India’s Forex Reserves Down $70 Billion From Peak
Foreign investors are worried about valuations, a weak earnings season ahead, a slowing economy, weak rupee and of course Donald Trump's presidency
On Episode 479 of The Core Report, financial journalist Govindraj Ethiraj talks to G Chokkalingam, Founder of Equinomics Research as well as Himanshu Parekh, Partner and Head of Tax (West) at KPMG
(00:00) The Take: India’s Diagnostics Industry Is Going to Grow
(04:41) Markets stay on weak footing, will midcaps surprise?
(07:20) What early market trends for 2025 are telling us about stocks
(16:56) India’s forex reserves down $70 billion from peak as markets brace for rupee sliding below Rs 86 to USD.
(17:55) Fresh sanctions on Russia increases the prospect for lower crude oil prices for India.
(21:05) 22 subcommittees are working on simplifying India’s tax laws before the Union Budget. Will they meet the deadline?
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 13th of January and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
The Take: India’s Diagnostics Industry Is Going to Grow
My dad often joked that everyone he knew or heard of had always walked into a hospital but always came out on a stretcher or on a wheelchair.
His corollary to this was that don’t do laboratory tests and blood work unless specifically asked to because you will always find out things you don’t want to know about.
Depressing as it sounds, this looks like 2025 is the year where we will find out about health problems we already had and, to be fair, should have known about.
Last week, in the largest-ever primary fundraise in the Indian diagnostics sector, Chennai-based superspecialty diagnostics chain Neuberg Diagnostics raised Rs 940 crore from Kotak Fund for growth and expansion.
Neuberg was set up in 2017 and thus less than a decade old and wants to expand into personalised medicine and integrated diagnostics, among others, according to Business Standard.
A few weeks ago, Mumbai based and India’s second largest pathology laboratory Metropolis Laboratories bought out cancer diagnostics firm Core Diagnostics in New Delhi for close to Rs 250 crore..
At the time, Metropolis said super-speciality tests now constitute 37 per cent of Metropolis’ revenue, and with Core’s acquisition, this would increase to 41 per cent.
India saw some 1.5 million cancer cases in 2023, a figure that is expected to grow even as non communicable diseases rise rapidly in India.
That growth is not necessarily from more patients developing cancer but those who will be diagnosed as having cancer, at least at an earlier stage than before.
Cancer testing itself is expected to grow close to 18% annually. If this is the case with cancer, it would surely apply to other conditions around cardiovascular and other lifestyle diseases, all of which are not just growing but exploding in India.
Latest data from pharma industry tracker Pharmarack shows that more Indians were getting treated for neurological conditions, including depression in 2024.
The reason, the firm says, is because more Indians are opening up to being diagnosed, the stage before actually getting diagnosed.
And once diagnosed, they are getting treated and buying medicines to cure it.
All this is obviously good news for pharmaceutical companies who will cure and the diagnostic companies who will diagnose the disease or health condition.
The Indian diagnostic labs market is believed to be worth around $18 billion or Rs 151,000 crore, according to a report hosted on Research & Markets.
The diagnostics business includes a lot of passive - my term - diagnostics, let's say linked to pregnancy and preventive diagnostics, as and when we do them.
While the active end of the business includes responding to lifestyle disease conditions and of course on the extreme, pandemic like situations that we saw four years ago.
And then there is the AI application of it. Companies like Astra Zeneca are partnering with Indian companies like Cure.AI to speed up scanning of chest xrays, automating the detection and localization of up to 29 markers, including those indicative of potential lung cancer.
The diagnostics business is also seeing considerable effort going into areas like genomic testing so as to help both early detection and personalised medicine.
Between increasing lifestyle diseases and our willingness to determine what is wrong with us, if something indeed is, the market for healthcare on the diagnostics and of course the cure side is set to grow rapidly in India in the coming years.
Increased diagnosis will also reflect a most likely less healthy nation than what we really are.
Rapid economic strides will mean hard work - I am not getting into how many hours - which will call for a healthy workforce.
Unfortunately, getting checked, tested or diagnosed will have to be something we do more often in 2025.
Top stories & themes
Markets
Markets stay on weak footing, will midcaps surprise ?
