Inside India's Largest Highway InvIT IPO

0:00In today's episode, we'll break down two important stories. First we'll talk about India's largest highway in-vit IPO and then we'll talk about India's inflation targeting being a work in progress. Welcome back to the Daily Brief by Zeradhar where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I am your host Akshara and today is Tuesday 10th March. Coming to the first story. So Raj Mark Infra Investment Trust or RIT is looking to raise up to Rs 6000 crore from the public. Their proposition however is somewhat different from the average IPO. They are selling investors the right to collect tolls on 5 operational national highway stretches across 260 kms. It'll become only the 7th infrastructure investment trust or in-vit to ever come to public market since 2014 when SEBI first opened this path. Now despite the space crossing Rs 5 to 6 lakh crore and assets under management, most

1:02investors are still fuzzy on what an in-vit actually is. We thought we'd help give you a sense of things. Now a few months ago we broke down how REITs work using the knowledge reality trust IPO as an example. In-vits are REITs less famous cousins. They have the same trust structure but instead of office buildings and rent checks, you'll pay for infrastructure assets and their associated cash flows. So this time around we'll use REIT as a running example to understand how an in-vit works and what you're really buying and where the risks hide. An in-vit pulls investor money to buy income generating infrastructure assets. Think of it like a mutual fund but instead of buying into a pool of money that holds stocks, you're investing in a pool of money that buys infrastructure. So highways, power transmission lines, telecom fibre, that sort of thing. Of course there are other ways of betting on infrastructure. You can, for instance, buy the shares of an infrastructure company like Larsen and Toubro or IRB infrastructure but when you do so, you're betting on their business.

2:02You're betting on their ability to win contracts, build assets on time from ground up and manage costs all while making a profit. When you invest in an in-vit on the other hand, you're buying into an already completed and revenue generating asset. The roads are already laid, the power lines already transmit electricity, you're simply buying the rights to collect the tolls or tariffs on those operational assets. There's no construction drama. There's a predictable cash flow at least in theory. But who are you trusting for your money? Like Reads, in-vits have a cast of characters. So at the center, it's the trust itself. The legal entity you buy units in. In our case, it's Rajma, Infra-Investment Trust. That trust has a sponsor, the original developer who built the assets and is transferring them to the trust. For RIT, that's NHAI, the National Highways Authority of India, who built these roads in the first place and now want to monetize them to free up cash for new projects. This is the whole point of the exercise from NHAI's perspective.

3:04It wants a lump sum today in exchange for future toll revenues so that it can redeploy that money immediately into buying more roads without waiting years for money to trickle in. But the sponsor doesn't give the highways directly to the trust. A trust is simply too messy, legally, to hold massive infrastructure assets. It's largely a fiduciary agreement and not a full-fledged business. And you don't want the invits many projects and their liabilities by extension to be concentrated in that single entity. So the trust creates a special purpose vehicle or SPV for every single project. And this is a company specifically created to hold that project's agreements and tolling rights. Each SPV is firewall from all others. It has its own balance sheet which means the liabilities of one project can't spill over and infect the rest of the trust. Now the trust has a trustee who's an independent watchdog who looks out for your interests as a unit holder. Its financial brains meanwhile are in the hands of an investment manager who manages its money and plots future acquisitions.

4:06On the ground meanwhile, a project manager fixes botholes and runs stool plazas for all the assets under SPVs. Now by Sabi's regulation, every six months an invit must distribute at least 90% of its net-distributable cash flow or the leftover cash once operating expenses and debts are paid off to unit holders. In the infrastructure world, the type of asset dictates the majority of the risk invits undertake. India currently has about six major publicly listed invits. They broadly fall into two camps, power transmission and roads. Now the difference between these two is enormous. So power transmission invits like indigrate and power grid invit resemble a regulated utility. They own tariff rides for electricity, transmission, lines and substations and they earn money for simply keeping the lines operational. Now it doesn't matter whether the economy is booming or in recession as long as the grid is running, the checks come in. Their cash flows are exceptionally predictable and the lives of their assets are long, 35 to 40 years.

