Can Indian Markets Recover From This Drubbing?
If the Sensex or Nifty were to fall below 20% from peak, they would have entered into bear market territory
On Episode 521 of The Core Report, financial journalist Govindraj Ethiraj talks to Madan Sabnavis, Chief Economist at Bank of Baroda as well as Ajit Velonie, Senior Director at CRISIL Ratings Ltd.
(00:00) The Take
(05:38) Can Indian markets recover from this drubbing?
(09:53) India’s GDP last year was now 9.2%. It has emerged even as GDP for the third quarter rises
(11:13) Outlook for the economy amidst strong agricultural demand
(20:38) Will lower risk weightages boost consumer loans and thus demand in the economy?
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 Monday, the 3rd of March and this is Govind Ethiraj, headquartered in Broadcasting and Streaming, like always from Mumbai, India's financial capital, and welcome to the third month of the year 2025. And just a reminder, time as always continues to fly away.
The Take
There is usually a sequence for big car launches in India. Usually we see display models at the Auto Expo in Delhi, now called the Bharat Mobility Global Expo, which is now held annually as opposed to once in two years earlier. There was some buzz, quite likely amongst and within the media only, that Tesla was going to show up at the Expo in February 2024.
Now that's last year. It did not. And along the way, we were treated to a barrage of rumours and leaks suggesting Tesla's arrival was imminent, including a grand entry announcement at the Vibrant Gujarat Summit in January last year.
Again, this did not happen. What we do seem to have now, in some degree of finality, is a 4,000 square feet showroom in Bandra Kurla Complex or BKC in Mumbai, and a similar sized one in Delhi that should follow soon. Now, the size of that showroom is okay, slightly below the average actually, but definitely not a grand one if you were expecting it.
And it's also extremely unlikely that this would include anything else, like a service centre. To be fair, in Delhi and Mumbai where rents are high, dealerships are now distinct from service centres, unlike possibly in smaller cities and towns. On the other hand, we've not heard of a service centre or network or partners for the same with Tesla, but possibly we will.
So apart from an Auto Expo or a Bharat Expo display and launch, companies have tended to reveal their top leadership, who are usually experienced marketeers from within and outside the automotive industry. Tesla has of course shied away from most of this. Now, there could be several reasons.
First, it is like a mobile phone company or a company that is essentially selling a computer on wheels, where there is limited engagement with a customer once the product is sold. At best, perhaps firmware upgrades. Now, to be fair, Tesla does have service centres and body repair centres, including for collision in the United States and reasonably well spread out.
Second, this is a highly limited engagement and entry strategy, for now, for an expensive product, despite the lower duties that it will follow and therefore does not call for the launch intensity of a Hyundai or a Toyota or even a Ford or a General Motors when they arrive in India. Third, Tesla is entering India with such weariness as is quite evident and it's almost like this is the best I can do in the given circumstances to keep people happy or satisfied for now. Or more importantly, if I were to use an automotive analogy, Tesla is entering with one hand on the reverse gear.
You can't blame Tesla for that. It might rightly feel its products are on the higher end of the market spectrum, at least for now, and thus do not merit much attention. Unlike other manufacturers, it is not investing in India for now and has strong-armed concessions for itself in order to enter on its terms.
Now, the key one, of course, being that it wants to sell a fully imported car in India before thinking about its next move, though technically it has to commit to that next move. Now, you could equate this to a Lamborghini strategy to export in India and not manufacture it here, except that Lamborghini, which I think has about three dealerships in the country, quite likely came on its own and was not chased incessantly for several years, nor to my knowledge has the CEO of the company been quoted the way Elon Musk has. So, the question, obviously, is why are we getting so excited about a company that does not really want us as much as we do, at least, and also seems uncertain about the Indian market?
Now, that's obviously a purely rhetorical question. The contrast is interesting. Chinese companies like BYD, also known as Build Your Dreams, are literally begging to be allowed more leeway in the Indian market.
