Markets On Standby For US Fed Rate Cut Today
The stock markets continued to rise to newer highs, though they have once again resumed their steady trot or gallop
On Episode 390 of The Core Report, financial journalist Govindraj Ethiraj talks to Atul Chaturvedi, executive chairman of Shree Renuka Sugars and also chairman of the Asian Palm Oil Alliance.
SHOW NOTES
(00:00) The Take
(04:21) Markets on standby for US Fed Rate Cut Today
(05:23) Oil prices fall, as does wholesale price inflation
(06:21) Gold imports jumped 3 times in August thanks to lower duties, taking the trade deficit to a 10-month high.
(07:49) Steep import duties on edible oils will increase inflation, why did the Government do it now?
(16:28) Bank credit falls following slowdown in personal, small business and agriculture segments.
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 regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Wednesday, the 18th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital
The Take
Companies often use the analogy of changing engines mid-air and during a flight to emphasise the challenges in keeping a company running and yet bringing about fundamental transformation in its businesses or product and service offerings.
Interestingly, Air India is faced with a problem that involves aircraft and a mid-air change but inside the aircraft and not outside with the engine so to speak.
This is proving difficult.
Air India has set a target of November 12 for a full merger and integration with Air Vistara, the clearly superior product from the same owners, the Tatas.
The internal benchmarking as I understand is clearly that the new product and service offerings should match that of Vistara, the smaller company and not the larger one.
This is obviously a desirable and grand outcome to aim for but not easy to execute.
In my understanding, it is rare for a large organisation to essentially become the smaller one it acquires.
I am also not really aware of any examples from anywhere, though there must be.
For this alone, this transition process will be interesting to watch. The management obviously realise this and are churning staff to make them more uniform in age and experience where feasible.
The latest news is that Air India has announced a $400 million refurbishment programme to overhaul 67 of its older aircraft which will begin with 27 narrow-body Airbus A320neo planes, followed by 40 wide-body Boeing aircraft.
The revamp will see a consistent three cabin layout with business, premium economy and economy seatings for all aircraft, like Vistara.
The Economic Times quotes Air India saying the first narrowbody aircraft, a single-aisle A320neo, went into the hangar on Monday and is expected to re-enter commercial service in December 2024.
It will join eight recently-delivered and operational Air India A320neo aircraft that already feature the upgraded cabin interiors and configuration.
Some 3-4 aircraft will similarly get upgraded every month with a completion date of mid 2025, which is what The Core report has estimated from interviews about what the likely date would be for an integrated company and product which is also mostly glitch free.
But this is the domestic product and only involves the smaller aircraft. Upgrading the 40 widebody aircraft, also where Air India gets the maximum flak for poor product, will start in early 2025 and will obviously go on for some time.
“Over time, all the legacy widebody aircraft will also be refitted. This comprehensive upgradation of Air India’s physical product is an important component of Air India transforming into a world-class airline,” said Campbell Wilson, Chief Executive Officer & Managing Director, Air India.
Vistara had said its aircraft and passengers will be handled by Air India from November 12.
Ai India's fleet currently comprises 128 aircraft while Vistara has 70 aircraft. And Air India flies to several lucrative international routes.
Handling this change, to stick to the mid-air engine and now cabin change analogy will require very solid and consistent communication with all stakeholders, including for example Vistara passengers who will surely protest when they land up in older Air India aircraft.
It may well be that changing engines while the aircraft is inflight might be easier in contrast to the challenge that lies ahead for Air India.
And top stories and themes.
Markets on standby for Fed Rate Cut Today
Oil prices fall, as does wholesale price inflation
Gold imports jumped 3 times in August thanks to lower duties, taking the trade deficit to a 10-month high.
Steep import duties on edible oils will increase inflation, why did the Government do it now?
Bank credit falls following slowdown in personal, small business and agriculture segments.
Markets & More
The stock markets continued to rise to newer highs, though they have once again resumed their steady trot or gallop rather than a raging bull charge, if you like such metaphors.
On Tuesday, the 30-stock BSE Sensex rose 90.88 points to 83,079.66 while the NSE Nifty50 rose 34.80 points to close at 25,418.55.
The market was mixed as it has been on several days with some sectors rising and others pulling back.
Both the Nifty Smallcap 100 index and the Nifty Midcap 100 index were down marginally, almost surprisingly, given that they seem to stop at no station.
The big trigger will be the US Fed Rate cut this evening, there is of course considerable speculation on how much it will be, whether quarter or half per cent.
