowers face is a lack of collateral. This is perhaps why the RBI from April 2026 doubled the ceiling on collateral free loans to small firms from 10 lakh rupees to 20 lak rupees. Ultimately however a firm with nothing to pledge is asking a bank to lend on trust. Now do banks actually have that appetite. Now that’s a question worth looking at next year. See banks have an odd convoluted relationship with money. They create money every time they give a loan but are hemmed in by a series of statutory ratios. The specifics are too complex for what we are doing here. In a roundabout way, however, a bank’s fortunes are tied to the rate at which they can procure money. Now, that has been tightening with time. The cheapest source of money for a bank is the deposits people make with them. Over much of the last year, however, banks were increasing their lending faster than they could grow their deposits. In FI 2025 to 2026, bank credit to the commercial sector went up by 15.9%. Just one year ago, that rate was much lower at 10.9%. Overall, bank credit grew by 17.1% through last year. Now, it isn’t that people aren’t making deposits. In fact, bank deposits too grew at a robust rate of 16.2% on a year-on-year basis. That’s reasonably quick, but it’s still almost a percentage point below the rate of credit expansion. Now, what does this gap actually mean? Banks won’t run out of money. All money with exception of hard cash ultimately sits somewhere in the banking system. If a bank can’t grow the current and saving balances in its account, they can reach for something else. They could, for instance, try getting people to make fixed deposits with them. And if their lending outstrips that as well, they could go for wholesale funding like certificates of deposits which are short-term IUS sold to mutual funds and insurers. Now this is precisely what the report shows in FI 2026. The banking sector’s total issuances of certificates of deposits were at 13.5 lakh cr rupees compared to 11.9 lakh cr rupees 1 year ago. They were effectively scrambling to fund an unending surge in lending. Different sources of money however come with different costs. Wholesale money for instance is pricing and reprices the instant rates move. In a crisis it is the first to dry up making it a part through which funding squeezes can curdle into failures. And over the year the rates of this wholesale money grew as well. Now there’s a common story that newspapers tell you. The banks are starved for money because people keep putting money in mutual funds. The report clarifies that there’s simply nothing to this. If anything, bank fixed deposits and debt mutual funds are complimentary, which is they move together. Meanwhile, there’s no relationship between deposits and equity funds at all. Over FI 2026, retail inflation averaged 2.1%. It was well below the 4.6% we had seen a year ago and nearly half of RBI’s 4% target. Now, what does that tell us about RBI’s performance? Well, try not reading too much into it at all. Judging the RBI by inflation rates is a tricky thing. Nearly half the consumer inflation basket is food, which barely budges when the interest rates move. Food prices are a matter of monsoon, of harvest, and of local logistics networks. The price of money has little to do with it. Last year, food prices rose by just 0.8% between April to December. Just one year before it had grown by 7.6% which is almost 10 times as much. October’s food deflation in fact was the steepest in the index’s history. It all sat on top of a costly base. Prices had jumped so much the year before that they seem flat for much of the last year. Perhaps a smarter number to look at is core inflation which ignores the prices of things like food and fuel that the RBI has little control over. That figure came much higher at 3.7%. But this number two tells us little about the RBI’s performance. Half of it came from the prices of silver and gold which recently saw a historic rally. Their prices were bid up by global investors buying safe heavens because the world felt too dangerous. Strip those out and inflation dropped back to just 2.1%. If anything, that rate was dropping, especially after September’s GST cuts made many durables much cheaper. Put all of this together, and the inflation rate bore little connection to the RBI’s action. This was simply a free cure. It saw geopolitical upheaval, choked global energy lifelines, jumpy commodity markets, and an unusually benign time for agriculture. None of this information the RBI can use for policym. Moreover, the RBI is changing its inflation basket. So, the coming year will look different either way. This year, it expects inflation to rubber band back to 4.6% as base effects wash out and things regress to mean. But if last year has taught us something, it is that the world is unpredictable. There’s nothing you can take for granted, least of all any normaly in prices. Since 2019, every year the RBI has been handing over the government a big check the size of which has become a small event. Now this year though it handed over its largest ever amount 2.86 lakh cr rupees which people see as a windfall coming out of a good year. This is often considered a dividend. In reality it’s something different. Legally, the RBI once it covers its cost and sets aside its reserves is supposed to hand over any leftover money to the government. Now, how do you tell what’s left over, though? That’s an interesting story. The RBI is supposed to set aside a buffer, a cushion of capital that would protect it against risks. A few years ago, after an ugly tug of war over the correct size of RBI’s buggers, a committee set a ban for how much the RBI could keep to itself. it would have to