Banking Stock Rally Drives Up Indian Markets
The markets staged another relief rally
On Episode 493 of The Core Report, financial journalist Govindraj Ethiraj talks to Madhavi Arora, Lead Economist at Emkay Global Financial Services as well as Praveen Singh, Associate VP, Fundamental Currencies and Commodities at Mirae Asset Sharekhan.
(00:00) A Small Take
(03:05) Banking stock rally drives up Indian markets
(05:16) Understanding the central bank’s liquidity boost measures, what caused the problem and now the solution
(16:02) Oil prices edge up as action in the high seas continues
(19:07) Colombian coffee prices are hitting record highs
(20:25) What is determining the prices of gold right now?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Wednesday, the 29th of January and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
Before we go to the top headlines..
India and China have agreed to resume direct air services after nearly five years and work on resolving differences over trade and economic issues, an official statement has said.
This follows meetings between India and China’s top diplomats and is largely seen as a further improvement of a relationship which had deteriorated considerably following clashes on the border five years ago.
The meetings were obviously scheduled before the DeepSeek bomb dropped on Silicon Valley.
But it is serendipitous nevertheless.
China has demonstrated its AI chops in a manner that has shaken up the global tech universe and battered most stocks with chip giant Nvidia being hammered in a way never seen before, quite literally.
Nvidia lost close to $600 billion in market cap on Monday, the biggest drop for any company on a single day in U.S. history.
Nvidia surpassed Apple last week to become the most valuable publicly traded company.
The sell off was driven by fears that DeepSeek, the Chinese AI alternative was much cheaper and consumed far less computing power which translates into chips and thus energy.
Viewed in the context of America’s tariff threats and trade war cries, this is an interesting moment.
A foreign policy analyst told Reuters that economic headwinds are being faced by both India and China and both have an interest in ensuring the economic relationship continues to be managed in a (mutually beneficial) way
Bilateral trade between India and China rose 4% to $118.40 billion in the last fiscal year ended March 2024, much of it Indian imports from China.
And the top stories and themes
Banking stock rally drives up Indian markets
Understanding the central bank’s liquidity boost measures, what caused the problem and now the solution.
Oil prices edge up as action in the high seas continues.
Colombian coffee prices are hitting record highs.
What is determining the prices of gold right now ?
Markets
The markets staged another relief rally, a term that best explains the kind of recovery we say on Tuesday.
It is useful to also look at the overall data on where the markets are, in case you are trying to form an opinion on whether this is a good time to invest.
But before that, on Tuesday, the BSE Sensex was up 535.24 points to close at 75,901.41.
On the other hand, the NSE Nifty50 was up 128 points to close at 22,957.25.
The markets did see some swings though not as wild as some other days.
The broader markets were down with the Nifty Midcap100 and Nifty Smallcap 100 indices closing down by 0.51 per cent and 1.81 per cent, respectively.
One reason for the markets doing well on Tuesday were banking stocks who in turn were relishing a liquidity boost in the system and more on that shortly.
And now, here are some macro data points via Reuters.
The Nifty 50 and Sensex have lost about 3% each in January, the second most in a four-month losing run.
They have now fallen 12.6% and 11.7%, respectively, from their record highs hit on Sept. 27, 2024.
A key reason for the continuing fall and weakness is obviously foreign portfolio investors (FPI) who have pulled out $8.3 billion from Indian equities this month.
The figure is inching towards the record $11.18 billion of outflows in October last year.
But the small caps are entering bear territory now.
They have fallen nearly 19% from their record highs hit in December 2024, while the mid-caps have dropped 15.5% from their all-time high.
Incidentally, stock prices of artificial intelligence driven-electronics manufacturing services (EMS) firms, including Dixon Technologies, Kaynes Technology, Netweb Technologies, and MIC Electronics, fell on January 28, Moneycontrol compiled.
This was because of the Nvidia effect flowing here though it was limited to these stocks as other stocks were steady to strong.
Meanwhile Wall Street was steady overnight following the massive tech sell off on Monday. Futures for the major indices including Nasdaq 100 were edging into positive territory
Understanding the Liquidity Boost
Banking stocks stole the show in the sectoral markets, with Nifty Bank, PSB, and private bank indices each ending higher by over 1 per cent.
The stocks gained after the Reserve Bank of India (RBI) on Monday announced a three-pronged measure to address tight liquidity conditions in the banking system, just 10 days before the six-member Monetary Policy Committee’s decision on the repo rate.