5:06There's very little that can disrupt them and that's why institutional investors overwhelm ingly prefer them. Indigrate for example owns 50 transmission assets spread across multiple states, mostly on long term regulated tariffs. Now road invits like RIT are a different animal. Revenue here depends on actual traffic volume and toll collections. So if the economy slows, if fewer trucks are driving for instance, tolls drop. If fuel prices spike, commercial traffic thins and tolls drop. If an alternate route opens up nearby, cash shift and tolls drop. Roads are economically sensitive in a way that power lines aren't. But to sweeten the deal, road invits have historically offered higher yields than power invits. You're being paid more for taking on more uncertainty. On top of that, the economics of every road is different and we've covered these in detail before. RIT specifically takes already built operational roads and sells their future toll cash flows to investors through a toll-operate transfer or TOT structure wrapped in an invit.

6:09The road already exists and you're buying the right to collect its cash flows. It's a monetization play and not a construction bet. So to evaluate this invit then, you're asking how much toll do these roads generate over the next many years? This analysis is very different from a typical stock. When we dug into RIIs offer document, most of our time went into studying the underlying assets. There was years of traffic data for each of the five roads, broken down by vehicle type, two wheelers, three wheelers, commercial trucks, passenger cars. It also had information on the current toll charges for each road stretch. These are the numbers that feed into 15 year cash flow projections. They are what you too would spend most of your time on and this investment really is a question of how you might underwrite an asset. So here are a few things to note. Quality of assets. RII holds five operational toll roads on the golden quadrilateral spread across four states. Charkand, Andhra Pradesh, Tamil Nadu and Karnataka.

7:12These roads are spread out over a large enough spread to be somewhat diversified. But the portfolio leans heavily on the Neil Mangalathum course stretch. This is projected to bring in nearly 34% of its initial FY27 toll revenue. So if traffic on that one stretch disappoints for any reason, from a local economic slowdown to a new competing road or train line, you will feel it across the entire trust. Notice how different this is from power transmission. Power transmission lines are natural monopolies. You can't build multiple competing high voltage lines along the same corridor. Highways by contrast have what you might call moderate monopoly power. While they might hesitate to do so, there's a point at which users might shift to alternative free roads or railways. One toll hike that feels too steep or a few months of congestion that makes detours worthwhile and alternatives start biting into the RII's business. Meanwhile, Andhra Chair has approved a pipeline to offer RII and additional 1500 kilometres of operational highways over the next three to five years.

8:13That gives them a clear roadmap for scaling up. Assuming the acquisitions happen at reasonable valuations and the trust can raise capital to fund them. Second, agreement terms. So unlike a REIT, where these terms can run for decades, infrastructure doesn't generate cash forever. REIT has a fixed 15-year concession for all five assets. And that's how long it'll collect tolls on these roads for. When it expires, those assets go back to NHAI. Now think of it this way. Every year that passes is a year's worth of toll income that has been exhausted. With a 15-year concession, five years in, you've already burnt through a third of your income life. With a 40-year transmission asset in contrast, five years is barely an eighth. The value of your unit erodes more noticeably with each passing year. Third, income stability and growth. So over that period, it's cash generation potential varies over time. Now toll revenues are traditionally volatile. Temporary inconveniences like fuel price shocks or monsoon disruptions

9:15can swing traffic numbers and thus toll collections. More broadly, when you run a highway, your cash flow comes from a diversified mix of passenger cars and commercial trucks. And this ties the in with fortunes directly to the broad Indian economy. So this is its appeal. It's a general bet on India's growth, but it's also a vulnerability exposing you to anything that slows growth down. If a recession eats two out of a road 15 years, that's two years you'll never get back. But RIIT has a somewhat unusual stabilizer. A transitional support agreement. So for the first 30 months after requiring each asset, NHAI continues to run the existing tolling contracts. Under those contracts, NHAI was collecting a regular fixed fee, while the daily traffic risk was borne by subcontractors responsible for tolling. Now instead of NHAI, the SPV collects those fixed payments. But when they come off, RIIT takes on full traffic risk. Its revenue then grows in two ways.