pay out the rest. Now that band incidentally was reugged last year that takes us back to the size of RBI’s check. Last year the RBI’s income jumped by 26%. The size of its checks to the government on the other hand increased by just 6.7%. The rest of its extra income which is 1.09 lakh cr was kept as part of its cushion. Now this was a massive increase from the 45,000 cr rupees it kept aside the year before. But why the change? Much of RBI’s earnings this year were paper profits. Its investments and reserves had swollen up through the year. Gold in particular ballooned. Although the RBI barely bought any, less than a ton in total, the value of its holdings leaped about 64%. This was amplified even further by the fall of rupee against the dollar. Those paper gains aren’t real. However, until that gold is actually sold. before that they can’t be paid to anyone. They’re simply part of what is called the revaluation account. This is meant to cushion against a swollen balance sheet. It would be counterproductive to hand that over to the government as a surplus profit. India’s payments ecosystem has one worldrenowned success, the UPI. The system appears unstoppable. The UPI rails carried over 200 billion transactions last year, growing an incredible 30% yearonear. About 86% of every retail payment in the country went through that system. Now, this isn’t where the RBI wants it to end, though. So far, India has built out the financial rails to move money, shuttling between bank accounts in seconds. Next, however, its ambition is to make money programmable. For instance, you can program the rupee to create guardrails around where the money can be spent. The RBI has been experimenting with this sort of thing through its central bank digital currency. In Gujarat, Pandicherry and Chandigar. The RBI paid food subsidies in this programmable rupee coded to be spendable only in eligible goods at Russian shops. This eliminated the need to set up monitoring mechanisms to police leakage and corruption. There was simply nowhere else that money could be spent. Now the next goal is tokenization. It plans to issue financial assets as digital tokens settled in the wholesale digital rupee. This would allow these assets to change hands at once, the way money currently flows through the UPI. The first of these to be bought on rail were certificate of deposit, the funding tool banks leaned on so hard this year. The other big project is around data, specifically the unified lending interface. The ULI lets a lender pull together all sorts of scattered records, land records, GST filings, business registration, even a dairy cooperatives receipt, making it much more easier to take lending decisions. Over last year, the platform crossed 9.6 cr data request and signed up 117 lenders. Now, it’s worth tempering this enthusiasm with a reality check. Though, there’s no guarantee that every such project will succeed. For instance, its retail digital currency in circulation actually strank this year from about,16 crores to 772 crores rupees. Even so, this is a fascinating glimpse into what money could look like just a few years into the future. We all treat tires the exact same way. They aren’t an exciting upgrade. They are a classic grudge buy. Fuel got more expensive earlier this year and now your tire vendor might be telling you that prices are going to go up again. India’s four major listed tire makers, Seiad, JK Tire, Apollo tires and Bal Krishna Industries or BKT closed FI26 with factories running at high utilization after a demand surge that followed last year GST cut on tires. Then in the last few weeks of Q4, the raw material picture turned sharply worse, raising the cost bill. The question that remains then is how they deal with these costs. But before we get onto the story, let’s look at the headline numbers. Seat standalone revenue crossed 4,000 crores for the first time, finishing at 4,36 crores, up 18% on a year-on-year basis. The IDIDA margin stood at 14.5%. Standalone PAD was 283.6 crores, which is up nearly three times from a year ago. But Siat admitted that they only held margins in Q4 because it was still running on cheaper inventory bought earlier. Their raw material costs are expected to rise 15 to 20% in Q1 FI27. JK Tire turned in its best annual performance on record. Their consolidated revenue for Q4 was up by 12% on a year-on-year basis to 4,233 crores with Aida margins at 12.9%. PAT was 188 crores, up from 102 crores in Q4 FI25. The company announced a 6,100 cr expansion plan to grow truck and car tire capacity by 24% through FI29. Apollo tires posted the biggest headline numbers but with a footnote. Consolidated Q4 revenue was 7,336 crores at 14.6% AITA margin. The reported PAT includes a onetime deferred tax benefit of roughly 570 crores from a shift to India’s concessional tax regime. Strip that out and the underlying business is more modest. BKT had a quite a revenue quarter. Standalone revenue was around 2900 crores which is up 2% on a year-on-year basis. But it also reported its highest ever quarterly and annual offhighway tire volumes in FI26. Its AIA margin of 22.9% ran significantly higher than peers. That’s because offhighway tires carry more pricing power than truck or passenger tires. BKT also admitted it faces near-term margin pressure. The West Asia conflicts effects on crude and fright are covered in depth in our four-wheeler story this quarter. For tire makers, the exposure to the same is unusually concentrated. What’s specific to tires is natural rubber. As we noted last quarter, India imports a significant share of its rubbers. So tire margins are exposed to global rubber prices and currency movements. That linkage when the rupees moved