These steps, according to bankers, are expected to inject about Rs 1.5 trillion into the system
Data shows the banking system’s liquidity deficit, measured via the RBI’s liquidity adjustment facility, stood at Rs 313,000 crores last week with the deficit consistently exceeding Rs 3 trillion over the past four days, barring Friday.
The RBI has front-loaded the liquidity infusion ahead of a possible rate cut to help monetary transmission, experts told Business Standard.
The RBI's measures lifted financials higher "as easing liquidity will support credit growth and earnings of banks and non-bank lenders," another equity analyst told Business Standard.
I reached out to Madhavi Arora, Chief Economist at Emkay Global Financial Services and began by asking her to take us through why there was a liquidity squeeze to start with and whether the present response would help.
INTERVIEW TRANSCRIPT
Madhavi Arora: So, you know, conventionally, you do see a fourth quarter of the fiscal year having a liquidity crunch. You generally have much higher currency leakage. You also generally have much higher tax outflows. Payouts will be much higher. Generally, the fourth quarter is more tax-heavy.
These two factors anyway play a major role in tightening liquidity in the fourth quarter. Now, this year, the only difference that has worsened the liquidity condition is two factors.
One is the government spending, which has been less robust. This basically meant that whatever taxes they collected have not been spent, leaving money stuck with the government's balances with the Reserve Bank. And the second one is the FX intervention of the RBI, which either happened in the spot or in the forward market. But irrespective, if there's an intervention somewhere, the liquidity impact will be felt, if not today, but tomorrow.
So I think these two factors, which is government spending and extremely high intervention by the RBI in the fourth quarter, which has also continued to some extent in this month also, but much less in terms of the way they were doing earlier. But of course, the kind of outflows that you're seeing has implied that policymakers had to sort of support the currency to some extent. But clearly, these two factors have been the biggest mover for liquidity deficit to have worsened.
Just to recall, RBI had done CRR cut in early December, which had infused 1 lakh crore worth of liquidity in the month of December with two tranches. That also hasn't helped. So since, I think, late December, third week of December or so, we have been seeing consistent liquidity deficit to the extent that at this point in time, we were close to around 3 lakh crore when the RBI announced the new measures, which essentially will imply permanent and some semi-permanent liquidity inclusion of close to around 1.5 lakh crore.
Govindraj Ethiraj: And if you were to look a little ahead now, the Reserve Bank has two or three methods by which it introduces liquidity. So if you could just take us through those measures and how it will help. And the larger question being, how will this liquidity or easing of liquidity help the economy?
Madhavi Arora: So the way for them to generate additional liquidities is basically two or three ways, which is what they had sort of done as well. So there could be, you know, temporary liquidity infusion by, say, they are lending to the banks, right, which is the repo operations. So they could do variable repo operations of one week, two weeks, three weeks, or maybe three months, depending on how they are viewing the problem of liquidity.
It's a temporary measure. Eventually, banks will have to reverse that, right? It's a reversible operation.
So basically, it's a temporary measure to infuse liquidity for a certain period of time. Then they can always do something which expands their balance sheet, which is the open market operation, right? When they start buying government securities, when they do that, their own base money creation increases or the balance sheet increases, which infuses durable liquidity in the system, durable rupee liquidity in the system.
A second way, of course, other ways being, again, temporary measure like FX swaps, they can basically do dollar rupee swaps, which leads to dollar liquidity being sucked in, liquidity being injected in. That also can be a temporary measure depending on the tenure of the swap. This time, they had done a much shorter swap, but they can always do a two-year, three-year also for that matter.
So that depends on the way they want to keep liquidity high, and they can always do something like a CRR cut, which again infuses permanent liquidity to the extent of, say, if they're reducing CRR by 0.5% of their DTL. So to the extent of the deposit base, 0.5% of liquidity will be available to the system because banks would not be required to keep a high CRR or cash reserve ratio as they say.
Govindraj Ethiraj: Right. And that obviously brings us to the next logical question, which is that, are you seeing that cut soon? And that's one.
And the second is, is there any other signal that you're seeing that is being transmitted because of what we are, I mean, all this action with the usual at this time of the year, but you said there were a couple of factors which are a little unusual, including government holding back. So what are the any other signals that we should be watching out for?
