Markets Capitalisation Crosses $5.2 Trillion
The m-cap of all BSE listed companies settled at Rs 423 trillion or $5.24 trillion
On Episode 319 of The Core Report, financial journalist Govindraj Ethiraj talks to Victor Vanya, director and co-founder of EMA (Energy Market Analytics) Solutions as well as Dr Nilanjan Ghosh, Director at the Observer Research Foundation (ORF) in India.
Our Top Reports For Today
SHOW NOTES
(00:00) Opening Thoughts
(03:37) Stories Of The Day
(04:21) Markets capitalisation crosses $5.2 trillion as indices stay at all time highs
(06:49) The RBI admits helplessness on inflation
(09:12) The amazing story of how India actually has surplus power during the day and deficit during nights
(18:43) India’s consumers are spending less and yet, GDP is at 8.2%. Decoding the meaning and impact
(29:46) Why the UK may not cut interest rates thanks to Taylor Swift
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning, it's Wednesday, the 19th of June and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital.
Before we start, India has an inflation problem that does not really seem to be anybody's problem.
The RBI Governor has confessed to struggling with the last mile of the disinflationary process, a slightly different way of saying, we are unable to bring prices of goods that you consume down.
What is the reason for this ? Well, it's food that we eat everyday.
Food inflation is at a 10-month high of 9.8%, vegetable inflation, hold your screens or mobiles, is at 32%, up from 24% last month.
Further, onions are quoted 58% above and potatoes are 64% above.
Pulses which include the dals we add to our cereals like rice is at 22%.
The Governor has a tough job because he has to talk about inflation as the RBI moves interest rates up and down to fight it.
Except that interest rate changes seem to have no impact on food inflation.
The larger problem as I see it is that no one really owns the problem of food inflation.
It is not easy to fight food inflation in a country like India particularly since vegetable prices fluctuate quite wildly and are also connected to infrastructure challenges like insufficient storage and cold storage, like in the case of tomatoes, which can go from Rs 250 per kg as they did in July, August last year to Rs 10 per kg in days to being dumped on highways by farmers.
It's not the Reserve Bank’s job either because fighting food inflation is not a monetary policy matter, at least as such.
The Government has been doing its bit, including banning exports of some food products, like rice or setting up import lines for pulses, like dals.
All this clearly has not worked and reflects the lack of long term investments in infrastructure rather than recent policy steps.
The general silence on inflation however is not helping, particularly food inflation. It suggests that there is no long term thinking or what is going on behind the scenes in terms of attempts to rein in food inflation.
Am sure there must be work going on because we obviously see some outcomes but there is nothing that suggests that this problem is being addressed at a multi-dimensional level with extreme urgency as it should be.
And by the way inflation goes beyond food.
Rent is another component which you don’t hear of much.
A report just out from real estate consulting firm Anarock says the average rent for a standard two-bedroom house spread over 1,000 square feet in seven major cities in India has increased by up to 64 per cent since 2019 or in 5 years.
The average rent in Sector 150, a micro market of Noida in the National Capital Region (NCR), increased by 63.3 per cent to Rs 25,000 in the second quarter of FY24 from Rs 15,500 in FY19. Chembur in the Mumbai Metropolitan Region has the highest average rent for a two-bedroom home: Rs 63,500. From Rs 45,000 in 2019, rent here has increased by 41.1 per cent in the last five years.
I can assure you salaries or incomes have not gone up 50% in the last 5 years at least not in the median.
Our top stories and themes for the day
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Markets Are Steady And Up
The Indian markets hit record highs in early deals and held onto their gains through the day. The benchmark BSE Sensex touched a lifetime high of 77,367 intraday, while the NSE Nifty50 hit 23,579 level.
The m-cap of all BSE listed companies settled at Rs 423 trillion or $5.24 trillion.
The BSE Sensex, eventually, ended at 77,301, up 308 points or 0.4 per cent. The Nifty50, on the other hand, settled at 23,558, up 92 points or 0.39 per cent.