10:15Natural increases in traffic volume, and annual toll rate hikes link to the wholesale price index or WPI. But it also means your returns become a bet on how many trucks actually use these roads, and how often the government tinkers with toll policies, exemptions, or competing roads. So in which offer a genuinely different way to earn yield in India, backed not by corporate earnings or rental income, but by the country's physical economic engine. But not all in which are created equal. A power transmission in vit and a highway toll in vit are almost different asset classes wearing the same legal costume. So the question for any investor looking at RIIT or any road in vit isn't just what's the yield. It's whether that yield adequately compensates you for the traffic risk after the 30 month safety net expires, the maintenance burden that compounds over a 15 year concession, and the reality that when the concession ends, you're left with nothing. So does the payout justify what you're signing up for?

11:15We go through tons of investor presentations and reports while researching our stories. So we thought why not compile the best infographics, charts, tables, and slides into one newsletter? That's exactly what we do in points and figures. A weekly newsletter we send out every Tuesday. Link is in the description. Coming to the second story. So every few months, the RBI's Monetary Policy Committee meets to answer one central question. Is inflation too high, too low, or just right? Since 2015, the answer is supposed to revolve around one number. 4% inflation give or take two percentage points either side. But for much of last year, inflation was under 2%. Just outside the RBI's tolerance band of 4% plus or minus 2%. So if inflation falls too fast, that might indicate that people aren't buying things enough. There were even a few rate cuts from the RBI last year to spur consumer demand. But what we wanted to understand was how inflation targeting became the RBI's central

12:19operating framework in the first place. We covered its basics in a daily brief story from August last year. Now India's inflation targeting journey was formally enshrined only in 2016, barely 10 years old. So how did India's central bank pursue its objectives before that? And how does inflation targeting clash with other objectives of the RBI? A paper by economist Radhika Pandey, Ilha Patnaik and Rajeshwari Sain Gupta offers the most comprehensive audit yet of how India's inflation targeting regime has actually worked. It's a huge paper and we won't be able to cover all of it. So we recommend reading it in full, but we'll summarize the most important takeaways here. So to understand why the adoption of inflation targeting in 2016 was such a watershed, it helps to understand how Indian monetary policy worked before. So before 1991, India's economy was more centrally planned by the state. Nationalized banks were directed primarily to fund government spending, and most importantly, there weren't many differences between monetary policy and fiscal policy.

13:22In effect, the former was meant to serve the latter. Now what do we mean by this? So the government ran high fiscal deficits at the time, and the RBI printed money to cover it. This is also known as fiscal deficit monetization. But as a result, the system often suffered from high bouts of inflation. For instance, average wholesale price inflation ran at 8-10% through the 1970s, 80s, and early 90s. While there were attempts to change its approach to monetary policy, they didn't work. But then, in 1991, the economy opened up to foreign capital and deregulated interest rates, and in the new paradigm, fiscal deficit monetization was faced out gradually. The RBI moved to what it called a multiple indicator approach, which means instead of targeting a single variable like money supply, it would watch a dashboard of data, credit growth, capital flows, exchange rates, inflation, etc. For about a decade, this approach worked well. Average GDP growth was around 7%, while inflation hovered around 5.5%.