Madhavi Arora: So I think, see, last quarter was a very interesting quarter for you to assess the RBS reaction function. You know, we saw massive emerging market currency pressures, which were not necessarily rupee targeted, but generally there was a pressure on the emerging market currency because dollar was strengthening. OE2 factors, which were again not led by emerging market, but going to what is happening in the US economy, be it rates point of view, or be it the fact that the growth is exceptionally strong in US versus its developed peers.
So US was enjoying that dollar bull run, which impacted other emerging currencies and RBI, I think went way ahead to defend the rupee when there was no problem from the rupee's point of view, you know, when there was no attack on the currency, you went all out to defend your currency, while you could have probably been much more judicious in your arsenal of all your spending pattern of effects. Because if I just give you a number reference, as per my estimate, the balance of payment, which is basically a difference between your trade deficit and your FPI flows and other venues of capital account, which could be FDI or ECB and stuff. So the net balance of payment of the economy for the third quarter of fiscal, which is December quarter, in my estimate was somewhere around deficit of 25-30 billion maximum, which means that the economy was having a fundamental problem of around 30 billion or 25 billion dollar deficit.
So to the extent of that, if the RBI had intervened, I would have understood, you know, they're trying to actually save the economy from the volatility and the fundamental problem. What they ended up doing was making the rupee extremely flat on volatility, there was literally zero vols. It's like RBI is really looking to tap a particular target.
More so, we became extremely overvalued against our peers. So to the extent that in the quarter of CY24, which is December quarter, we were actually 2% up against CNY, because we were the only currency in emerging market which was stable or appreciating, while everybody else was going through troubles because of dollar strength. And RBI, to the extent of the BOP deficit of 25-30 billion, ended up spending more than 110 billion on intervention led FX, which was around 20% of their own FX.
So you don't spend your arsenal at a time when there is no attack on you per se. It was generic attack or generic depreciation that was happening. So what happened going to that is that RBI, we were made to believe that RBI's rookie or the policy makers in general are looking to really keep rupee overvalued.
And either they are obsessed with the fact that a strong rupee is a reflection of a strong growth in the economy or strong economy in general to the global investors or whatever the case may be. But clearly they went overboard with whatever they did, which also made us believe that RBI, having been obsessed with the rupee management, probably will not be able to cut rate in February, because any kind of rate cut, technically in economic parlance, would probably lead to a much lower interest differential or the risk differential or risk premium that emerging markets would offer to the FPIs.
And thus, there could be a further depreciation pressure on the rupee and RBI would be wary of that, which made sense. And thus, in December, they actually did TRR cut instead of any kind of repo cut, because that's the more unconventional way liquidity infusion that they can do, would not necessarily lead to big headlines in terms of repo rate cut and then probably rupee. This is the least painful measure that one can think of.
The fear was that if the dollar appreciation continues in the next quarter, February will also be a very difficult call to take because one would not know how Trump administration would actually behave. Luckily for the global markets, the Trump rhetoric has sort of faded to some extent that dollar rally has also faded, which has given some wiggle room or relief room to the emerging markets, to the extent that countries like Indonesia, which have very high debt exposure of FPI, they have 15-18% of the debt is owned by the foreign investors, have decided to cut rates and not at the cost of their own currency, IDR, and at the cost of other things, but they focused on growth instead of focussing on a higher interest differential. So I think if in the current junction, if the currency volatility sort of remains manageable, they may also opt to cut rates and if they had to do a rate cut, if they're planning to even think of a rate cut in February, it is very important that they create an environment domestically which is able to absorb the rate cut.
When does it happen? When there is a decent liquidity in the system. If you have a deficit of around 3 lakh crore, 4 lakh crore in the system, rate cut would be a waste cut.
So I think that's what they have tried to address. So that was partly a signalling tool also that one, there's a rupee pressure which is manageable, we've let the rupee fall, we've decided maybe partly that we lost focus on the rupee but we focus on say monetary policy management and let the SPI be. So to be very honest, India is not a debt or interest differential economy.
FII has come to India for growth. If you have a good differential with the rest of the world, people will anyway come to India and the rupee will take care of itself. So I think to some extent they're trying to address those things and my sense is that if at all there is no disruption in the global markets, February should see a rate cut and we may also see further unconventional easing ways for the RBI to probably bring in more contraceptive measures to the economy which could be either in the form of more liquidity infusion at the margin here and there or in the form of probably easing lending conditions in the economy by probably easing the conditional norms on the banks with regard to the provisioning to say NBFCs or Infra Lending stuff like that that they had discussed or they had implemented last year.