BYD, which is now matching and overtaking Tesla sales globally, showcased its C-Line 7 at the Bharat Mobility Expo 2025, that's in January this year, apart from its existing lineup of the A to 3 SUV and the E-Max 7 MPV for the multipurpose vehicle. Now, BYD cars, by the way, stand out on Indian roads because they're large and comparable to traditional cars in roominess and are yet, of course, electric. Now, BYD, which is not a premium car, unlike Tesla, and is perhaps more suited for India as it stands, also has 38 dealerships listed on its website across the country and promises strong service backup and battery backup as well.
Now, there are some good reasons why India has been cool to these advances by the Chinese companies, particularly in the last few years. But now, as we know, there are clear signs that there is a thaw in the China relationship, whereas it's quite the opposite with the United States, at least on trade. And finally, the Tatas and Mahindras are all gearing up with Mahindra's new-generation electric car models already getting bookings equal to one-third the size of India's EV market.
SP Singh, a listener on The Core Report, had this to say, Let Chinese EV giants be allowed to bring its fully built-up high-end electric cars and SUVs into India with the same terms and conditions offered to Tesla. Then we should have free market play between Tesla, BYD, and Indian car makers. Consumers in India deserve choices.
Well said. And I would add, and the government should listen to what consumers want or likely want rather than chase dreams, or at the cost of being a little corny, maybe pay more attention to the company that wants to build them. And that brings us to the top themes of the day.
Can the stock markets recover from the drubbing that we're seeing?
India's GDP last year was now 9.2%. It's emerged, even as GDP for the third quarter, that's the last third quarter, rises.
Outlook for India's economy amidst strong agriculture demand.
And will lower risk weightages boost consumer loans and thus demand in the economy?
The Markets Get A Thrashing
India's market participants are suddenly discovering and waking up to the fact that the capital gains charged by the Indian tax department on sale of shares is prohibitive, including on foreign institutional investors who usually don't pay capital gains anywhere else in the world. The Core Report has argued in the past that the market needs more incentives if it has to snap out of this current stupor. And capital gains, which has been hiked repeatedly, is surely one which can be eased.
What we saw instead in the latest union budget was a tax giveaway to the middle class, to whom the linkages with the stock market, let's say via better performance of consumer-facing industries, thanks to more demand, was ambitious at best and tenuous at the least. So the sequence on tax is as follows. We had a securities transaction tax on sale and purchase of shares to replace capital gains tax, which was removed earlier.
Then we brought back capital gains tax for the short term and kept STT as well. And then increased both sharply. STT now ranges between 0.25% to 0.1%, depending on the class of securities, whether it's shares or futures and options, and whether you're actually doing intraday transactions or taking delivery. All of these shifts, of course, reflect tax uncertainty, apart from the proverbial killing of the golden goose. In framing policy for the stock markets, the government usually visualises, at various points of time, rich Indians who are cashing out of stock markets and are presently buying up 50 crore rupee apartments in DLF Gurga or 100 crore palaces in the sky in Mumbai. But the market breadth is not and never will be made up of such people only.
And it is quite clear that the assumption that FIIs do not swing markets was plain wrong, because it is not just about the capital, but also about their informed research-backed view on specific stocks, industries, and the market and economy as a whole. And yes, views of foreign brokerages can also swing depending on the positions they take and could be mercenary too, but you cannot ignore the research and in many cases, the decades of experience. At least I don't.
And it's not just FIIs who've been selling, so have others like family offices, alternate investment funds, and other pools of capital. A lot of money has also flown into the primary markets looking for quick returns and has, or will, come to grief. Meanwhile, on Friday, it was a hammering of the kind we've not seen in a while.
The indices saw their worst day in about five months, with the nifty 50 posting its longest monthly losing streak now since 1996. That's almost 30 years. The Sensex closed down 1,414 points at 73,198 on Friday.
Now, that takes it to about 2,113 points falling in a week and about 4,300 points down in February 2025. All in all, the Sensex is now down 15% from its all-time high of 85,978. On Friday again, the nifty 50 was down 420 points to 22,125.
