Markets On Pause As More Tariff Bombs Start Flying
There are more voices that are now openly saying that Foreign institutional investors are important for Indian markets
On Episode 522 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Bagga, veteran market analyst as well as Captain Sam Thomas, President of the Airline’s Pilots Association of India (ALPA).
(00:00) Stories of the Day
(00:50) Markets on pause as more tariff bombs start flying
(14:26) Why does the Government like gold?
(16:19) FDI into India has fallen in the last quarter
(17:23) India manufacturing slows even as China picks pace
(20:43) Are airlines not hiring pilots from each other?
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 4th of March and this is Govindraj Ethiraj Broadcasting and streaming as always from Mumbai, India's financial capital. The top stories and themes.
The stock markets are on pause as more tariff bombs start flying.
Why does the government like gold?
India's manufacturing slows down as China picks up pace.
Foreign direct investment into India has fallen in the last quarter.
And why are airlines not hiring pilots from each other?
The Markets On Pause
There are more voices that are now openly saying that foreign institutional investors are important for Indian markets. I'm not sure the same ones said they were not important earlier, but others, including domestic institutional investors, did try to sell the point that India was not so dependent on foreign portfolio investors anymore. But all of this may not matter in future, which is that domestic investors may completely drive the markets, but that clearly is not the situation right now.
And if you thought otherwise, clearly you could have been making some mistakes in the way you were trying to time your purchases or sales or even the market as a whole. Meanwhile, the downward pressure is still strong and quite palpable. The benchmark indices were down again on Monday with more than 1,100 stocks, that's 1,100 stocks on the Bombay Stock Exchange, falling to their 52-week lows, according to the Economic Times.
On Monday, the 30-share cents exploded at 73,085, that's down 112 points, while the nifty 50 ended down 5 points to 22,119. If you're not, we are calling it a somewhat flat market on pause right now. If you were looking for silver linings, though very small ones, then the nifty mid-cap 100 index was up very slightly, 0.14%. The nifty small-cap 100 index, however, was down by about 0.3%. Incidentally, stocks like Tata Motors, Alliance Industries, State Bank of India, Asian Paints, and Hindustan Unilever and Titan are all at their 52-week lows. So if you were a long-term bargain investor, this perhaps is your moment, or maybe you want to wait for a little longer. Two-wheeler stocks like Bajaj Auto and Hero Motor Corp have also hit 52-week lows, falling up to 6% on the Bombay Stock Exchange on Monday. So now the big question, of course, is what are the underlying trends in this market?
And if so, how should we be viewing the movements in the context of both flows and corporate performance present and near future? To discuss this, I reached out to Ajay Bagga, a veteran market analyst, and I began by asking him how he was interpreting the events of the trading days in the recent past.
INTERVIEW TRANSCRIPT
Ajay Bagga: The amounts are quite high. Historically, you would not get such high levels. Nearly 3 lakh crores have gone out from the secondary markets over the last one year, and it has accelerated in January and February.
I think that's one reason the absolute amounts are big. The second reason is that there is some slowdown in the retail sentiment. So probably, direct retail buying is not happening as strongly.
Even though mutual funds have been buying and they have absorbed most of the selling by the FIs. And third is the impact cost is high. So in February, Govind, we saw mid and small cap indices fall by 11%, while the Nifty and BSE Sensex were down more than 5.8% each. So that 11% is more the impact cost. So that is coming through. Wherever there is selling in small and mid caps, we are seeing some amount of damage coming in much faster.
So those two are already in a bear market at 20% plus from their all-time highs, while the Nifty and Sensex are fighting to stay above 20% falls. They are at about 16% right now.
Govindraj Ethiraj: Right. And if you were to correlate this equation, and when I say equation, I mean between foreign and domestic flows historically, are there any periods that stand out, either because of the way it's similar or dissimilar?
Ajay Bagga: Whenever we had foreign outflows, like in 2000, 2008, 2013 at the time of the taper tantrum, and then the Trump Tariff 1, 2018-19, when China did a big devaluation of its currency, when we saw foreign investors going out in the pre-COVID period, we would have much more damage to the Indian markets. This time around, it has been more muted because the domestic flows have become very chunky, very large in comparison to the incremental foreign flows. Foreigners still are about $850 billion in a $4.2, $4.3 trillion market. So they are 18%, 17%. But the DIIs plus the Indian retail plus insurance have now caught up with the FII, at least on a portfolio basis. Incremental flows, we are just about matching.
We need more to come in. But what happens on a one-year basis now, we have given up the returns on the leading indices. So Nifty and Sensex are mostly flat on a one-year basis, while small cap, mid caps, where a large portion of the retail money was going, are negative on a one-year basis.