Govindraj Ethiraj: Right Madhavi, thank you so much for joining me.
Madhavi Arora: Thank you guys. Bye.
Oil Boil
Meanwhile, there is considerable action quite literally in the high seas as sanctions on Russian oil kick in.
Reuters is reporting that trade for March-loading Russian oil in top buyer Asia has stalled as a wide price gap between buyers and sellers emerged in China after costs for chartering tankers unaffected by U.S. sanctions jumped, according to traders and shipping data.
Sanctions by America over two weeks ago targeted Russia's oil supply chain, causing tanker freight rates to soar as some buyers and ports in China and India steered clear of sanctioned ships.
The latest sanctions target tankers that carry about 42% of Russia's seaborne oil exports, primarily to China, according to analytics firm Kpler, although sanctioned tankers are gradually discharging oil in China and India during a waiver period.
The U.S. clarified to India that tankers loaded with Russian oil must discharge by Feb. 27 under the sanctions, according to Indian Government officials last week, adding that payments for oil onboard affected ships must be cleared by March 12, he added.
On Monday, China also reported an unexpected contraction in January manufacturing activity, further fuelling concerns over crude demand growth.
Meanwhile, oil prices have edged higher but remained near a two-week low on Tuesday, thanks to the weak economic data from China.
Another factor playing on oil prices is rising temperatures thus dampening the demand outlook.
Brent crude oil futures were at $77.43 per barrel on Tuesday.
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Tracking Trump Tariffs
And we are back to our favourite segment on Trump tariffs.
The United States will impose tariffs on countries that “harm” America, President Donald Trump announced, naming China, India, and Brazil as examples of high-tariff nations.
Speaking to House Republicans at a retreat in Florida, Trump said, “We’re going to put tariffs on outside countries and outside people that really mean harm to us. Well, they mean harm to us harm, but they basically want to make their country good.”
He also said he would impose the tariffs on aluminium and copper - metals that are needed to produce U.S. military hardware - as well as steel, to entice producers to make them in the United States.
"We have to bring production back to our country," Reuters quoted him saying.
It was not clear how broadly the tariffs could be applied, but several mining CEOs have previously said they are preparing for different scenarios as markets brace for a potential change to trade flows, analysts told Reuters.
Interestingly, analysts have pointed out that U.S. aluminium and copper smelters have been closing and would need new infrastructure and power contracts to restart, among other measures, all of which take time.
Arabica Prices Rise
Remember Colombian coffee.
Well, it is likely you might hear about it a bit more now.
Colombia is a key source for high-quality Arabica coffee beans and Colombian coffee means Arabica beans grown there.
The U.S. imports about 30% of its coffee from Colombia, along with other food staples such as bananas and avocados, and gold, JPMorgan analysts said in a note. Overall, the U.S. imported $16.1 billion in goods from Colombia in 2023, according to Census Bureau data.
Continuous arabica coffee futures were up at $3.48 a pound in volatile evening trading in Europe, though they are up more than 40% over the past three months and 79% on year.
Arabica set a fresh record of $3.56 earlier in the session, exceeding the prior record of $3.48 set in early December.
Before November’s rally, coffee prices had generally been supported by developments in the market for robusta coffee beans, an arabica alternative, as hot and dry weather in Vietnam sharply lowered production. Robusta futures wobbled in London, before settling 1.9% lower in evening trading.
Trump had issued threats to impose 25% tariffs and sanctions on the South American country on Sunday afternoon, in retaliation for the Colombian government refusing to allow two military planes with migrants to land. He changed course later, with the White House saying Colombia had agreed to all of Trump’s terms, including to repatriate migrants into the country.
That said, the tariffs would only be “held in reserve, and not signed, unless Colombia fails to honor this agreement,” the White House said.
Gold Prices - Where Are They Headed?
Gold prices held steady on Tuesday, a day after a sharp decline amid a tech-led selloff.
Spot gold was holding around at $2,742.37 per ounce Tuesday, having fallen over 1% on Monday, marking its steepest drop since Dec. 18.
Investors rushed to liquidate bullion to offset losses triggered by a sharp pullback in technology stocks, spurred by DeepSeek's low-cost, low-power AI model, Reuters reported.
Investors' focus is now set upon the Federal Reserve's first meeting this year, scheduled to start later in the day.