The nifty 50 index has fallen 6% in February and almost 16% from its all-time high of 26,277. So, if the Sensex or nifty were to now fall below 20% from their peak, they would have entered into bear market territory. Speaking of which, the broader mid-cap index is already in a bear market, having fallen more than 20% from its September 24 close.
There are several reasons for the markets falling. Most of them are the same as in recent weeks and include poor earnings, higher absurd valuations, some brokerages have quite candidly pointed out consistent foreign investor selling and of course, the drama going on in the United States with regards to tariffs. And then of course, funds are rotating out of India to China because investors feel and are also saying that they ignored China in the last year or so and their eyes have been yanked open, so to speak, by the deep-seek development.
But global markets are still steady on balance and India seems to have been affected more. Like we discussed on Friday, looking beyond, a consistent fall is tougher than a sudden one. Will it be three or four months or longer?
Tough to say, except that it can and has taken time and patience is the best virtue here and of course, a belief that the long-term view of the economy or markets holds as it did earlier. Elsewhere, gold is still steady and not shooting up or rocketing up and Brent crude is quoting below $73 a barrel, which is in general for buyers like India, a good sign or a relatively good sign, given all the other uncertainties that are looming large over the markets.
GDP Growth For The Last Quarter Is Up and So Is It For The Last Year As Well
A good part of the projections on the market and its constituents are obviously dependent on GDP growth numbers and the economy's performance in general. India's economy grew about 6.2% in October or December, picking up on increased government and consumer spending and a further acceleration is expected in the current quarter. A stronger rural economy did help in the last quarter but manufacturing growth remained subdued and the overall rise in GDP is still below peak quarterly growth rates seen in the three years after the pandemic.
Now, India is still the world's fastest growing major economy though growth in the last quarter was lower than the Reserve Bank's own estimate of 6.8% but the economy grew 5.6% in the previous quarter so the recovery to the level that we're seeing now was largely projected and expected. The interesting thing is the revisions in back data and more on that shortly. Last year's figure was 8.2% which by the way many of us did consider a blowout and that's been revised to 9.2% which is quite substantial by any stretch. Similarly, the third quarter for the 23-24 figure is 9.5% now which has been changed from 8.6% earlier so we had a great last year if it helps sentimentally knowing that only today. Agriculture has been the leader in the last quarter with a 4.6% growth which means the rural economy has done well and will be one of the engines of growth going forward according to Bank of Baroda research. Manufacturing has been revised downwards which is not surprising as corporate profitability has been under pressure this year.
BoB research also says that companies in the consumer space have lamented on urban stress because of inflation which has pushed back consumption and hence output. And more on consumption coming up after this. BoB says that in nominal terms consumption is up 12.3% against 9.7% and thus almost the same growth rate in real terms. While private investment is still to get broad based BoB says substantial revisions of past data make forecasting more challenging though the overall picture and analysis remains unchanged which is that the economy is on a stable footing. A growth rate of 6.5% for the year also means that Q4 has to be close to 7.4-7.6%. That looks a little tough. Q4 is really the quarter that we're already in now though it is doable. I reached out to Madan Sabnavis, Chief Economist at BoB Research and I asked him how he was seeing the fairly large backward revision and if that was unusual before asking him to take a shot at how things are going to be looking in the coming quarters.
INTERVIEW TRANSCRIPT
Madan Sabnavis: See actually Govind, the way I look at it is that we should be looking at a full year rather than the quarters because if we're looking at the quarters of course Q3 was slightly lower than what was projected but if you look at the overall picture for the full year growth was supposed to be 6.4% in the first advance estimates which came out in January. Now we're talking about the number being 6.5%. Now in a normal course, I would say there's not much difference between 6.4 and 6.5 but the fact that the numbers for fiscal 24 have been revised in the upward direction I think that itself is quite interesting because this means that the growth which we're seeing of 6.5% is fairly stable and sturdy I would say. So it provides a fairly good base for which the Indian economy can actually build on in the coming year that is in fiscal 26.
