Markets Pause After 5-Day Streak
The stock markets paused on Friday last week, after a 5-day winning streak following the Reserve Bank’s move to keep its key interest rate unchanged at 6.5%
On Episode 453 of The Core Report, financial journalist Govindraj Ethiraj talks to veteran economic journalist and author Shankkar Aiyar.
(00:00) The Take: The Uncertainty Machine
(05:38) Markets pause after 5-day streak, could pick up positive Wall Street cues
(08:37) Can the Sensex go to 105,000 in a year?
(09:53) Forex reserves rise $1.5 billion after falling $48 bn in two months
(11:12) Why is India gearing to raise the GST tax on a variety of items?
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 9th of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: The Uncertainty Machine
In February 2021, almost four years ago now, reports emerged that the internationalisation of the rupee was inevitable but would complicate the formulation of the monetary policy.
This was attributed to the Reserve Bank of India’s report on currency and finance.
Internationalisation would mean that the rupee could be freely transacted by both residents and non residents.
And here’s the important part, it could be used as a reserve currency for global trades.
The report also said that while this ideal world would lead to lower transaction costs of cross border trade and investment operations by mitigating exchange rate risk, it would make the simultaneous pursuit of exchange rate stability and a domestically oriented monetary policy more challenging unless supported by large and deep domestic financial markets that could effectively absorb external shocks.
It is not clear whether the RBI was advocating for internationalisation or just pointing out what it would take.
Reading between the lines, I would conclude the RBI was assuming that the former was inevitable, to use its own words and the latter, which is the domestic monetary policy stability, was what we had to work on to ensure it worked well.
In short, several leaps of faith at least as I could see.
The Reserve Bank has been careful to use the term internationalisation of the rupee though it does appear that it is nothing but code for de-dollarisation because it largely means the same, practically speaking at least.
In March 2023, another headline or perhaps headlines said the rupee was closer to replacing the dollar as 18 nations had agreed to trade in the INR.
The article referred to a statement in Parliament by India’s union minister of state for finance who in turn referred to a July 2022 circular from the central bank permitting invoicing international payments in rupees.
He also said that the RBI had given approvals to several banks to open special rupee vostro accounts or SVRAs which allowed for settling payments in rupees.
While the countries ranged from Singapore to Sri Lanka and Malaysia and Seychelles, the key one was obviously Russia with whom India has purchased large amounts of crude oil in the last two years or more.
Russia, itself a pariah since it invaded Ukraine, has been floating all kinds of trial balloons on alternative currencies, including a BRICS currency last month. Which likely got Mr Trump worked up.
To be fair, there is nothing wrong in aiming to create a currency reserve of your own though there are problems when an idea gallops faster than strategic plans to ensure its arrival are made.
That includes growing an economy to a certain scale and achieving the resultant economic might that goes with it.
Since no other country has done it, including China whose GDP is five times India’s, it is fair to say or expect that nothing will happen in a hurry.
And when incoming President Donald Trump said he would slap a 100% tariff on countries to start an alternative currency, when the prospects for such a currency were in itself so far-fetched, it was interesting to see the reactions.
BRICS countries have no interest in weakening the U.S. dollar at all, India's foreign minister Subrahmanyam Jaishankar said at an event in Qatar's capital Doha on Saturday.
The RBI Governor Shaktikanta Das on Friday while announcing his credit policy said as far as India was concerned, the country had not taken any steps specifically aimed at de-dollarisation.
All that we have done, he said, was permitting the opening of Vostro accounts and entering into agreements with two countries by now to do local-currency denominated trade.
That is basically to de-risk our trade, dependence on one currency can be problematic due to appreciation or depreciation," Das said.
Well.
To be fair to Das, he has never used the term de-dollarisation in the past either and broadly held the same stance.
But India’s almost abrupt leap to clarify is puzzling. If we had a position on internationalisation of the rupee, however long a project it was, why take a visible step back.
Unless it's all in the semantics, which is that we will pursue internationalisation of the rupee but not de-dollarisation which should keep you, the United States, happy.
Barry Eichengreen, Professor of Economics at UC Berkeley writes in the Financial Times that the dollar will get stronger in the short term and then start getting weaker.