What early market trends for 2025 are telling us about stocks
India’s forex reserves down $70 billion from peak as markets brace for rupee sliding below Rs 86 to USD.
Fresh sanctions on Russia increases the prospect for lower crude oil prices for India.
22 subcommittees are working on simplifying India’s tax laws before the Union Budget. Will they meet the deadline?
Markets & More
It's another week to start an unpredictable week, except unless some Q3 results surprise and if they do might see some stocks responding favourably.
Or, like in the case of TCS, a positive outlook More on that in a moment.
Else, the only big trigger is a cut in income taxes in the upcoming Union Budget, scheduled for February 1.
Sounds mercenary, but that’s how markets work.
Last week, the Sensex and Nifty both fell about 2.4% this week, after gaining for two weeks before.
Twelve of the 13 major sectors logged weekly losses.
The broader smallcaps and midcaps indices are falling faster now and more on that shortly. They lost about 7.3% and 5.8%, respectively.
The IT indices are doing well, as we said earlier IT major Tata Consultancy Services saying it was betting on Donald Trump's regime to revive client confidence and discretionary spending in North America, a key market for IT companies.
On Friday, the markets were down for the second consecutive session.
The 30-share Sensex fell 241.30 points to close at 77,378.91. While the NSE Nifty50 settled in the red at 23,431.50, shedding 95 points or 0.40 per cent.
On Friday, Nifty Midcap100 ended 2.08 per cent lower while the Nifty Smallcap100 ended with losses of 2.61 per cent at 17,645.55.
One reason the markets are on a weak footing is obviously foreign institutional investors who continue to sell..having sold around $2.5 billion of stock in January already, as opposed to a little under $2 billion net buying last month..
Foreign investors are worried about valuations, a weak earnings season ahead, a slowing economy, weak rupee and of course what Donald Trump's presidency will mean for global trade and business.
Meanwhile, Wall Street which was going gangbusters until recently is not with some cracks here and there.
Stocks dropped on Friday after a hot jobs report dampened Wall Street's expectations for more interest rate cuts from the Federal Reserve this year.
The Dow Jones Industrial Average lost 696.75 points, or 1.63%, to close at 41,938.45. Friday's losses pushed the major benchmarks into the red for 2025, CNBC reported.
U.S. payrolls grew by 256,000 in December, while economists polled by Dow Jones expected to see an increase of 155,000.
The unemployment rate, which was projected to remain at 4.2%, fell to 4.1% during the month. The yield on the 10-year Treasury note spiked to its highest level since late 2023 after the report.
This is obviously good news for the economy but not for the markets apparently, at least now.
So what is the prognosis for Indian markets and why are the underlying trends so weak and what can change that.
I spoke with G Chookalingam, Founder of Equinomics Research and began by asking him what are the broad and early trends he was seeing going into 2025 which could influence markets in coming weeks and months?
INTERVIEW TRANSCRIPT
G Chokkalingam: The fall has started in September 24, and it continued till the end of last year, 24. And fortunately, the small and mid-cap indices outperformed Sensex and Nifty that period. But that got reversed in the first 10 days of January now.
The small cap is falling more than the Sensex. And in the process, from the peak of September 2024, nearly 54 lakh crore rupees, 54 trillion rupees of market cap got wiped out from the market. And while mid and small cap account for 55% of this wipeout, large cap accounts for the balance.
Now, what are the reasons for this latest trend? The GDP growth slowed down, as we all know, for FY25. But the latest news of GDP growth being around 6.6%, for FY26 also hit us this week. That was a big surprise, because a lot of people thought FY26, India could improve the growth of 7%. So the United Nations has come out with a forecast of 6.6% even for FY26. And then the old news is that the Fed may not jump in in cutting down the rate.
And third most important, which is unique to the Indian market, is the liquidity. In the last calendar year, foreign portfolio investors have sold about 1.21 trillion rupees worth of shares in the secondary market. But they invested 1.22 trillion rupees in the primary market through IPOs and also through QIPs. So what has happened, that has taken away the liquidity from the markets. And we also know that last calendar year, the promoter selling was one of the highest in the recent years. So these IPOs, promoter selling to QIP, the money got chucked out of the secondary market.