In the broader markets, the BSE MidCap claimed a new record high of 46,278.53, before ending at 46,255, up 0.43 points.
The BSE SmallCap index, too, touched an all-time high of 51,758.97 before closing at 51,694, up 0.96 per cent.
Meanwhile the economy, as reflected by direct tax collections, is going strong.
The Indian government's net direct tax collection rose 21% year on year to Rs 4.63 lakh crore from April 1 to June 17, the Ministry of Finance said on June 18.
On a gross basis, tax collection before refunds grew more than 22% year-on-year to Rs 5.16 lakh crore, the ministry said in a report quoted by MC.
Elsewhere, oil prices continue to rise, now touching a shade under $85 a barrel.
Oil climbed, building on its biggest weekly advance since early April and extending a short-covering rally, helped by risk-on sentiment in broader markets, Bloomberg reported.
Meanwhile, a rally in leading technology companies drove stocks to all-time highs, with the S&P 500 hitting its 30th record this year.
Traders are now standing by for retail-sales data, among other cues. That’s ahead of Wednesday’s holiday.
Overall optimism has lifted US equities up about 15% this year.
Also, US industrial production increased in May, helped by a broad-based pickup in factory output in a positive sign for a manufacturing sector that has been struggling for momentum.
The 0.9% increase in production at factories, mines and utilities followed no change a month earlier, Bloomberg reported Federal Reserve data saying. The gain exceeded all forecasts in a Bloomberg survey of economists.
US markets are closed on Wednesday, June 19th for a federal holiday.
The Fight Against Rising Inflation
India’s central bank has a retail inflation target of 4%. Getting to it, particularly the last mile, is proving increasingly challenging, the Reserve Bank of India has admitted.
The last mile of the disinflationary process is proving to be sticky owing to the 'stubborn' food prices in the country, Reserve Bank of India Governor Shaktikanta Das said at an Economic Times event on Tuesday.
"The disinflationary process is facing a lot of resistance from food inflation which is stubborn and high, primarily due to supply side factors affected by weather conditions," Das said at ETNow Leadership Dialogues in Mumbai.
According to him, that as also seen in certain advanced economies, the last mile of disinflation journey is proving, sticky and arduous.
It's not clear to me though if the economies are facing the same set of inflation triggers and for the same reasons.
"There are a lot of uncertainties; food inflation continues to be high. The average food inflation in the last seven months has been around 8 per cent," Das said. India's core inflation reading has substantially moderated and reached a historical low of 3 per cent in May.
Retail inflation stood at a one-year low of 4.75 per cent in May thanks to wholesale price inflation being low but food inflation is high as we discussed earlier.
What is making things worse of course is the extreme climate conditions, right now in the form of severe heat waves across the country which in turn links to energy and more of that shortly.
And then, the monsoons are already 20% deficient as of this week and starting from June 1. This may and ought to change in coming weeks but this is where we are. Remember, this year’s monsoon was forecast as being above normal.
Of course we have some time to go in the monsoon. I don’t know about the rest of it.
Power Demand & Night Power
Latest reports quoting India’s power ministry say that demand for power at the peak time on Monday reached 89 gigawatt (GW), the highest ever for the northern region, adding that the strong demand, which has prevailed since May 17, was "challenging", Reuters reported.
The temperature in the national capital Delhi was about 44 degrees Celsius (111.2 Fahrenheit) late Monday afternoon but the IMD said it felt like 49.2 C.
This summer has seen a record peak 250GW demand for power throughout the country, with the ministry implementing various measures as the need for air conditioners and other cooling appliances rises.
Now there are two interesting points to note.
First, the overall power generation capacity in India is much higher than even the peak demand levels we are seeing currently.
It is a different issue that all power plants cannot just fire up like that and we will come to that in a moment.
The second and more important point to note is that India is actually power surplus during the day and deficit during the night.
This is of course a top view but the interesting fact is that the rise in solar power is actually leading to more surplus during the day which goes away at night.