to 94 rupees against the dollar during Q4 fed directly into domestic rubber prices. International natural rubber moved from about $1,800 per ton to $250 to $2,100 by the end of the quarter. The Q4 numbers were mainly insulated from the worst of this because companies generally tend to buy materials in advance. But everyone expects the bill to arrive. Apollo CFO Gorovkumar confirmed the Q4 raw material basket rose only about 1% sequentially. The real reset lands in Q1 FI27 where they expected to grow to the high teens. Admittedly, Apollo’s already announced 6 to 8% price hike is explicitly not enough to cover it. Seat expects those costs to rise to 20% of the bill by quarter end while JK tire guided to 18 to 20%. BKT which had already absorbed a 4 to 5% rise in Q4 expected another 7 to 8% in the June quarter. Now to shave off some of the impact every company has already announced price hike to be born by the customers. Seat for instance announced a 5% increase in the replacement tire market between March and April and is targeting another 5% through May and June. JK tire took a four to 5% price hike in tire replacement and also flagged more hikes to come. Apollo announced 6 to 8% for Q1 and BKT took 3 to 5% across markets. Now the problem isn’t that the companies can’t raise prices. It’s that different channel absorb hikes at different speeds. See OEM pricing which is what tire makers charge vehicle manufacturers is contractual and adjust with a roughly 3 month lag. For example, SAT expected a meaningful OEM increase only from July 1 with only a small singledigit bump in Q1. So for about 3 months, tire makers bear higher input cost before OEM prices catch up. Apollo said the first hit from inflation usually shows up in new vehicle purchases, not freight movement. If goods have to move, trucks keep running and higher cost gets passed along the chain. In contrast, replacement demand is an easier channel to push through cost increases through. That’s because the customers here will primarily be the end consumers of cars who don’t buy tires on contractual terms. So there’s no lag, but it does not make it immune. Fleet operators, for instance, can still stretch tire life, retreat more carefully, or delay non-urgent replacements when tire prices rise sharply. Seat said truck and bus replacement demand may slow rather than collapse if tire price acts become difficult for customers to absorb. Still, a potential slowdown of replacement demand matters in an industry running near 90% utilization and adding fresh capacity. If it slips even modestly, the new capacity may take much longer to pay off. And the scale of capeex wave that we covered last quarter has only grown stronger this time around. Everyone has fresh capacity to announce and none of them have pulled back. Apollo has committed to 3500 crores of FI27 capex nearly 80% toward growth. Most of its FI27 KEEX is already committed with utilization near 90% and April demand still strong. The company sees little reason to pause its expansion plans. At the same time, JK Tire has added a fresh 5,000 cr to the 1130 cr already announced. bringing its expansion program to 6,100 cr through FI29. BKT approved a fresh 2,000 crunch on top of the 28 crore it spent in FI26 alone. The rural demand cushion is a meaningful part of this confidence. And JK Tire’s farm sector volumes grew 58% yearonear in Q4 with OEM farm volumes nearly doubling. Industry tractor sales in calendar 2025 crossed 10.9 lakh units and tractors and farm equipment company reported record sales in FI26. BKT’s core business is still offhighway tires for farm construction and mining equipment and India has been one of its stronger markets. But that strength depends partly on rural cash flows. If rainfall disappoints across parts of Maharashtra and central India, farm equipment purchases could slow and tire replacement decisions could get pushed out. The first real test will come in Q1 FI27. Q4 still had an inventory cushion. Tire makers were selling into strong demand but were not bearing the full cost of the raw material spike. By the June quarter, that changes. Natural rubber, crude linked inputs and freight will flow more clearly into the cost base while the first rounds of price hikes will test how much customers are willing to absorb. That is why the next quarter matters more than the last one. If volumes hold despite higher prices, the sector’s margin recovery story remains intact. If replacement demand slows, even modestly, the recovery gets pushed out. The companies may still grow, but they will be growing into a tougher margin environment. FY26 ended with India’s tire makers running their factories harder than they had in years. FY27 begins with the same factories and commitments but with a cost base that has shifted meaningfully against them. The companies aren’t wrong to be confident about the long run. But the next two quarters will tell us how correctly the confidence has been calibrated. Now coming to the tidbits. Vietnam’s green SM launched electric taxi service Green SM limo in Dilli NCR planning a 10,000 vehicle fleet a year after Blue Smart’s collapse raised viability questions about all electric ride healing in India. Indian agricultural workers lost 163.3 million work hours to heat stress in 2024 which is 54 days per worker up 52% since 1990 threatening food production in inflation per an ECIU study an NYU Stern study found Indian government factories supplying uniqlo tesco and M&S face up to 10% productivity losses from extreme heat threatening the $39 billion peril export industry employing 45 million workers. That’s it for this episode. See you in the next one.

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