14:25But then came 2008, which triggered a rush of capital out of emerging markets. Foreign investors pulled money out of India, putting sharp downward pressure on the rupee. The RBI, which had been intervening in currency markets to stabilize the exchange rate, began burning through reserves and eventually had to step back. The government was also issuing fiscal stimulus to prop up demand. But capital outflows weren't the only issue at hand. Food prices surged, and CPI inflation stayed above 10% for years. People stopped believing that prices would stabilize and started pricing that expectation into their wages and savings decisions, which only made inflation worse. Alongside this, the fiscal stimulation only worsened the inflation further. As a result, India's monetary policy lost its nominal anchor, which is the reference point that tells markets and households what the RBI is actually trying to achieve. Now in the earlier years, the rupee's exchange rate occasionally acted as an informal anchor for policy. But under the multiple indicator framework,

15:26the RBI was never formally committed to any single target and markets did not know which one ultimately mattered most. Multiple expert committees came to the same conclusion. The RBI needed a single, clear, legally mandated target and not an assortment of things. And that's where inflation targeting comes into the picture. Now the logic behind inflation targeting is straightforward. Businesses invest and hire more confidently when they know what prices will look like in three years. Households don't need to demand higher wages every few months to stay ahead of rising costs. Banks can offer longer-term loans without building in massive uncertainty premiums. This was the argument that finally prevailed. After successive reports recommended giving the RBI a clear price stability mandate, the machinery slowly moved. In 2015, the government and the RBI send the monetary policy framework agreement and the finance act of 2016 formally amended the RBI act to enshrine inflation targeting in law. Now under the new framework, the RBI's primary job is to keep CPI inflation at 4%

16:31with the tolerance band of plus or minus 2%. Now the instrument is the reparate, which is the interest rate the RBI charges banks for short term loans which flows through the lending and deposit rates across the economy. So if inflation breaches 6% or falls below 2% for three consecutive quarters, the RBI must formally explain itself to the government. The new framework brought clarity and a clear right vision, but it came with its own set of problems. The biggest of them is something economists call the impossible tralema. We covered this tralema in depth in a previous story, but we'll briefly touch upon it again here. So the tralema works like this. Say a country has the following three policy goals, an independent monetary policy to set interest rates to suit your own economy, a stable exchange rate to keep the rupee dollar rate from swinging wildly, free movement of capital, letting foreign investors move money in and out freely. The problem is you cannot have all three simultaneously and at any given time can only achieve

17:33two of them. That's because free capital movement links interest rates across countries in ways that break the other two goals. So the mechanism by which this tralema manifests is a little complex, but bear with us as we try to explain it. Imagine that the U.S Federal Reserve raises interest rates sharply. Higher U.S. rates make dollar-denominated assets more attractive, so global investors sell rupees and buy dollars. The rupee comes under currency depreciation pressure. Now the RBI faces a dilemma. If it raises rates to match the Fed, it's effectively letting U.S monetary policy drive Indian monetary policy, not independent at all. If it doesn't raise rates, the rupee depreciates, making imports costlier and potentially stoking inflation. There is a third option. The RBI can intervene in the Forex market by selling dollars to support the rupee, but that only works for as long as the RBI's own reserves of the dollar hold. And capital outflow pressure is often stronger than any central bank reserves. Moreover, RBI's foreign exchange actions change the domestic money supply,

18:36which itself is intricately connected to inflation. For instance, when the RBI buys dollars, it pays for them with rupees. And this prevents the rupee from appreciating, but also injects rupees into the system, which may have inflationary consequences. In fact, in 2023, the RBI was buying dollars at the same time it was keeping the report rate high at 6.5% to fight inflation. In effect, both levers were pointing in opposite directions. Now India has been trying to have all three, and the paper documents this tension in striking detail. Between April 2023 to July 2024, the rupee's annualized volatility was just 1.9%. The lowest in three decades. By comparison, the long-term average volatility over 2020 was 5%. The RBI achieved this by massively scaling up its intervention in currency markets. In FY24, the rupee was the third most stable Asian currency against the dollar, behind only the Singapore dollar and the Hong Kong dollar. There is another built-in structural tension in the Indian economy that may dampen the

19:40effectiveness of inflation targeting. The RBI simultaneously manages monetary policy and manages the government's debt. As India's central bank, the RBI's job under inflation targeting is to raise interest rates when inflation is high. But as the government's debt manager, its job is to keep government borrowing costs in control. Higher interest rates may make it more expensive for the government to service its debt, and when India runs higher fiscal deficits, it needs to borrow more. Every expert committee that has reviewed the framework since the 1990s has recommended fixing this by setting up an independent public debt management agency to take over debt management from the RBI. Now, PDMA provisions were included in the finance bill 2015. The same year, the inflation targeting framework was adopted, but the RBI pushed back and the clauses were withdrawn before the bill was passed. The government promised a separate roadmap, but it never came. Now, this tension shows up in the bond market. Between May 2022 to February 2023, the RBI hiked the reparate by 250 basis points.