So, in India’s electricity exchanges, power is being purchased for around Rs 3 per unit during the day while at night distribution companies are willing to pay upto Rs 10 per unit.
And still not find sellers.
The result, sweltering nights without electricity for homes in some parts of the country.
I spoke with Delhi-based Victor Vanya, Co-Founder of EMA Solutions, an energy intelligence and data firm that tracks real time electricity sales data across India.
I began by asking him to take us through the overall demand and supply figures before coming to the interesting gap between daytime and nighttime power demand numbers.
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Why Is Private Consumption Down?
You may have heard, from many quarters, how consumption is slowing down across the economy.
This is not so evident in macro numbers except the one I am coming to but has been quite evident in other indicators like sales of consumer product companies for more than a year now.
Now, there was an interesting situation recently when the CEO of a privately owned paints company pointed out to his investors he was unable to understand why their business which usually tracked GDP numbers was not doing so anymore.
Well, the answer as we will come to is that after some 30 years of close correlation between private consumption and GDP growth, the link has snapped.
A research paper by the Observer Research Foundation says that contrary to consumption driving the Indian growth story, in 2023-24, private final consumption expenditure grew at only around 4 per cent against the 8.2 per cent GDP growth.
Interestingly, gross fixed capital formation or investment grew by almost 9 per cent — emerging as the prime mover of the Indian growth story last year. The origin of this shift can be located in the data for the last two quarters. There is at least a temporary decoupling of consumption and GDP, with investment picking up pace and acquiring a greater share of domestic output.
The paper also says that econometric analysis conducted by its authors reveals that from 1991 India encountered a consumption-driven growth phenomenon.
But from 2023-24, the co-movement has snapped.
I reached out to Dr Nilanjan Ghosh, Director at the Observer Research Foundation (ORF) in India where he leads the Centre for New Economic Diplomacy (CNED) and ORF’s Kolkata Centre.
I began by asking Dr Ghosh to walk us through some basic definitions before coming to the two strands of private consumption and public investment.
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Meanwhile, India is expected to grow by 7.2% in the current fiscal year, stronger than earlier expected, with its central bank opting for just a one-quarter-point rate cut in that period, Fitch Ratings said in its quarterly Global Economic Outlook (GEO) report published on Tuesday, reported by Reuters.
The ratings agency has also raised its world growth forecast for 2024 to 2.6% from 2.4% earlier as confidence in European recovery prospects improves, China's export sector revives and domestic demand in emerging markets excluding China shows stronger momentum, Fitch said.
Taylor Swift Keeps Interest Rates Down
We have of course heard of Swiftonomics. If you haven’t, you are forgiven of course and that’s of course a good reason for you to stay tuned to The Core Report.
Now, apparently, American rock and pop star Taylor Swift’s record-shattering Eras Tour is continuing to supercharge consumer spending as it enters the U.K.
Hundreds of thousands of dedicated Swifties are flocking to London in August to see the singing sensation during her final U.K. dates, reports Reuters.
And the economic boost could be enough to defer a possible September interest rate cut, according to investment bank TD Securities.
“We still anticipate a BoE cut in August, but the inflation data for that month might keep the MPC (Monetary Policy Committee) on hold in September,” the bank’s macro strategist, Lucas Krishan, and its head of global macro strategy, James Rossiter, wrote in a note Friday, reported Reuters.
The Bank of England is expected to soon begin lowering its bank rate from a 16-year high of 5.25%, with all but two of 65 economists polled by Reuters anticipating a cut in August, while financial markets are pricing in September.
However, a possible clash between one of Swift’s August tour dates and a key inflation index day could skew the data enough to make the bank rethink its path, the analysts said.
This is not as bizarre as it sounds.
Here’s why.
“A surge in hotel prices then could be material, temporarily adding as much as 30 bps to services inflation (+15bps on headline),” Krishan and Rossiter wrote.
The BOE did not respond specifically to the comments when contacted by CNBC, but said that “the MPC looks at a wide range of economic indicators when they make their decisions on interest rates.” said Reuters.