Then damage starts happening to retail sentiment, and you could see more SIPs getting stopped out rather than being formed. So that is the risk we are running right now. But historically, if we see, we have seen big portions of FII outflows, and the markets used to be hurt much more, not so much this time because of the domestic cohort coming in.
Govindraj Ethiraj: How would you classify foreign portfolio investment in its smartness? And I'm drawing a distinction between the sort of amount or quantum of money flowing out versus, let's say, the strategic nature of that sell decision. As in, are they selling or have they been selling because they're not seeing value in certain sectors specifically, and therefore are taking very well-researched calls?
Or is it like a general exodus?
Ajay Bagga: It will be both because it's not a homogeneous segment. There are sovereign funds who come in for 20-30 years. There are pension funds who again come in for long periods, universities.
These are the three big, chunky players who invest into India. These are all long-term players. Then you have the hedge funds, the long shots, who might have a smaller window.
Secondly, if it's a gem fund, a global emerging market fund, and they have outflows based on, say, Thailand or Philippines or Indonesia or China for most of last year, they would have had to take money out of India as well. Then you come to India-specific country funds, where again, because the dollar returns were not that good over the last one year, we have seen some amount of sentiment breaking. The big elephant in the room, Govind, was U.S. money market funds giving you 4.5% to 4.8% on a risk-free basis in a dollar asset sitting in the U.S. And if your nifty on a dollar sense was giving 4% returns after all the churning, all the volatility you had to face, and then you have to pay taxes on taking it out, that really spoiled the sentiment. So, it was a function of valuations. It was a function of slowing down the economy. The FI is seeing that corporate earnings were slowing down over the last three quarters.
Government expenditure fell. Tightening liquidity because RBI was defending the rupee and selling dollars into the market, absorbing rupees. Liquidity tightened systemically.
And based on that, we also saw the rupee falling. All these combined into a perfect storm. And we saw on the margin, foreign money going out.
Again, if you see, we started at about 900 billion and about 20-25 billion would have gone out, secondary markets. Primary markets, we still attracted funds. We are getting funds from the PEVC segment, even though they made good amounts in the IPOs that they exited out.
2 lakh crores was sold out by the PEVCs and NQIPs last year. All that hit the secondary market liquidity. So, it became a perfect storm of an asset which was very highly valued and not giving that much returns.
And on the margin, money started flowing out.
Govindraj Ethiraj: Right. You touched upon tax, Ajay. So, there have been a few other voices in the markets which talked about this today, specifically tax on foreign portfolio investors and, of course, in general, long-term capital gains tax on Indian investors, particularly long-term.
So, now, obviously, this was not so much of an issue or perceived as an issue. Is that because maybe the markets were doing well? So, therefore, people didn't focus so much on it, but now people are feeling the pain?
Ajay Bagga: From the last budget itself, it was a pain point for foreign investors because if you don't have an offset in the home country, all these funds get domiciled in such a way that they are coming from tax havens. Even if they are American funds, they will come as Delaware or Cayman Islands funds. Singapore will come under the treaty.
Mauritius, of course, was the traditional treaty. Japanese funds would normally come from Cayman or Luxembourg. So, there were treaty protections for all of them.
That has slowly eroded. Now, we have reached a point where they are paying substantial taxes. And you are right.
If you are seeing growth and earnings are growing 17%, 18%, you can catch a company growing 25%, make 20% on your entire portfolio. You don't mind paying 2-3% tax and 2-3% of rupee depreciation if you are making 12-14% overall returns when you take your money out. But if you are making 4%, 4.5$ returns after all this heavy work and then you can't claim back, then it becomes a no-show. So, again, sovereigns or universities or pensions will not take decisions based on tax. They will take a structural view of India. But it does rankle the hedge funds.
So, they would try to find ways of having synthetic exposures or they will take exposures offshore in the GDR market or something like that where they don't end up paying taxes. But that makes it a very shallow market. So, let's see what comes out.
The government hopefully will not get stuck to its position and will look at it. Because we are a capital deficient country, we need a huge amount of capital for the infrastructure build-out. That has to happen over the next 20 years.
We need trillions of dollars to flow into this country. So, we should welcome that foreign capital. It should not be an East India Company kind of outlook which the communists would always do.
We should rather embrace that capital. And if it's really coming from pensions, sovereigns and from universities and large funds, I think we should make that capital feel welcome in India.
Govindraj Ethiraj: How are things looking in the next few months? I mean, just from a mood and maybe if there is any cyclical trend or cycle that you're seeing within the way markets have been moving?