He also projects that the Eurozone and China might allow their currencies to depreciate which will increase their exports into other countries.
Most of all he argues that economic policy uncertainty has a strong negative effect on investment.
And Trump is an uncertainty machine, he says.
So while we figure out where we want to take the rupee, it would be wise to remind ourselves that certainty in policy matters most when it comes to the entire spectrum of investment and economic activity.
That would include hopes for creating a reserve currency.
Top Stories
Markets pause after 5-day streak, could pick up positive Wall Street cues.
Can the Sensex go to 105,000 in a year ?
Forex reserves rose $1.5 billion after falling $48 bn in two months.
Why is India gearing to raise the GST tax on a variety of items ?
Markets & More
The stockmarkets paused on Friday last week, after a 5-day winning streak following the Reserve Bank’s move to keep its key interest rate unchanged at 6.5 per cent on Friday.
Moreover, the RBI lowered the economic growth forecast to 6.6 per cent for FY25 from the earlier projection of 7.2 per cent.
It also cut the cash reserve ratio (CRR) that banks are required to hold, thus easing monetary conditions against slowing economic growth.
Most if not all of this was not a surprise.
The Sensex was down marginally by 56.74 points at 81,709.12 while the NSE Nifty50 ended at 24,677.80, up 30.60 points.
Economists are now betting on a rate cut in February but more on that shortly.
Meanwhile, the bullish reports have resumed, this time from Morgan Stanley though with some prominent caveats here and there.
According to the US brokerage, India’s stock market may emerge as a standout performer among emerging markets in 2025, Morgan Stanley said on Friday, according to a report by The Economic Times.
The global brokerage firm has forecasted, with a 30% probability that the BSE Sensex could soar to 105,000 in a bullish scenario, supported by strong earnings growth, macroeconomic stability, and robust domestic capital inflows.
On the flip side, it sets a base case scenario of 93,000, reflecting a 14% upside from current levels.
Importantly, the bull case projects an earnings growth at 20 per cent annually for FY24-27 under this scenario and 17% under the base case.
But there is a bear case as well.
Which is the Sensex dropping to 70,000 in a worst-case scenario, representing a 20 per cent decline.
One trigger for this is oil going above $110 a barrel and the US economy slipping into recession, says Morgan Stanley.
Which would mean that the Sensex earnings could compound at 15% annually till 2026.
I could not see any discussion of Trump tariffs but presumably it is not easy to predict the unpredictable.
Morgan Stanley of course is returning to base like many other foreign investors who appear to have exhausted their selling quota for now. The first week of December has already seen a roughly $3 billion or Rs 24,454 crore net inflow from FPIs.
Both October and November saw outflows with October seeing over $11 billion alone.
Meanwhile, on Wall Street, the S&P 500 and Nasdaq Composite
hit fresh records on Friday after November jobs data came in slightly better than expected.
The broad market S&P 500 climbed 0.25% to 6,090.27. Tech-heavy Nasdaq advanced 0.81% to 19,859.77, bolstered by gains in Tesla, Meta Platforms
and Amazon
Both indexes touched new all-time highs during the session and closed at records, CNBC reported, adding that Dow Jones Industrial Average however
slipped 123.19 points, or 0.28%, to close at 44,642.52.
RBI Interest Rates
Some Friday news to recap since it is important.
The Reserve Bank of India (RBI) kept its key interest rate unchanged on Friday but cut the cash reserve ratio that banks are required to hold for the first time in over four years, effectively easing monetary conditions as economic growth slows, Reuters reported.
India's GDP growth rate fell to 5.4% in the July-September quarter, the slowest pace in seven quarters, while inflation is rising and the rupee has hit record lows.
The cash reserve ratio (CRR) was cut by 50 basis points to 4%, effective in two tranches on Dec. 14 and Dec. 28. The cut was the first since March 2020.
The move will infuse 1.16 trillion rupees ($13.72 billion) into the banking system.
The benchmark repo rate is holding at 6.50% for an eleventh straight policy meeting.
Elsewhere, oil is holding steady at this point at around $71, lower than the numbers we saw last week.