It all gone to promoters largely in the secondary market through secondary market selling and also through IPO. Even the FBIs, they swapped their money for a primary market with money proceeds they generated from selling in the secondary market. All of us know that generally, the stocks listed on the secondary markets were not so overvalued as compared to the primary issues in 24.
So these FBIs, they swapped this money by selling in secondary and buying in primary. So now that also led to a lot of pressure on listed space in the secondary market. That also led to the draining out of the liquidity from the hands of the investor.
Because normally in secondary market, if it circulates, some set of stocks are sold, some set of stocks are bought, but here it was one way direction. Then the fourth one is weakness in the rupee and foreign exchange reserves. So historically, when the local currencies start depreciating, the trend continues.
The FBIs sit on the sidelines. They don't invest aggressively because they will directly lose money when the local currency depreciates. So normally, when the short-term trend is down, they sit on the sidelines.
They don't invest. Rather, they even start booking profit. That's what exactly happening now.
And one more interesting historical insight is that particularly when the market becomes weak and there is a budget forthcoming, many foreign investors, they wait for the fine print of the budget before they make the next big move. So all this led to weakness in the secondary market, a lot of selling happening. Added to that, the expectation of earning growth.
Generally, it is a single digit for all aggregate corporate world. This is what led to this weakness. So unfortunately, this may continue till end of this month, till the budget is presented.
Govindraj Ethiraj: Right. And we'll come to how things look beyond that. So the net outflow that we are seeing right now, for example, in Jan is about two billion dollars for FBIs.
So how does that compute in the context of IPOs? You're saying people, if they're selling in the secondary market and moving to primary market, the money is still within the system, but the net outflow is still higher, right?
G Chokkalingam: Yeah, that's what happened in 24. In Jan, you know, first week, that argument is not that valid because it's only just 10 days and not many IPOs have come. Now, what happens, you know, when they sell in a secondary market, the market participant in the secondary market, that liquidity gets checked out.
Now, when they reinvest in the primary market, and unfortunately, what has happened, a majority of the fund flow mobilised through IPOs, they have gone to promoters directly. What I mean to say, you all, both of us know, you know, the economic development calls for a very strong primary market. That is true.
But this year in 24, a lot of offer for sale happened. Offer for sale, which leads to mobilising money from the primary market and which goes to the promoters for unlocking, that was a very dominant. So therefore, to that extent, the liquidity gets stuck in the hands of promoters.
So it is not circulating in the hands of investors, nor it is going to add to new capex also. So that was unfortunate fact. So a lot of money went for unlocking rather than reinvesting in the capex or reinvesting in the secondary market.
Govindraj Ethiraj: Right. So on the supply side, inflows into mutual funds continue. And there is obviously a lot of liquidity with mutual funds as SIPs are still systematic investment plans from small investors are still looking steady, if not strong.
So that does not seem to be offsetting all of this.
G Chokkalingam: Yeah, very interesting question. And interesting data point is that precisely the reason you have said that what helped small cap to outperform Sensex and Nifty by big margin from September peak to December 31st. Small cap index fell least among all Sensex, Nifty and BSE mid cap indices.
So most of these retail investors, they tend to buy small cap because they take a lot of risk and they want to make big wealth or a long term wealth. Now, this 10 days experience is a little odd. You know, despite huge fund flow to mutual fund by the retail investors, especially in this first 10 days, the fall in small cap is more.
However, I have a view that ultimately in this quarter itself, once again, small and mid cap would outperform Sensex and Nifty for two, three reasons. Till last Saturday, in a matter of just three weeks, around 27 lakh new investors still entered the market despite market weakness. So on the one hand, a lot of money is flowing from the retail investors to mutual fund.
On the other hand, a lot of investors are getting participated in the market. Third, the reason which will help us to see this outperformance is that, you know, in the large cap, you have sectors like cement, IT, FMCG, so many, auto. Many of these sectors, what I call as single digit growth syndrome, you know, in dollar term is in a single digit.
FMCG volume growth in single digit. Cement also in a single digit volume. So they continue to suffer from the single digit growth syndrome, whereas there are around 4,000 stocks in the small cap space.
There is still a lot of individual growth stories, value unlocking stories, deep values in terms of land bank, in terms of, you know, investments by holding companies and acquisition possibilities. Like for example, in cement, we saw two acquisitions in the short span. And plus, the investors are still coming at the rate of 7 lakh per week.