Whatever the number, it will likely change the nature of global flows for the coming months and that is something institutional investors particularly would be watching very carefully.
Oil Prices Down
Oil prices were subdued to lower on Tuesday as concerns about slipping demand continued to drive market sentiment.
Like all other markets, oil traders are also waiting for the Federal Reserve’s moves on Wednesday evening.
Brent crude futures for November were quoting around $72.27 a barrel.
Meanwhile, India's wholesale price index based inflation eased to a four month low of 1.31% in August, thanks to, you guessed it, falling costs of crude oil and then steel and cement.
On the other hand, prices of food staples like potatoes and onions rose sharply, Reuters reported, adding August wholesale inflation was lower than the 1.85% increase anticipated by economists in a Reuters poll and down from 2.04% in July.
More on food prices and edible oils specifically coming up.
Exports Fall
India’s merchandise exports contracted 9.3 per cent to $34.7 billion in August thanks to soft global demand and logistics challenges.
Imports, on the other hand, rose 3.3 per cent to $64.4 billion during the month, leading to a trade deficit of $29.65 billion, a 10-month high.
The high import numbers were driven by gold whose imports were up three times to more than $10 billion in August, thanks to rising demand and of course lower import duties which have kicked in at 6% versus the earlier 15%.
Of course, gold comes into India anyway and more of it is smuggled in when duties are high.
A Reuters poll had quoted economists expecting the country's August trade deficit to be $23 billion. The deficit stood at $23.5 billion in the previous month.
Gold imports In value terms, August gold imports were the highest since March 2021, when they had touched $8.5 billion, according to Reuters calculations.
Exporters told Reuters Indian goods exports have been impacted by the escalating US-China trade war and rising freight costs which have doubled in the past year to Europe and the US, besides a fall in global commodity prices.
Brace For Edible Oil Price Rise
The Government on Friday somewhat suddenly increased import duties on edible oils both crude and refined. The new duties have gone from 0 to 20% which is basic customs duty as there was always a 5.5% cess.
So on crude palm oil, soy and sunflower, duty will be 27.5%.
On refined palm oil, the import duty will be 35.75% versus the earlier 13.75%.
So why did this happen ?
For one, the domestic farmers as we will find out were already asking for more protection as the imported oil was coming in at a price lower than even the minimum support price.
For example, in the case of soybean, Former Agricultural Secretary Siraj Hussain said in an article in moneycontrol the prices were 35% lower than MSP and almost at par with prices 10 years ago.
However, latest inflation figures for August 2024, released last week show that vegetable and pulses for example were running at close to 11%.
While edible oils and fats were at -0.86%, so negative, one of the very few components in the entire inflation basket that were negative.
Put another way, low edible oil inflation was what was keeping inflation from shooting further.
Everyone of course knew this.
So what’s changed and what will be the impact ?
I reached out to Atul Chaturvedi, Chairman of Sri Renuka Sugars and Chairman of the Asian Palm Oil alliance and began by asking him how he was seeing the latest move by the Government to hike import duties.
INTERVIEW TRANSCRIPT
Atul Chaturvedi: So in fact, the industry had been demanding from the government that it's high time the duties are raised, because the trouble was soybean was selling much below minimum support prices, and that the fear was getting generated that going forward, you might have a situation that the farmer loses total interest in oil seed cultivation, and that is not good from sustainability angle as well, and as well as in terms of atmanirbhar. So I thought, and I feel that the government has acted correctly and at the right time, because you have a big soybean crop looming on the horizon, and we are now looking at something like 12.5 million tons of soybeans getting harvested this time around, and the rain gods have been Indian for the change. So in that scenario, I think it's appropriate, and there was no reason why edible oil should remain in a deflationary or a stationary mode. So I think it's a good sign.
Govindraj Ethiraj: Could you give us a sense on what is our current composition of consumption? I mean, how much is based on imports, how much domestically produced?
Atul Chaturvedi: If we take our consumption at around 26 million tons annually, about 16 million tons or thereabouts is our import, and about 10 million tons is domestic availability, which includes mustard, soybean, groundnut, rice bran and cotton, all the oils put together. So our dependence on import is pretty high. And what we've also seen all the years is that India increases this duty. It's not that the whole increase in duty gets passed on to the domestic consumer. It doesn't happen that way. 20% increase in duty happens. There may be about 10-12% will have to be borne by the Indian consumer, and the balance will actually be borne by the country supplying edible oil to the country, to India, which is Indonesia, Malaysia, Latin America.