India's Forex Reserves Rose After Dropping $48 Billion
India's foreign exchange reserves rose for the first time in nine weeks and stood at $658.09 billion as of Nov. 29, coming off five-month lows, data from the Reserve Bank of India reported by Reuters showed on Friday.
The reserves rose by $1.5 billion in the reported week. They had dropped by $48.3 billion cumulatively in the last eight weeks.
The RBI intervenes on both sides of the forex market to curb undue volatility in the rupee because of which the rupee has been considered amongst the steadiest currencies in recent years.
The last two months have seen sustained pressure thanks to foreign portfolio outflows and the dollar strengthening following Donald Trump's victory in the U.S. presidential election.
The RBI's "central tenet" is to maintain orderliness and stability in the exchange rate, without compromising market efficiency, the RBI governor Shaktikanta Das said on Friday.
The currency ended at 84.6875 on Friday and logged a fifth consecutive weekly fall, declining 0.2%.
It had hit a record low of 84.7575 during this week.
Why GST Rates Might Go Up
Last week, several news reports suggested that there would be an increase in goods and services tax or indirect tax on items ranging from tobacco and aerated drinks to nearly 150 products.
A Group of Ministers or GOM is believed to have recommended a slew of changes in the rates, beginning with a 35 percent slab for ‘sin goods’.
The proposals included raising GST to 18 percent on products priced between Rs 1,500 and Rs 10,000, and 28 percent for goods priced above Rs 10,000.
For instance, the GST on wrist watches priced over Rs 25,000 was to be hiked from 18 percent to 28 percent, and shoes costing over Rs 15,000 would attract 28 percent.
Apparel was not spared leading to the Clothing Manufacturers Association warning that the rise in rates would lead to a loss of 1,00,000 jobs.
A day later, the Central Board of Indirect Taxes and Customs tweeted, “Reports in public media on the basis of GoM deliberations are premature and speculative.”
Veteran economic journalist and author Shankkar AIyar wrote a column on this theme in The New Indian Express over the weekend where he argued for greater transparency in the process of setting GST rates and greater involvement of tax payers as well, ahead of a December 21 GST Council meeting in Jaisalmer.
The larger question of course is why now and what is this bill being presented for ?
I began by asking Aiyar what he thought was the reason for the likely GST hike at this point, whichever ones finally come through.
INTERVIEW TRANSCRIPT
Shankkar Aiyar: So, it's a mystifying question. I mean, problem with the GST Council's process and systems is that they appoint a GOM on issues. For instance, there is a GOM on reducing GST on health insurance, which is understandable and, you know, we could have a discussion about it.
The second, there is another one on compensation set. Now, GST is roughly seven years old and still we are talking about a compensation set. So, the rationalisation for that is not available.
This GOM has been talking about rationalising the rates. So, if you know the GST has multiple rates, multiple definitions, confusion sets and stuff like that. So, to me, the first thing that struck me is why would you increase rates when demand is waning?
So, I mean, you know, that's like the eco 101 question. But beyond that, that's really my beef in the sense that why is the GST Council setting up a GOM on rationalisation? What is the objective of this?
They should define. So, the terms of reference don't give you any, there is just a circular saying so-and-so, so-and-so and ministers are there and it is convened in this particular case, the Deputy Chief Minister of Bihar. So, why is the GOM set up?
What is the objective? What rationalisation do they want? Do they have a target for GST growth?
Do they think that GST growth is not up to the mark? What is driving the need for the rationalisation? Is it simplification of the process or is it for higher revenues?
And if it is for higher revenues, then they should explain that this is fallen or this is the rate of growth that we expect and this is not coming. I suspect some of this has to do with all the populist schemes that have been announced by state governments in the run-up to elections in the past year and more. For instance, the cash benefit transfer to women across states, some 8 or 10, the estimate is that it is 2 trillion rupees.
We know from the GDP data that government capex has fallen. We know from state government finances that revenue expenditure has gone up, they are missing targets on investment in infrastructure. So, all of these requires the GST Council to come up front and say, A, this is what we are doing, B, this is why we are doing, C, this is the objective that we aim to achieve and the process is completely opaque.