And they're also investing in small cap funds of mutual funds. So therefore, I believe today's shock would be temporary. In January, March, quarter, once again, the retail investors would support in a big way, significant way, the small cap and mid cap stocks.
Therefore, I consider that bank on the domestic market, bank on the domestic businesses, bank on the domestic investors, which obviously mean bank on the small and mid cap segment for next three to six months, that will be relatively better avenue to invest.
Govindraj Ethiraj: And within that, this quarter, at least, are you seeing any sectors which to you look more attractive than as opposed to other sectors, which you feel are more on the sunset side? One would be pharma.
G Chokkalingam: IT is a defensive, but we saw the initial result also only 3-4% growth. So one could be the pharma, it is defensive, it will be by the rupee depreciation. And the pharma would also see some acquisition they saw in the recent period.
Even small cap ITs would see some consolidation. In the last 10 years, it happened, but last one and a half year, there is a wellness in the space of acquisition. Because the whole industry is growing at 2-3%, so that possibility is there.
So small cap IT stocks and the small cap quality pharma stock, these are the two areas. And then there are a lot of holding companies. There are cement companies.
If you see the three acquisitions in the last six months in cement space, they happened at $80 to one at $80 per tonne, other one at $112, other one at $118 per tonne. So there are many quality cement companies, few companies which are available at enterprise value per tonne of $40 to $50, but with a good business model. So that is another area in a small and mid cap space one can look at.
Govindraj Ethiraj: Right. Chokka, thank you so much for joining me.
The Rupee Is Sliding Again
The Indian rupee was down again to its all-time low on Friday as the dollar stood firm.
The rupee weakened to 85.97 against the U.S. dollar, inching past its previous record low of 85.9325 hit on Thursday. The currency ended at 85.9650, down 0.2% on the week and logged its tenth consecutive weekly loss, Reuters said.
Meanwhile, India's foreign exchange reserves fell for the fifth consecutive week to a 10-month low of $634.59 billion as of Jan. 3, data from the Reserve Bank of India (RBI) showed on Friday.
The reserves declined by $5.7 billion in the reported week, after falling by a cumulative $17.8 billion in the prior three weeks. Reserves have fallen by about $70 billion from their all-time high of $704.89 billion in late September.
Oil Is Now Kissing $80
And here is our energy segment supported by India Energy Week.
Oil prices are now in kissing distance of $80, having risen over the last week or so over mostly rising demand, including thanks to a cold winter in the west.
Meanwhile, among news that India has to watch,
Russia's Foreign Ministry on Saturday denounced new U.S. sanctions against Moscow's energy sector and said the country would press on with large oil and gas projects.
A ministry statement also said that Russia would respond to Washington's "hostile" actions, announced on Friday last week, while drawing up its foreign policy strategy, Reuters reported.
The U.S. Treasury imposed sanctions on Gazprom Neft and Surgutneftegas, which explore for, produce and sell oil as well as 183 vessels that have shipped Russian oil, many of which are in the so-called shadow fleet of ageing tankers operated by non-Western companies.
This will lead to Chinese and Indian refiners sourcing more oil from the Middle East, Africa and the Americas, boosting prices and freight costs, traders and analysts told Reuters.
For the first 11 months last year, India's Russian crude imports rose 4.5% on year to 1.764 million bpd, or 36% of India's total imports.
China's volume, including pipeline supply, was up 2% at 99.09 million metric tons (2.159 million bpd), or 20% of its total imports, over the same period.
China's imports are mostly Russian ESPO Blend crude, sold above the price cap, while India buys mostly Urals oil, Reuters said.
India’s dependence on Russian oil has come down in the last year but the interesting development could be if Russia brings its crude price below $60 a barrel so it can continue to use Western insurance and tankers, Reuters reported.
On the other hand, life after January 20, the day Trump will take charge as President, could be quite different.
This segment was supported by India Energy Week 2025 scheduled from February 11-14, 2025, in New Delhi and you can register for the same using the link in the show notes.
Inflation Could Come Down
With demand slowing down and if the otherwise unpredictable vegetable prices are steady, it is quite normal to expect inflation to cool off.