Ajay Bagga: See, the big move will be twofold. One, the Trump tariff and Trump uncertainty has to move out. I think over the next three months, that will get resolved.
The second part will be Indian earnings recovery. And already we saw with this GDP for December quarter, it's a big jump. And even in the last two years, GDPs have been revised upwards.
So, that's giving hope. If you look at the capex expenditure of the Government of India, December saw a 91% year-on-year growth. They are in a catch-up mode.
January saw 51% growth year-on-year. So, what got missed out because of the elections and the intense heat and the budget finally coming through July, orders coming through October and money getting dispersed in December, that's coming through. But these four months are too short to catch up.
So, we won't meet the 10 lakh crore expenditure on capex. But we will do 9 lakh, 9 lakh 50 or something, which is good enough. It sets the ball rolling for April.
So, overall, I think with a base effect, corporate earnings start looking up by June. By September, you will see the economy rolling much faster. If the Trump issues get resolved, I am not expecting much disruption for India.
There will be opportunities for India. Even we have, if you look at rare earths, for example, we have 8% of global reserves and which we have not been able to, so far, utilise. If we can do an agreement with the US, welcome their miners to come in and start extracting those rare earths.
All those kinds of opportunities are there. But structurally, I think September is when you start seeing very good earnings and a feel-good factor coming in. And then October with the festive season and Diwali, I think you could see a pick-up coming.
So, markets will react in advance, Govind. I would say May-June, probably you will start seeing Indian markets going up again.
Govindraj Ethiraj: Ajay, it's been a pleasure. Thank you so much for joining me.
Ajay Bagga: My pleasure. Thanks for calling me.
Gold, The Safe Haven
Gold will remain relevant for investors as a portfolio diversification mechanism with a likely ascending importance as an asset class in the coming years. Now, all of this is not according to some expert on gold, but the country's chief economic advisor, V. Anant Nageshwaran, who spoke on Monday in a report quoted by PTI.
Of course, it's only fair to say and report that he was speaking at a gold markets conference and thus quite likely felt it appropriate to talk about gold's future. And of course, gold prices reflect exactly the sentiment, which is that it will remain not only relevant as a store of value, as an ornament for cultural and religious purposes, but also as an important portfolio diversification mechanism. And here, now read this or hear this carefully, until such time the world is able to arrive at an international monetary system from the current international monetary non-system.
The words are his, not mine. But the point about gold being a safe haven, which is what all of this is leading to is taken. Remember, central banks, including India, have been stepping up their purchases of gold in the last year.
And the larger point about capital moving towards gold and more so in the Trump tariff uncertainty era is also now well documented. The chief economic advisor pointed out that the value of gold has increased by about $200 per ounce or 8% in the last three months. And at the same time, the Indian stock markets have fallen over 8% in the last three months.
So that's an interesting correlation, though there is no direct relation, except in the sense that there are, of course, funds that's constantly moving between asset classes. India is a net importer of gold and most people that we speak to on gold and who are experts in the gold market are projecting higher prices over $3,000 an ounce and even going up to at some point $3,200 to $3,500 an ounce.
FDI Slows Down
Foreign direct investment in India has tipped or fallen by about 5.6% year-on-year to about $11 billion in the October to December quarter of the current financial year. According to government data quoted by agencies, FDI inflows during October to December 23-24 were about $11.5 billion. We're averaging about $11 billion right now.
So presumably, that's about $40 billion a year of foreign direct investment, a figure that's lower than previous years. According to the Department for Promotion of Industry and Internal Trade, in the July to September quarter of the current year, that's a quarter before the previous one, inflows were up about 43% to about $13.6 billion and had increased about 48% annually to $16.1 billion in the preceding April to June quarter. FDI, of course, means direct investment as opposed to portfolio investment, which is treated and computed separately.
India and China Manufacturing
India's manufacturing activity grew at its weakest pace in over a year last month thanks to cooling demand, but employment generation rose at a healthy pace and inflation eased, according to a survey on Monday reported by Reuters. The HSBC Final India Manufacturing Purchasing Managers Index, compiled by S&P Global, fell to 56.3 in February, its lowest since December 2023 from 57.7 in January. Meanwhile, China's factory activity expanded at its fastest pace in three months to 50.8 in February, according to the same PMI Index, as millions of migrant workers returned to work after an extended Lunar New Year holiday. The seasonally adjusted K-Shin S&P Global Manufacturing Purchasing Managers Index beat Reuters' poll forecast of 50.3, also accelerating from 50.1 in January and 50.5 last December.