Govindraj Ethiraj: Right, so the figure for 24 that's 23-24 is now at 9.2% instead of 8.2%. Now that's a really substantial jump. Have we ever seen something like this before in a retrospective?
Madan Sabnavis: I don't think we have seen it. See normally it happens in the downward direction. So in fact we were thinking that this number of 8.2% was also on the higher side because if I remember right we had a GVA growth of 7.2% last year and then there was a 1% coming on account of the net taxes. That's how we came to 8.2%. So we thought this 8.2% could possibly go downwards. But the fact that it's gone to 9.2% and I think the breakup is 8.2% plus 1% is the net taxes. It means that the economy did much better probably because of the pent-up demand phenomenon where the economy did much better than what we thought in 24.
Govindraj Ethiraj: So if you were to now use that as the base I mean which we are and now look at where we are today what is that telling us?
Madan Sabnavis: See what it tells us is that while growth has definitely slowed down so numerically we can say from 9.2% we're coming down to 6.5% rather than 8.2% to 6.5%. But if I make a comparison with the growth which was projected earlier at 6.4% it means that we are at this particular range of 6.5%. So that itself is fairly satisfying more so because if you look at the internals look at the eight sectors which contribute to this growth in the GVA we have seen there's not much change in terms of the overall trend. When I said overall trend in the sense that seven out of the eight sectors or rather six out of the eight sectors have been doing well the exception was manufacturing and that also we know is because corporate profitability was something which was down in 24-25 and this is the number which gets included when we're calculating value added for the manufacturing sector.
So I think manufacturing to a certain extent mining and electricity which also get linked to manufacturing were the underperformers whereas the services sector in agriculture as well as construction which I'm taking as services have done very well. So that is something that gives hope to us that even in fiscal 26 this kind of momentum is something which can be maintained.
Govindraj Ethiraj: Right, so in your report following the numbers you've said that agriculture has been the leader with growth of 4.6% and translating into the fact that the rural economy has done well and will be a growth engine. So my question is now how does that compare with the rest of the economy and how are things looking for the last quarter of this year and maybe the one after that?
Madan Sabnavis: So if you're looking at agriculture its manifestation of how the rural economy is behaving this is even though we should admit that agriculture has not more than 50% of the overall value added which comes from the rural economy you also have a large number of SMEs in both manufacturing and services but generally when agriculture does well it provides the demand for non-agricultural products especially manufacturing products and assuming that if this 4.6% number holds which means that even the Rabi harvest will be good we could be expecting some kind of an uptick in consumerism coming from the rural side post the Rabi harvest in the months of April, May. So that is something which could actually add the delta to the overall economic growth which we see. So agriculture is definitely kind of an anchor because we have seen when agriculture doesn't do well the economy definitely doesn't do well.
It may not necessarily hold the other way around saying that if agriculture has done well doesn't mean the economy is going to grow at 78% but I would say it's a necessary condition not a sufficient condition. So once the necessary condition has been ticked I think that itself provides a lot of comfort when we are trying to interpret what is going on in the economy and what holds for us in the coming year.
Govindraj Ethiraj: Right, so we've had a weak growth rate or rather we've seen weak growth rates in the corporate side and it does appear that Q4 is also likely to see some lagging. What's your sense and how does this link to how corporate performance will be which in turn of course links to the overall industry and business optimism?
Madan Sabnavis: See if we're talking of Q4 now if I purely look at these numbers which we have for Q1, Q2, Q3 as well as the full year it does look like that Q4 growth has to be in the region of 7.5%. It looks a bit challenging at this point of time. Now what would this actually mean? I think what gives us real hope is that number one is of course a rural demand which we have spoken about.
