Markets Hold Ground, Gain in First Trading Session
The markets have rejected the negative signals from India’s poorer than expected GDP growth and Donald Trump’s threat to slap a 100% tariff on BRIC countries
On Episode 448 of The Core Report, financial journalist Govindraj Ethiraj talks to Kunal Sodhani, vice president at the Korean Shinhan Bank
(00:00) The Take: India’s Spiralling Real Estate Market
(04:21) Markets hold ground, gain in the first trading session
(05:18) The rupee hits another record low, what is the outlook?
(14:46) Oil rises on perception of slow Chinese recovery
(16:25) Another steel company gets into car making
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 Tuesday, the 3rd of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: India’s Spiralling Real Estate Market
Between January and May this year, real estate developer DLF sold close to 3,000 luxury homes across multiple projects.
On each occasion, these Gurgaon apartments, adjacent to Delhi, were sold in about three days' time.
Most of these apartments sold for close to Rs 7 crore or around a million dollars each at least at that time.
Some 25% of these apartments were bought by non-resident Indians or NRIs according to reports.
The story is similar across India in recent years. Premium properties have seen huge demand as well-to-do Indians both resident in the country and outside snapped up real estate, bidding up prices, project after project.
While India’s middle class tightens its belt, cutting back on everything from tea to two-wheelers due to soaring consumer inflation, the richest 1 per cent who own 40 per cent of the country's wealth are snapping up homes in cities with well-paying jobs, says the Reuters poll.
The poll adds that average home prices in India are set to rise steadily over the coming years driven mainly by demand from wealthy individuals, while the rising cost of living will make owning a property unattainable for most people.
Several research reports have pointed out that the affordable end of the housing segment has been slowing steadily for more than a year with people at the lower end of the economic scale unable to afford houses or even put down the minimum, say 10 - 20% required to apply for a loan.
Could prices and demand now be reaching peak levels now ?
The Reuters poll and report says that while demand is enough to sustain price rises in the short-term, property analysts say there are limits to how much the rich can keep demand alive in an economy which is already slowing down.
So much so that real estate industry watchers are worried that the creamy end might slow down on buying, presumably because they might get bored of buying property and at which point the market might fall suddenly.
On the other hand, rents are thus expected to rise even faster than house prices, by 7.5 per cent to 10 per cent over the coming year, according to the median range given by 11 property experts.
While it is good that premium segments of the housing market have grown rapidly and going by signs would continue to grow for some time, it is time to pay attention to those who are getting edged out of the housing market, whether for purchase or even rent.
Cities like Bangalore have already seen discontent among its migrant youth after landlords started raising rents two years ago. Most of these youngsters work in IT companies at starting or close to starting salaries.
Combined with the general sense of insecurity in their own industries, rising home prices are a big deterrent to stability and thus a positive outlook for the future.
Creating affordable home segments, like the UK social housing projects or Singapore's Housing Development Board where homes are owned by the state or run by the state but rented out to those starting out, have never really taken off in India where the need has been so high.
The lack of such housing projects has led to slums in Mumbai where the onus of survival is placed on the individual rather than the state.
High real estate prices also create other distortions including in the channelisation of savings because people find it more and more attractive to invest in real estate rather than anywhere else.
This locks their capital in and locks out genuine buyers as in those who would buy and stay in that house as opposed to investing in it.
More significantly, high prices and frenzied buying also creates the impression that the economy is on a strong footing.
And triggers fresh construction of housing stock. If this sounds familiar, it is what also helped create a 60 million of unsold homes in China as per a Bloomberg estimate 5 months ago.
And that story has not ended well.
And that brings us to the top stories of the day.
Markets hold ground, gain in the first trading session.
The rupee hits another record low, what is the outlook ?
Oil rises on perception of slow Chinese recovery.
Another steel company gets into car making
Markets & More
The markets may have rejected the negative signals from India’s poorer than expected GDP growth and Donald Trump’s threat to slap a 100% tariff on countries like India thinking of an alternate currency instead focussed on the positive signals coming from Wall Street which saw fresh records on Friday last week.
Whatever the reason, these indices ended the first session of the last month of the year in positive territory.
The BSE Sensex added 445.29 points to settle at 80,248.08.
Similarly, the NSE Nifty50 settled at 24,276.05, up 144.95 points.
Notably, mid and small-cap stocks outperformed the benchmark on Monday, with Nifty Midcap100 and Nifty Smallcap100 indices settling with gains of 1.08 per cent and 1.04 per cent, respectively.
Rupee Hits Fresh Low, Where Can It Go?
The Indian rupee declined to its weakest level on record on Monday, at 84.7050 during the session before ending at 84.6950.
The currency weakened 0.2% on the day, its worst single day fall since June 4, the day India’s general election results were announced, Reuters reported adding the rupee has hit a string of record lows over the past two months.
The rupee is being driven down by our flows as well as a strong dollar that has got stronger after Donald Trump’s election.
Interestingly, a report from Axis Bank says that while the INR has become one of the most stable currencies globally over the past 12 months, it might be time for the Reserve Bank of India whose actions have kept it so, to loosen up a little..