20:45But the yield on the 10-year government bond, which should move up when the rates rise, barely budged, rising by only 24 basis points. One possible explanation was this was that the RBI was buying government bonds in the secondary market to keep government borrowing costs from rising too fast. So the result was a nearly flat yield curve, and in some periods an inverted one, which sent confusing signals to the broader market about where rates were headed. Now, how did inflation targeting perform as an intended policy objective? The first MPC under the new inflation targeting regime 2016 to 2020 had a relatively smooth run. Average inflation during its tenure was 4.2%. Perfectly in the RBI's ban. The committee mostly kept rates steady, cut them when growth slowed, and brought the reparate from 6.5% down to 4% as the economy weakened. But the second MPC, 2020 to 2024, had a much harder time. It inherited a pandemic, navigated a supply chain crisis, and then faced the inflationary shock from Russia's invasion of Ukraine in 2022,

21:50which pushed global commodity prices through the roof. Average inflation during this MPC's tenure was 5.8%, which was dangerously close to the top of the RBI's ban. In fact, in 2022, the RBI officially breached its mandate for the first time as consumer price index or CPI inflation exceeded 6% for three consecutive quarters from January to September. Naturally, the central bank had to write a formal letter of explanation to the government. Now, the data does support a modest positive verdict. Compared to the pre-inflation targeting period, 2012 to 2016, when average headline inflation was 7.3%, the post 2016 average of 4.9% is meaningfully lower. Inflation has also become less volatile, and there's also some evidence that households inflation expectations have started to anchor more closely to actual inflation, though India still lacks long-term expectation status. Whether the good news is entirely due to inflation targeting, or partly due to lower global commodity prices and better behaved food markets,

22:53is genuinely debatable. What seems fair to say is that the framework provided a credibility floor that kept expectations from spiraling the way they used to. Now, the third MPC was constituted in October 2024, and it began its work with inflation finally near the 4% target. The RBI Qatar appore it in early 2025 for the first time in several years, but the structural questions the paper raises haven't gone away. India may need to decide what combination of the trilama it wants to live with. A fully floating rupee would give the RBI genuinely independent monetary policy, but it would mean accepting more exchange rate volatility, which is something policy makers have been reluctant to do. Setting up the long-promised independent debt management agency would remove a genuine conflict of interest, but it requires political will. Now, none of these are insurmountable. But in a situation with increasing geopolitical rivalry and fragmenting world trade, it's going to be even harder to manage the trilama. A framework on paper and a framework in practice

23:55are two different things, and the gap between them is where the next set of reforms need to go. Now coming to the dead bits. Daikin, Walters, Blue Star, LG, and others are hiking air conditioner prices just before peak season, driven by surging copper costs, a weaker rupee, higher freight costs, and new energy efficiency norms. Coming to the next dead bit. The auto PLI scheme requires OEMs to have a minimum global revenue of rupees 10,000 crore, and fixed asset investments of rupees 3000 crore, thresholds that lock out EV startups like Euler Motors despite their being among the top players in electric cargo vehicles. Euler CEO is asking the government to count total investment and not just fixed asset toward the eligibility criteria. Coming to the final dead bit. Karnataka will end its decades-old system of fixing liquor retail prices and move to an alcohol content-based tax structure, the first Indian state to do so. The reform cuts pricing categories from 16 to 8,

24:56and lets producers set their own prices. That's all the news I have for you. Thank you so much for watching, and see you in the next one.