Second, I think this Kumbh Mela has been a big positive for the economy because if we go by the official numbers released of 600 million people visiting this place, think of the kind of expenditures which might have taken place largely towards consumer goods. That is for services as well as for products. It could be food products particularly it could be a bit of clothing it could be of travel in this period of 45 days just going by the 600 million number because 600 million means 60 crores if there are 2000 rupees as a minimum expenditure per head just for coming and going that itself means over 1 lakh crore 1.2 lakh crores has been spent. So I think this is another big positive which has happened in this particular quarter and if we believe that inflation has come down which I think it is coming down and there are some signs that urban demand could also have been picking up especially in the FMCG sector may not necessarily be in the automobile sector. I think there could be this kind of delta which is added past the third quarter and that's the reason why I think that while 7.5% may be a bit going this way or that this 6.4, 6.5% growth for the year could be muted and as I mentioned if the Rabi crop turns out to be good the spending is more likely to be in the next quarter so from the rural demand could be buoyant but that's also the marriage season April, May especially in the northern states so that is something which could be quite buoyant in the first quarter of the next financial year.
Govindraj Ethiraj: Right and here's a question Madan which I'm trying to pose to a lot of people is that if tariffs come down or if we are forced to reduce tariffs could that be a good thing for us?
Madan Sabnavis: So it could be good in terms of avoiding these tariff wars which are there. So I think hard lowering tariffs may be a better option than facing higher tariffs in other territories especially US given the fact that US is our major exporting partner so to that extent it may be good. It will of course be a case of reduction in terms of customs collections from the point of view of the government so that is something which we will have to live with.
One has to really evaluate on what basis do we reduce these tariffs and how significant they are. Now at times it's a case of just sending an announcement effect saying that I'm reducing tariffs but I may not really be importing much of those goods or maybe if I'm importing say for example if I'm reducing the import duties on say motorcycles I may not be importing too many Harley Davidson's so even if I'm importing now some days a large quantity come they could actually be a delta to my earnings because earlier they were not coming now they're coming in because I have a lower tariff rate it could actually be beneficially working well both ways too. So I think on the whole I think rationalisation of tariffs is always good if one believes in free trade and I think free trade has brought about lots of benefits to the world including our own economy and future direction will be of course to harmonise these rates based on what the global trends are so that we are able to foster global trade and also enjoy the benefits from which come from it.
Govindraj Ethiraj: Madan, thank you so much for joining me.
The Impact Of Reduced Risk Weightages
So could growth indeed pick up in coming months which might lead to among other things the markets looking up though the factors driving the markets are much more than just pure growth. You may remember that in November 2023 fearing distress in consumer loans the Reserve Bank of India had tightened norms for personal loans and credit cards raising the risk of slowing loan growth. The tighter rules in the form of higher capital requirements made loans costlier and did curb growth in these categories which had outpaced overall bank credit growth of about 15% in the last year.
The Reserve Bank of India had increased risk weights for banks and non-bank finance companies of the capital that banks need to set aside for every loan by about 25 percentage points to 125% on retail loans. Now, the Reserve Bank has pulled back and is easing off quite quickly as it tries to match the government's push to increase consumer spending and presumably some of it through increased borrowing. On Tuesday, that's last week it reduced those risk weights on bank loans to non-bank finance companies and also microfinance loans.
All of this will be effective in a month's time. That's from April 1st. I reached out to Ajit Velonie Senior Director at Crystal Ratings and I also began by asking him how he was seeing the downstream impact of these reduced risk weightages on the financial system.
INTERVIEW TRANSCRIPT
Ajit Velonie: If you just step back, November 23 was when the Reserve Bank had increased the risk weights. There were two broad areas. One was the increase in the risk weights for consumer credit exposure which is basically direct lending there.
And the second one was the increase in risk weights to lending to NBFCs. I think currently what the regulator has done has reduced the risk weights for lending to NBFCs. The impact is largely twofold.
One, at that time there was quantitative impact because effectively banks had to set aside more capital for the same lending that they were doing. But I would say more importantly it was also a messaging from the regulator during that period because we had a fairly high period of growth in the retail space, especially unsecured. And I think it was in a way a message from the regulator to pay for the NBFCs and banks to be able to vary in terms of the quality of underwriting and to try and maybe just cool down some of the fast growth that we saw during that period.