A Reuters poll of economists says consumer price inflation in India likely fell to 5.3% in December on moderating food price rises, a Reuters poll of economists showed.
This is increasing expectations for an interest rate cut by the central bank next month amid slowing economic growth.
Food prices make up nearly half India’s consumer price index (CPI) basket and have kept inflation elevated in recent months, largely driven by a sustained surge in vegetable prices, which have risen mostly by double-digits for a year.
The Jan. 6-9 Reuters poll of 43 economists showed inflation as measured by the annual change in the consumer price index (CPI) fell to 5.30% in December from 5.48% in November.
Could We See A Simplified Tax Regime?
A key expectation from the Union Budget to be presented on February 1 will be simplified tax laws as promised in the last Union Budget in July.
Some 22 subcommittees are working on this simplification process but it may not make the deadline in its entirety, some positive changes are around the corner.
Other reports suggest there could be more illustrations and examples so both the tax payer and the tax man find it easy.
The larger pitch continues to be simpler tax administration and less litigation.
On the other hand, tax collections could slow in coming months as the spike in personal incomes thanks to a booming market could slow.
I spoke with Himanshu Parekh, Partner and Head of Tax (West) KPMG in India and began by asking him first how we were seeing collections.
INTERVIEW TRANSCRIPT
Himanshu Parekh: We've seen pretty robust tax collections in this year. So when you look at the income tax collections for the period April to December 2024, the gross tax collections have been 20% higher than the last year and the net tax collections and by net I mean the gross tax collections less the refunds issued to the taxpayers that is also grown at a very decent pace of 16.5% over the last year. And if you look at the GST collections, they have also been pretty decent.
We were at a 10% growth in the period April to December this year as compared to the last year. So when you look at it on an overall basis, you know with a forecasted GDP growth on about 6.4 to 6.5%, I think tax collections have seen a very very robust growth and that's quite encouraging.
Govindraj Ethiraj: Right and do you feel for example that one of the reasons we've seen a bump up in personal tax collections is because of the increased activity in the equity markets which may not last into the next calendar?
Himanshu Parekh: You're right yes that has been one of the key reasons for the spike in the personal tax collections. What's also helped is that now when it comes to personal taxes, you know you have two regimes. One is the erstwhile regime and then you have the new regime which is very simple in nature because you have liberalised tax lapse and higher exemption limits under the new regime but without the benefit of any incentives or exemptions or deductions.
But taxpayers are finding it quite simple to comply with the new tax provisions as compared to the erstwhile regime and therefore you see higher number of tax compliances also and higher number of tax returns getting filed this year as compared to the past. So that's also you know one of the key reasons for seeing a spike in the revenue collections.
Govindraj Ethiraj: Right okay let's come to budget 25-26. I mean of course there are many areas which have been addressed or have been proposed in terms of changes and the government itself had initiated a exercise to rewrite the tax act 61. Now some of the changes that have been reported as likely include you know broadly under the head of simplification income tax computation structures to be replaced by formulas, tabular depiction for identical taxpayers for easier understanding, reducing the number of forms.
So these are some of the things that we've been hearing. What's your sense Himanshu?
Himanshu Parekh: So two three things that we are expecting from this budget. One is of course there has been a lot of noise surrounding this simplification exercise. So there is a committee which was formed by the government a few months back and in fact there are some 22 subcommittees which are currently working on this simplification exercise.
What we understand is that these subcommittees are spending the midnight oil working you know across the clock with a view to simplify a lot of tax provisions which are ambiguous in nature. As you rightly said the attempt is to not only reword the provision in a simple manner but to give some illustrations, examples so that it becomes much easier for both the taxpayers and the tax administration to understand and interpret the law. Once those recommendations get finalised they will have to be run past with the ministry of law for the final amendments to take place and one hopes that we should see something meaningful emerge out of this exercise in the forthcoming finance bill which will be presented by the finance minister on 1st February.
Clearly they are running against time here. Let's see what exactly emerges out of this exercise by 1st February. So that's one major expectation.