India's Trade Talks
Before we come to India, President Donald Trump is all set to slap new tariffs on Canada and Mexico while doubling tariffs on China. These long-promised tariffs are scheduled to take effect on Tuesday, and they could be the most sweeping of the Trump era, applying to about $1.5 trillion of annual imports, according to Bloomberg. The U.S. could put a 25 percent tariff on all imports from Canada and Mexico except Canadian energy, which would face a 10 percent tariff. And, of course, the tariffs on China would double to 20 percent. Now, there is a chance that these tariffs might still be delayed since it's already happened once, but it's more likely that this could be temporary, according to that report in Bloomberg.
Trump has said that these tariffs are a tool to bring the neighbouring nations to heel on securing the borders from migrants and drugs, particularly fentanyl. Meanwhile, India's Trade Minister has started on a trip to the United States to pursue trade talks on Monday, according to government officials who spoke to Reuters. And this is, of course, with weeks to go for Donald Trump's planned reciprocal tariffs, which could affect India.
Trade Minister Piyush Goyal's visit was apparently sudden, and he departed after cancelling previously scheduled meetings until March 8, according to those officials. Prime Minister Narendra Modi's visit to the U.S. last month was also somewhat last-minute, though it did not appear to achieve so much on the trade front, though it's possible that something worse was prevented. India and the U.S. have agreed to work on the first segment of a trade deal by the fall of 2025, aiming for bilateral trade worth $500 billion by 2030. Trump has said that his government will impose reciprocal tariffs from early April on trading partners, including India. And that's, of course, worrying exporters here in sectors ranging from agriculture to apparel to automobiles. And city research analysts have estimated potential losses at about $7 billion a year.
The Trade Minister is expected to seek clarity on U.S. reciprocal tariffs to assess their impact on India. Remember, it's a very complex procedure, as guests on the court have pointed out. And he may also discuss other potential Indian concessions and add to them that we've already made.
With both the Prime Minister and now the Trade Minister hitting the road now to engage with Donald Trump and his team, any tariff hits on India after this will clearly not be for lack of trying or desire to negotiate at the highest levels.
You Can’t Poach My Pilots
The Airline Pilots Association of India, ALPA India and a member associate of the International Federation of Airline Pilots Association has alleged that Air India and IndiGo have a tacit understanding not to hire from each other. IndiGo is the largest airline in the country and Air India is the second largest, though a little behind.
IndiGo has a roughly 65% market share and Air India and all its associated airlines has a roughly 29% market share. The ALPA has sent letters to the Aviation Ministry and has said that this is unfair to pilots. Such an arrangement, if true, raises serious legal and ethical questions as it restricts the fundamental right to employment and fair competition.
The letters said, ALPA India has urged the Minister to ensure that employment in the aviation sector remains fair. Air India and IndiGo did not comment on queries from news agency PTI about this allegation and an IndiGo official apparently said there was no substance in the allegations. Now, the feeling that there is a no-poach working, even if informally, has most likely been triggered by the fact that offers made to some pilots by one of the airlines in question were pulled back, and more on that shortly.
Now, the larger question, of course, is how bad is the pilot shortage right now and how is the industry preparing for it? Because remember, if there are not enough pilots, then we have a problem or rather we could have a problem in capacity management. I reached out to Captain Sam Thomas, President of ALPA, earlier a commercial pilot with Jet Airways and now flying General Aviation, and I began by asking him what this flare-up was a reflection of.
INTERVIEW TRANSCRIPT
Capt. Sam Thomas: See, we got this from actual complaints from some of our members who were in the line to be selected with IndiGo Airlines. They were from Air India and all of a sudden, there was this letter of regret or rather kind of signal given to them that all our hirings are on hold and we'll let you know as to when we can re-look into your appointment. Now, that's strange because the number of orders that IndiGo has got and they should be hiring, and rightfully so, at breakneck speed.
And the point that, first of all, we have no proof to substantiate that the airlines have agreed into this, have got into this agreement, and that we object to the term poaching itself. It's a HR-induced term which almost looks like an operation that is conducted by the likes of Virupan. So, why are they doing it?
Because you have trained manpower available in the country and everybody should be free enough to hire somebody from a competing company and that gives a level playing field and a good opportunity for local talent.
Govindraj Ethiraj: Let me ask you the reverse question as well, Captain. A couple of years ago, there were also allegations that, let's say by airlines like Akasa Air, that people were leaving them in droves and getting pulled or poached by Air India. So, without getting into the names and specifics, both situations have existed, right, in the past?