Govindraj Ethiraj: I'll come to the process in a moment, Shankar, but if you were to look at the core of what has been suggested, it ranges like we mentioned earlier as well that some products could go to 18%, some could go to 28%, wristwatch is above 25,000 from 18 to 28, shoes over 15,000, 28% and apparel is a key part of this because there's obviously apparel has become expensive also and the Clothing Manufacturers Association put out a public release saying this rise in rates would lead to a loss of a hundred thousand jobs.
So, my question is, two questions actually, so one is that this is obviously inflationary in itself, isn't it? And second is that if they were to raise the rates, would that really achieve what they are setting out to achieve which is, you know, actually raising revenue because I'm assuming there's some demand hit that will follow.
Shankkar Aiyar: So, that's one of the questions that I raised. Have they estimated or is there been a study of how much revenue potential lies in what category of price points? Do they think that the demand in that category will sustain?
The more important question is that in an economy where you know the top end of the economy is sort of holding the consumption which is sort of weak, why would you go and tax them? And then the question of inflationary is obvious. I mean, you know, there will be an impact on the inflation if you sort of raise rates across 150 different products.
Even if they raise from say 5 to 12 or 12 to 18 or whatever, I can understand them wanting to curb use of sin goods like tobacco, you know, aerated drinks. By the way, alcohol is still the same. So, have they increased rates there?
That is one of their biggest revenue sources. So, the state governments are simply getting a pass in this. I mean, all the social media outrage was on the centre and, you know, the centre has obviously the vote, the veto power, so to speak, in the GST council.
But state governments, the opposition parties in state governments, they are sort of hunting with the hounds and running with the hares. I mean, you know, this is duplicity. You know, you say that, you know, inflation is going up, this, that, and then you have a committee of people from…
Finance Minister from Kerala, West Bengal, Karnataka, all participating in one GOM which is happily saying that, you know, we need to increase rates. So, the process requires some amount of public consultation.
Govindraj Ethiraj: If you were to go back to the genesis of this, which is, there is a bill that is being presented or has been presented and someone has to pick it up. And who do you think is going to pick up the bill then? And in what other ways could it be presented?
Shankkar Aiyar: Obvious question for any government is how they manage their budget and how they've managed the left and right hand side of the Excel sheet. So, what are they doing for expenditure control? What are they doing for efficiency?
First question. Second, all taxation is about income and consumption. If growth is papering, then your presumption that consumption will continue…
I mean, you know, the government of India and the state governments must be the only entities in the world which think there can be a market of sellers without buyers. I mean, how do they explain this contradiction that here's 5.4% growth rate, the RBI has pulled down the estimates, all economists are now saying 6 to 6.5 for the whole year. And in that, you have to actually look at what is the logic.
And which is why I argued that there is… I mean, parliamentary standing committees invite submissions, like, you know, feedback from citizens. The RBI regularly does studies and it invites stakeholder comments.
The union budget is passed in parliament. For whatever worth it is worth, there is some debate and deliberation and voting happens. And there is a distance between the presentation of the budget and the implementation of the budget.
The GST council is the only entity where, you know, they come and say, okay, this is what we are doing. And thereafter, you know, if there is a sort of outrage about khakra tax or this tax and all, and then there is a UTA. Why wouldn't the GST council follow what is followed in parliamentary standing committees or followed by regulators?
This is like, you know, the primary requirement in any democracy is to have some stakeholder comment. I mean, for sure, you and I, if we say that we disagree with something, or an industry association disagrees with something, I mean, for instance, all this apparel stuff, have they conversed with the industry association, the apparel manufacturers? I mean, apparel is the small, medium and micro enterprises who employ the bulk of the formal sector employment.
They are also on the frontier of exports. You know, companies like Walmart and all are sourcing from them. And then you go and sort of say that, okay, I'm going to raise rates on apparel from this to this.
Those companies have to survive to export. So simple point in the column was that there needs to be a better way of doing these things. I mean, surely, the GST council, it is not superior or at a higher intellectual plane than the Parliament of India or the finance ministry, which presents the union budget, that there has to be some coordination, some collaboration in how you fix the rates in an economy, particularly when you are faced with an uphill challenge ahead.
Govindraj Ethiraj: Right. Shankkar, thank you so much for joining me.
Shankkar Aiyar: Thank you, Govind.