Meanwhile, what are the forces of demand and supply at work in determining gold prices across the world right now.
I reached out to Praveen Singh, senior fundamental research analyst commodities and currencies at Mirae Asset Sharekhan and asked him to take us through the various global factors driving gold prices right now.
INTERVIEW TRANSCRIPT
Praveen Singh: Praveen Singh Yeah, thanks a lot Mr. Govind. Thanks a lot for having me. Yeah, definitely there's a lot of volatility and a lot of cross-currents, a lot of views and news pertaining to gold prices.
At the same time, people are having different notions about where could possibly gold prices go, especially in the wake of Mr. Trump's election as President. Overall, the way I see the things, it goes like this. In January, gold has risen very sharply.
It is up approximately 5% this year. That is despite the fact that equity yields are somewhat elevated and dollar is mostly flat. So what we are seeing currently in gold is January impact, that is because of the fund flows and expectations of the fund managers regarding the performance of gold in the remaining part of the year.
Now, as Mr. Trump creates major economies with tariffs, he is trying to be focused on growth and at the same time, he is pursuing his deportation agenda. So these things are definitely going to have impact not only on gold market, but as such on other financial markets as well. Tariff, I don't think that tariff would actually be a factor.
The impact of tariff would be in some other terms. It is going to have a negative impact on global trade, so that will be positive. However, his deportation type, that would be increasing because of upward pressure on base, but at the same time, it is going to constrain the level market, so yields can go up.
That would be pushing dollar index upward. And as risk sentiments remain strong and Mr. Trump is focused on growth, so there would be actually increase in borrowings. Borrowings rise, that again will be pushing the yields higher, at least in near term.
More so because the job market is strong, the federal reserve is actually focused on containing inflationary pressure. So it is likely to maintain its office in stats. As the dollar index rises because of a rise in yields and because of the risk aversion, initially we can see some correction in gold prices from the current level.
But overall, the same thing is likely to become positive for gold going forward because the fundamental drivers for gold remain very well in place, like concerns about the global debt, concerns about U.S. debt, fiscal situation in leading economies. And if I talk about the interest rate payment to be done by the U.S. that is approaching $1 trillion, debt to GDP ratio is 100%, that is likely to rise 120% in a decade or so. So the fiscal scenario doesn't look good, so that is actually a huge concern for investors as well as for institutions also.
So that will be supportive for gold. And it is a situation not only in the U.S., it is being seen elsewhere also, like what happened in the case of the U.K. Because of borrowing concerns, the cost actually shot up and funds fell to more than a year low. So more or less the same thing happened in France also.
So we are seeing that the broad Midlands, they are becoming active and there could be a re-rating of sovereign funds. So in that case, initially gold may go down because of higher yields. But as we know that gold, now it does not respond much to its traditional drivers like yields and dollars because borrowing is huge.
So the market is saying that if you want to borrow, you'll have to pay me a higher cost. And it means that earlier, the kind of impact that we were seeing on gold prices due to drivers like gold and yields, that is not happening anymore. Then we have got big concerns coming from the Chinese economy.
Like we saw yesterday only that PYMA factoring has shook back into contraction growth. Property market is still struggling. So that is yet another source of gold buying.
And then central banks, they would continue to basically buy gold to hedge against economic uncertainty as well as to reduce their dependence on the US dollar index. So we have seen very strong central bank buying in the last three years. And the trend is more or less going to continue in 2025 also.
That is one of the most important sources are gold prices, which is actually leading to buy and sell gold. And then apart, see the point is that the last four years, we have seen a lot of outflows. So the investment demand as such is not strong.
I think it is going to be revived because of the fact that now the markets are increasingly worried about the fiscal situation, including economies like the US. Like if I talk about 2020, I think there is a new split. In that year, the investment demand was around 1795 tonnes.
And the ETF inflow was around 900 tonnes, I guess. And in the last four years, the inflow has been negative. So even if there is somewhat slack left by somewhat reduced central bank buying, we are lucky to see investment demand picking up that slack.
And in fact, if it rises to the tune of what we had seen in 2020, it would be extremely bullish for gold prices. So overall, in short, because of Mr. Trump and his policy, because of risk aversion, higher yields and dollar index, gold prices may go down. But if that happens, so that would be a very good buying opportunity.
Govindraj Ethiraj: Right. Thank you so much for joining us.
Praveen Singh: My pleasure. Thanks a lot for having me.