With this current reduction it's also a positive messaging from the regulator where potentially we have seen growth rate for instance the bank lending to NBFCs if you go back to FY23 the growth was some 30 odd percent even till November our ROI growth was more than 24 percent. That had nearly flattened out over the last 9-10 months till November. In December we saw a slight uptick but basically it's a fairly muted growth.
Govindraj Ethiraj: So I would say this also means from a regulator perspective that there is some element of comfort that they could have derived in terms of the pace of this growth And would the eventual outcome have been achieved which is to really reduce or increase the scrutiny of small loans?
Ajit Velonie: Absolutely. I think there are two elements to it. One clearly that the regulator gives you an element of a warning saying that potentially there could be a heating up in the system and two with that all companies that for the banks as well as NBFCs have had a complete change and refocus on risk management quality of underwriting.
I think the latter clearly continues to hold even today. So while there is an element of release of capital and potentially you could now lend more, we do believe that both banks and NBFCs will continue to be prudent when it comes to at least the consumer part of the lending.
Govindraj Ethiraj: What's the sense of correlation between these risk weights and the downstream impact on loans? I mean, like, you know if you increase by 20% or 25 basis points what happens or has happened?
Ajit Velonie: I would say it's more in terms of the messaging from the regulator as opposed to a direct correlation. But just from a numbers angle again in that period what the regulator discloses says for banking systems as sectoral deployment they have a category called personal loans which is largely covering overall retail loans, housing, consumer durables, credit card and also other personal loans. So if I just simply look at the category of other personal loans again growth rate was more than 27-28% even FY24 was about 20 odd percent and if you see YY it was down to around 9 odd percent.
So clearly there was an impact on both the risk weight increases that the regulator had done in that period. So you could say there's clearly a correlation on the C.
Govindraj Ethiraj: Conversely, now that it's been reduced do you see demand going up which of course is also a function of actual propensity to borrow but how are you seeing it?
Ajit Velonie: Two things. We do believe that one, banks as well as NBFCs will continue to maintain the prudence they've displayed over the last one year and ensure there's better quality underwriting but in a way there's also a positive nudge where with the regulator having changed the risk weights we think it will allow them to continue to reach out to the customer segment you know the underbanked underserved segment especially with the NBFCs for them to reach out and show some growth.
We have to also in our view look at it in the context of the overall GDP growth so we did see consumption slowdown and there is some bit of attribution that the open consumption slowdown could also have been driven and if you look at over the last one two months we've had a rate cut we've had some income tax related benefits and now we have the setting a combination of these three would mean that there could be some impetus given in terms of the consumption model.
Govindraj Ethiraj: In the past when let's say risk weightages were what they were not all banks and non-bank finance companies are equally aggressive and I'm sure some were more than the other so does this period mean that basically the aggressive ones become less aggressive and the others continue as normal or is there any rebalancing that happens or has happened?
Ajit Velonie: I would address that in two parts if you look at from the last say decade basis the banks were historically very focused on corporate loans and we did go through this whole challenges of the asset quality review and there was this whole push to bring in granularity in the book and which is why you saw across the banking system there was higher emphasis on retail loans in that period. NBFCs if you see more than 90% of the NBFCM continue to be retail I think there won't be any real change in it. From a bank point of view on the other hand today when you come they are also grappling in a way with the challenges on the deposit side.
So if you look at deposit and credit growth they're more or less now matching at this period and there are a few banks where the credit deposit ratio is probably much higher. So I would say the banks where there could be some more focus on this growth will be ones where relatively a credit deposit ratio is in a favourable state because while there is this release of capital you'll also need at the other hand the deposits to be able to try and show this growth.
Govindraj Ethiraj: Right. Ajit, thank you so much for joining me.
Ajit Velonie: Yeah. Thanks. Thanks so much.