Side effects of low volatility are now showing up. A stable currency signals macroeconomic health, and some also see central banks incurring such costs like public service, reducing uncertainty for businesses and investors.
However, limited volatility over long periods of time has reduced corporate hedging, increasing the reliance on RBI to suppress volatility.
Higher volatility might alleviate stress, and help INR find its right level With ~USD 655 bn in FX reserves, even adjusted for forward shorts, the RBI has the ability to defend the INR for long periods (Fig 9).
With expected higher volatility, It appears prudent to shift some of the currency risk back to businesses and investors via a gradual rise in volatility, one that does not cause panic in unhedged parties and force intervention once again, says Axis Bank.
I reached out to Kunal Sodhani, vice president at the Korean Shinhan Bank last night and began by asking him what explained the weakness in the rupee right now.
INTERVIEW TRANSCRIPT
Kunal Sodhani: I think it's important to understand the global trajectory because it's not about weakness in rupee. So, as of now, we are aligning it to rupee. But if we talk about Asian currencies at large, you know, they have all been weakening against the donor, you know, after the way the election results were with respect to the US presidential elections.
And plus the behaviour, you know, historically, which we have seen of Donald Trump. One important thing why this is happening now in is because of two reasons. One is about the propaganda which Donald Trump had during his election time.
One was about the lower taxes. And second important one was about raising tariffs wherever required and wherever necessary to protect the US economy employment at large. Both of these focus on one important thing is more government spending.
And if there is more government spending, which will lead to further more inflation. And if furthermore inflation comes into picture, the rate cut trajectory may take a backseat. It may not be that aggressive.
So, this trajectory what I explained is leading to a rally in dollar across all currency pairs, starting with majors, emerging markets and Asian currencies. So, this is the backdrop as we are discussing.
Govindraj Ethiraj: So, this is the external part. And what are the internal factors?
Kunal Sodhani: So, internal factors, there are a couple of things which one needs to observe. One, the most important factor is flows. When we talk about dollar-rupee pair, I think flows are the major drivers.
So, by flows, I mean the domestic equity flows. If we talk about the month of November, we saw an outflow of almost around 94,000 crores. Even if we talk about the month of December, till date, we have already seen an offer to the tune of around 21,000 crores.
Plus, considering December and where book closing happens for the foreign companies as well as the offshore countries, the anticipation of flows being negative still holds true. So, historically, again, we see. So, flows remain an important factor which is not in the favour.
Second, also, if we talk about the fiscal deficit number, where the fiscal deficit number till October, which was announced yesterday, came in around 46.5%, whereas the same number was at 45%, the same period last year. So, that is still remaining a concern. And one of the most awaited data was the GDP data, which obviously came far off than the expected number to around 5.4%, I think, lowest since last seven quarters, to be right, is again affecting a mindset of how RBI will behave from now on. Because it's about two things. One, when the GDP is getting affected by so much, there are one set of people who think that rate cut now is imminent and is a must. But on the second side, if I talk about the elevated inflation and still the global uncertainties prevailing already because of the Ukraine and Russia plus the Middle East, and now Trump coming into picture and inflation further can rise up, is creating some kind of mindset that this rate cut trajectory will move from even RBI, where they may pause rate for this coming policy also.
So, lastly, one more domestic factor which I want to highlight is whenever we are seeing this depreciation also, we have also seen how RBI has behaved. And even if it is a reflection from the FX reserves data now, which is standing around $658 billion. So, I think it is also clearly indicating that, you know, somewhere, obviously, there is FCA, which is foreign currency assets, which are getting revalued.
But at the same time, you know, sharp intervention has also been seen by RBI in order to curb some kind of volatility.
Govindraj Ethiraj: You're saying that the forex reserves are down, which they are, and you're saying the fact that they're lower itself is a signal?
Kunal Sodhani: So, the fact they are lower itself is a signal of a couple of things. One, obviously, maybe RBI is also seeing some kind of uncertainties and they want to hold. But at the same time, historically, again, we have seen that RBI does leave certain levels, you know, it's not, like, for example, when we were at around 84 levels, I think it for a couple of months, it took and it broke that level and we found a new high.
Similarly, even now, what my personal observance is when Asian currencies start depreciating, like, for example, Chinese yuan or South Korean won, like South Korean won is above 1400 now, or even Chinese yuan around 7.28. When they start depreciating, RBI tends to be less aggressive or tends to sideline themselves. They may not be that aggressive, which is again a reflection to me and thus we saw levels of 84, 70 also today. So, I think RBI also behaves in a manner that they don't want to lose that export competitiveness against these Asian countries or currencies.
At the same time, they don't want any kind of excessive volatility as well.
Govindraj Ethiraj: So, if you were to look in the near future, I think the distant future might be too distant, but in the near future, what are the cues that could help you determine which way things will go and what are you looking out for?
Kunal Sodhani: Once Trump comes in and how the tweets play around, we have seen predicting anything is almost impossible, let's be honest about it. But yes, if I talk about rupee, it's not that predictable. But if we talk about dollar index at large, because it is more matured, dollar rupee still has this illiquidity into picture.