Govindraj Ethiraj: You're saying that basically countries that export to us, including in Southeast Asia, will have to reduce their prices to obviously supply to India more competitively. My analogous question is, how is it cheaper to produce it there than it is here? Because we're not talking about, let's say, I mean, it's not like, for example, light engineering from China and so on.
Atul Chaturvedi: No, but India has been neglecting its oil seed scenario for a very, very long time. In fact, we were actually heavily compromised to edible oil security over the years, and that was largely because the government felt that importing may be much better option. But over the years, what has also happened is the Indian domestic consumption has actually gone up so from a situation in the late 90s when India was only importing about three lakh tons of oil, we now have a situation that you're importing close to about 16 million tons, which means your edible oil security is heavily, heavily compromised. So I think it's a step in the right direction. We need more action on this front to ensure that dependent on imports actually brought down below 50% level,
Govindraj Ethiraj: Right, and on impact to consumer. So you said that, let's say, because inbound prices will be lower, the net impact on consumers should be lower about 10% but that also seems high in a way, because edible oil prices are the only one of the few elements of the inflation basket which have been keeping overall food inflation low, and that looks like it could change now. So how do you see that?
Atul Chaturvedi: We are in a very catch 22 situation. You need high prices for your oil seeds, and your farmer is crying hoarse because his produce is getting sold below even the minimum support price. And on the other hand, we want to pamper urban consumers by giving him very, very cheap oil. If you really look at the edible oil scenario, in the last 30-40 years, edible oil prices haven't really moved much, so which means we have neglected edible oil, or oilseed sector, big time, a partial correction of the aberration, and I hope, results in more investment going into oilseed cultivation and farmers doing something about improving the productivity as well.
Govindraj Ethiraj: Just to come back to that earlier question. So why do you feel some of these other countries are able to produce at such low cost? Is it because they're not consuming it, and therefore they are, in a way, getting rid of excess production, or is there something in the way they produce, including agriculture productivity levels, which are different?
Atul Chaturvedi: No, if you look at Southeast Asia, especially in the case of palm, the same is the story ss far as other royalties are concerned. Takes soya bean for example. I was talking about to a Brazilian farmer yesterday who was visiting us. They I asked him, What is your average yield? He said, our average yield is close to about four tons per hectare. An Indian average is one ton per hectare. And in case of India, you are all actually occupying 12 million hectares of land for soybean and producing just about 12 million tons of beans. So there is a big disconnect, but that probably is the case with most of our agri produce. And go back into land size and better improvement in terms of seed and blah, blah, blah. So the whole problem.
Govindraj Ethiraj: Right. So now that the duties have been raised, do you see these duties staying on, or do you feel it's more short to medium term measure.
Atul Chaturvedi: Difficult to say. Because in India, we find, by and large, actions which are, at times, knee jerk but this time round, I think, I hope and pray that it is not a knee jerk reaction. And the other thing, the icing on the cake for the government would be that this would generate hell of a lot of money by way of customs duty back of the envelope. Calculation is that the government might actually end up getting something like 45 to 50,000 crores as customs revenue. I hope and pray that they use this money for augmenting the oil seed production in the country, so this money will come handy, so at some stage we will have to bite the bullet, and probably this is one beautiful moment.
Govindraj Ethiraj: Right, Mr. Chaturvedi, thank you so much for joining me.
Atul Chaturvedi: Thank you. Thank you.
Bank Credit Slows
Bank credit growth fell by nearly 6 percentage points in July from a year earlier, driven by a slowdown in personal, agriculture, and small business segments, research reports and bankers said, according to Moneycontrol.
A September 10 CareEdge report showed banks' lending growth slowed to 13.7 percent in July from 19.5 percent in the year-ago period.
Lending growth slowed across all major sectors except industry in the period, with growth in personal loans slowing to 14.4 percent from 31.2 percent.
The decline was driven by a slowdown in vehicle and unsecured loans, impacted by the HDFC-HDFC Bank merger, though partially offset by an increase in gold loans, according to the CareEdge report.
Lending to agriculture was down too.
Moneycontrol quoted analysts saying the slowdown could be attributed to reduced credit expansion in the non-banking financial companies’ (NBFCs) and trade sectors.
Commercial real estate however grew faster than before.
The CareEdge report highlighted that after reporting robust growth in FY24, credit offtake is anticipated to moderate in FY25, led by continued temperance in unsecured retail and slower corporate credit off-take.