Capt. Sam Thomas: Yes, and they are bound to exist in every industry. Why do we see that as a bad thing? You know, that necessarily need not be good.
If the reason why people are leaving X airline and joining Y airline is because the conditions there are not suitable or not as good as what the airline that you're moving to is going to provide. Now, let's take a look at Indigo. Indigo is one of the best airlines to join and move forward in your career because the opportunity that they provide and the command requirements that a pilot sort of gets in Indigo is unsurpassed anywhere in the world.
It's one of the best airlines to be at that time. But now you have a physical requirement as well. What I was doing at 21, I can't do at 55.
So, it's not necessarily a bad thing. I can go into, like I moved into corporates just to get a little bit of reprieve from that daily flying. That's the way it should be.
And that's the way it has been worldwide. That is one of the world's best practices.
Govindraj Ethiraj: So, corporates, you mean private jets for those who are listening? Private jets, correct. Give us a sense of the overall supply demand situation right now, Captain.
And also within that supply demand, there is, you know, obviously demand for, let's say, trained or senior pilots, kind of pilots, as in maybe a Boeing or an Airbus or some other kind of aircraft.
Capt. Sam Thomas: It's a pretty complex matrix as far as the requirement is concerned. Primarily, we'll stick to the Airbus A320 and the Boeing 737, which are currently still the two most prominent aircraft types that the airlines use. Now, as far as the low cost airlines are concerned, they are predominantly into Airbus A320 number wise.
And of course, there is Akasa and a few cargo airlines that are using the 737 right now, in addition to Air India Express. Now, I haven't got my mind on the amalgamation of these airlines into a single entity called Air India. So, the orders that are currently in place are in excess of a thousand aeroplanes.
These are narrow bodies, just sticking to the narrow body. Now, that would require at least, at least six sets per aeroplane, like arithmetically, if you want operations to sustain. Otherwise, it's about eight to 10 sets that gives you the proper industry standard rests.
Now, in that particular scenario, we have a shortage of about 4,500 captains from our research. And though it's a staggered requirement, you have no option at the moment, but to bring in expatriate talent, which in itself is another big issue, both for the expatriates as well as for the Indian nationals. And just to be on record, we are the only country that pays the expatriate pilot more than what a national pilot were to earn with this exact same experience.
So, there is a shortage and that's going to be a shortage in the long term if we do not take action right now at grassroot level. So, stopgap arrangement can be done with the expatriate induction, but otherwise it's going to be a perennial shortage.
Govindraj Ethiraj: Right. And what do you see happening because of this in the medium term? I know long term things could get sorted or maybe not sorted, but in the short to medium term, what's the impact of this shortage?
And does that link in any way to the issue that you raised about this poaching or attempted poaching or no poach agreements rather?
Capt. Sam Thomas: From time to time in the aviation industry in India, there has been this tacit arrangement of no poaching. Now, that is only up to a point when your senior management puts pressure and we had that in jet airways. Now, we said we will not take from Sahara, we will not take from Kingfisher, they are our friends and all that.
But when our aircraft started landing up and they were being parked on the tarmac for want of these arrangements, from my experience, we will be thrown to the winds and we will do anything, including paying in excess of 15 lakhs as joining bonus, which Indigo did as well. And that is the way it works in the medium term. And also, like I said, a big part of it is going to be expatriate inductions.
And that will continue till such time that, you know, we have our own manpower, which I don't see happening unless we do some major changes in at the grassroots level, right from the flying club levels, right from the institution, the FTOs, from there, and DGCA having to undergo a major overhaul in their thought process, including the Ministry of Civil Aviation that does not categorise us as something that is a need for the country, but still seen as elitist.
Govindraj Ethiraj: Just to pick up one quick point. So the grassroots level, since we're talking about a supply line, which only takes a few years to fill, assuming someone joins flying club today, I mean, it should take a few years and then that person should reach at least trainee pilot level. What is the one thing that we should do to improve supply in India?
Capt. Sam Thomas: Firstly, we'll have to look at it as something that is necessary for a developing country. We somehow still categorise that as elitist, and we do not have any enabling regulations in place. We have an Indian Aircraft Act 1937, we keep throwing it at every person who even wants to join.
Let me give you a very simple example. If a trainee were to join or make up his mind to become a pilot today, he has to apply for something called a computer number. Now that takes him about three, four months.
On paper, we have lovely regulations, but it simply cannot be enforced and there is nobody who is accountable.
And unless we have a rethink on that process, we are not going anywhere forward.
Govindraj Ethiraj: Got it. Captain, thank you so much for joining me.
Capt. Sam Thomas: Most welcome.