So, considering dollar index, there is still scope of one more move towards 108 plus levels. We have seen those levels tested and sharply moved even below 106 recently, maybe yesterday or day before yesterday. But I think this might not stall.
So, my anticipation is dollar index may strengthen a bit from here, testing once again that 108, half, 109 levels once again. The all time high is recently or we have seen is around 114. Obviously, that's too far off.
I'm not talking about that story. But I think this appreciation of dollar will continue. Also, one more reason I want to state here is the recent comment by Donald Trump on the BRICS, where it was clearly stated that in case if you're looking forward for your own currency or trying to ignore dollar, 100% of tariffs could be imposed.
That was one of the major trigger points of weakening of rupee and the Asian currencies, apart from the domestic factors, which obviously we have stated. Now, this talks about the internationalisation of other currencies or the replacement of dollar or dollar de-dollarization is the right term, I would say. So, somewhere my personal take is China has been trying this since past 11 years.
And obviously, BRICS now has been discussing it more aggressively. Lot of other members have also joined BRICS. And if you talk about Egypt and many other countries or UAE and 34 countries are in queue who wants to join BRICS.
So, I think the threat remains that if more than 50 countries are eyeing something else, the dollar gets threatening. So, if we also historically speak, starting from Bretton Woods system, dollar was a flip flop. Then went to, if you talk about the Nixon effect, which happened in 1970s.
There again, they were dealing to the dollar. So, somewhere this currency and oil have been the major players to look out. And if such kind of things happen, I think de-dollarization may take a lot of time from here on.
For me, I think the movement is more towards a multi-currency system rather than a replacement of one currency by another. So, I don't think the replacement can happen because 90% of the global reserves and trade are in dollars, 64% of the global debt is in dollar. So, it is not that overnight or maybe in a couple of years, things can just fade away or be replaced.
But I think the focus will remain on multi-currency systems, local currency invoicing, and slowly, steadily, the share going lower. That's what my personal take is.
Govindraj Ethiraj: Right. Kunal, thank you so much for joining me.
Kunal Sodhani: My pleasure. Thank you.
Oil Prices
Oil prices have risen somewhat, interestingly following signals of some recovery in China’s economy.
Brent futures traded above $72 a barrel, following a 3% fall last week, after China’s factory activity showed tentative signs of recovery in the world’s biggest crude importer, Bloomberg reported.
Meanwhile, OPEC+ pushed back its meeting on supply by four days, it was supposed to be on December 5.
OPEC is widely expected to delay a slight increase of production for a third time.
Oil has been trading in a range of less than $6 since mid-October, driven by a varied set of reasons from geopolitical tensions affecting both demand and supply potentially.
Windfall Tax Scrapped
India has scrapped a windfall tax on crude products, aviation turbine fuel, and petrol and diesel exports, a government order said on Monday, reported by Reuters.
The tax was first imposed in July 2022 on domestic crude oil production that was introduced after a rise in global crude prices, to capture revenue from windfall gains made by producers.
It also applied to some products refined from crude, including aviation turbine fuel, and petrol and diesel exports.
The Indian government collected 130 billion rupees through the windfall tax in 2023-24, compared to 250 billion rupees a year ago, according to a government source.
In the financial year thus far, the government has collected 60 billion rupees through the tax, the source said. The government does not release a breakdown of windfall tax collections.
Perhaps for the first time in decades, companies from diverse backgrounds are jumping into the mobility business and more specifically cars.
While electric two wheelers have already seen myriad newcomers including startups launch their products, alongside the traditional brands like Hero, Bajaj and TVS, the four wheeler segment has not seen any Indian entity really announce significant plans.
That is changing with steel giant JSW Group saying it wants to launch an electric vehicle (EV)under its brand, the Business Standard quoted The Financial Times saying.
Technically, Tata Motors predecessor was also a steel company, being Tata Steel and they all started in Jamshedpur, though that was of course in 1945 and Tata Motors, then known as Telco or Tata Engineering and Locomotive Company started by making locomotives.
The first heavy commercial truck came in 1954 and the first car came in 1998.
Back to JSW, in an interview, Chairman Sajjan Jindal signalled JSW's aim to establish itself as a key player in India’s growing EV industry.
JSW earlier announced a $1.5 billion joint venture (JV) with SAIC Motor, the Chinese automaker behind the MG brand, to produce and sell MG EVs in India.
JSW will set up its EV facility in Maharashtra's Aurangabad, specifically for its in-house brand.
The Aurangabad Industrial City (AURIC) confirmed the company’s investment of Rs 27,200 crore ($3.2 billion), expected to create over 5,200 jobs and manufacture both passenger and commercial EVs, the report said.
While battery-powered two-wheelers have gained immense popularity in India, adoption of four wheelers has slowed, behind hybrids, at least for now.
EVs currently account for just 2 per cent of passenger car sales, translating to around 100,000 units annually, according to S&P Global Mobility, as reported by The Financial Times.