The other major expectation go with is vis-a-vis rationalisation and simplification of the TDS regime. So as things stand today you have roughly about 35 TDS provisions in the income tax law which has made the entire TDS regime very very complicated. You have varying tax rates across a variety of transactions and which have resulted into a lot of interpretation issues sort of ambiguities and litigation on that front and there's been a long outstanding demand of the industry to simplify the TDS regime something similar to the simplification exercise that we saw in the last budget vis-a-vis capital gains tax regime.
The expectation is that this year we should see a simplification of the TDS regime in the sense that one is expecting that there need not be more than three or four rates of TDS. So there could be one standard rate which will be applicable for all salaried employees which will depend of course on the salary income of the employees and as per the normal slab rate there could be one higher rate of TDS vis-a-vis people who earn casual income like lottery income and you know gaming income so on and so forth. Then there should be one standardised rate which should apply to variety of transactions be it rent, be it royalty, be it commission, service fee, works contracts so on and so forth and then there's an expectation that wherever we have this very low rate of TDS which is 0.1% which applies say to e-commerce transactions or on purchase of goods above a particular threshold that those provisions should be abolished because a 0.1% rate of TDS does not lead to any significant revenue augmentation at the same time it proves to be an administrative nightmare for taxpayers.
So some major major expectations as far as TDS regime is concerned. The one other major expectation from this budget is for the government to make some concrete announcements in terms of what measures are they proposing to adopt for avoidance of tax disputes and resolution of existing tax disputes. So two major expectations one is going forward can we come up with some kind of a mediation or a settlement scheme something similar to the APA regime that we have in trans-surprising whereby we allow the taxpayers and the tax department to settle disputes right at inception so that it does not result in any long-term litigation at all and as far as the current backlog of litigation is concerned what can the government do in terms of clearing the current backlog of the APs which are especially pending at the first level of talent authority which is the commissioner piece.
As we talk there is about 12 trillion rupees of tax amount which is locked up in litigation today and I'm talking only about income tax and we have more than six lakh APs which are pending disposal across different appellate forums with almost 90 percent of them pending with the first appellate authority being the commissioner piece. We are again expecting some major announcements to come in this budget vis-a-vis aspects surrounding resolution of existing disputes and how do we go about avoiding disputes from arising going forward. So to my mind going these are some of the major expectations from the budget this year.
Govindraj Ethiraj: And I'll come to some of the other expectations but before that you mentioned TDS. How many rates do we have today?
Himanshu Parekh: Almost for 35 TDS provisions we've got rates varying from 0.1 percent in some cases you've got a rate of 1 percent then you are rate of 2 percent, 5 percent, 10 percent and 30 and 40 percent also in some cases. So we've got lots of rates currently in vogue.
Govindraj Ethiraj: So you're saying we have 35 TDS so when you say provision you mean provision for rate or provision to charge?
Himanshu Parekh: You have 35 income tax sections dealing with TDS on different varieties of transactions.
Govindraj Ethiraj: And that you feel should be brought down to about three to four?
Himanshu Parekh: There can be n number of transactions which can be subjected to TDS that's not a problem but let there be no more than three or four different rates which should be applicable so it becomes much easier to comply with the TDS regime.
Govindraj Ethiraj: Right and the government's thinking it seems in the past has been that we apply this 0.1 percent to tag the transaction rather than to tax it.
Himanshu Parekh: You're absolutely right in today's era of GST going it's possible to track each and every transaction through the GST regime and if that be so you know the government has already sort of got the mechanism to track all those transactions through the GST regime and if that be so can we go about and abolish this 0.1 percent TDS which results just in a duplication of effort nothing else.
Govindraj Ethiraj: Right so you talked about these 22 subcommittees who are working on simplification and racing against a deadline of barely two weeks from here so looking at the kind of effort that we've seen in the past in these areas administration simplification ease of doing business how do you rate our chances this time?
Himanshu Parekh: To me it seems to be a herculean task and I would be very very surprised and amazed if you were to see this exercise getting consummated and seeing some tangible outcome there from in the forthcoming budget I would be very surprised to see that happen in this budget.
Govindraj Ethiraj: Right so having said that you however feel that since we are putting in this effort at some point it should bear fruit.
Himanshu Parekh: Definitely you should expect that in the forthcoming months for sure.
Govindraj Ethiraj: Right Himanshu thank you so much for joining me and sharing your thoughts.
Himanshu Parekh: Pleasure thank you Govind.
