Markets Receive Fresh Set Of Positive Cues
The big question facing Indian stock markets is, what will it respond to apart from sector specific ones
On Episode 415 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Srivastava, Founder of the Global Trade Research Initiative (GTRI) as well as Shankkar Aiyar, veteran economic journalist and columnist.
(00:00) The Take
(06:07) Markets receive fresh set of positive cues, will they respond
(08:37) Oil prices soften once again
(09:25) Gold hits fresh record. Safe haven is back
(10:35) A Donald Trump presidency means tariffs could go up, as promised. What does that mean for Indian industry?
(19:31) Making sense of a slowdown
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 Monday, the 21s of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
In one of those interview questions and answers that have stayed with me for life, I asked then Reserve Bank of India governor Y V Reddy who he visualised or thought of when formulating central bank policy ?
He responded promptly, the aam admi, the small guy or the average joe, whatever you want to call it.
There is an increasing or constant disconnect between what the regulators think and what mostly newer entrants in the banking or financial services space think they are there for.
Going by the reactions to the recent and fresh clampdown on non bank finance companies, you would think that the RBI governor should first think of the life and fortunes of a venture capital firm parked in the Bay Area in California trying to force create the next Apple Pay or similar in India.
After having either done something or failed trying to do so in China.
Or the RBI should perhaps think of the entrepreneur who sold the same dream sitting in Bangalore or thereabouts so that the company in question can comfortably proceed with a Series B or C fund raising round or better still dump the entire flaming pile on unsuspecting retail investors, as some evidently have.
So, why is the RBI acting so ?
The primary reason is the sheer growth of personal loans in the country. And the mounting evidence that borrowers are using the loans for lifestyle reasons or to invest in various financial and non financial instruments.
The top down view tells us what is going on.
For instance, credit card dues as of July were the fastest-growing sector, accounting for over 1% of total bank loans, increasing 22% year-on-year to nearly Rs 2.8 lakh crore, the Times of India reported on September 2.
Loans against gold jewellery, however, grew the fastest within personal loans, rising by 39%, the report said, adding personal loans also captured the largest share of non-food credit at 32.9%, followed by services at 27.4%, among others.
According to RBI's sectoral data on bank credit, personal loans grew by 14.4%, reaching nearly Rs 55.3 lakh crore.
Not surprisingly, the RBI is watching quite closely this segment, in addition to ringing periodic alarms.
But the NBFCs in question would have you believe they are being singled out.
A collective and predictable whine went up in some parts of the community as if the RBI’s surveillance department got up on a Monday, discovered something was afoot and sent out closure notices on Tuesday.
Some pointed out that the crackdown would spell the death knell for the industry and there would be poor people who would be deprived of loan products they desperately needed.
It's actually the contrary but that is a different discussion.
The Reserve Bank said last week there were failures to adhere to the Fair Practices Code, improper income assessments, and neglect of borrowers' repayment capacities, particularly in the microfinance sector.
I further quote the RBI. Inspections revealed alarming practices, including evergreening of loans, questionable asset classification, and inadequate disclosures. All these were further compounded by outsourcing of core financial services.
Of course it was conveniently forgotten that the RBI said almost the same thing in June this year when the governor warned NBFCs and micro finance institutions of charging usurious or unlawfully high interest rates.
Remember, many of these NBFCs are essentially fronts for mainstream banks who take on the slick app-based selling and overselling to customers, in the guise of customer acquisition and growth of course.
If loans are a matter of a simple swipe on a smartphone obviously more people will take them.
It works like a TikTok which is considered to have the worst or best algorithms to keep you and your brain glued to the screen for the longest time possible.
The difference here is, in addition to your brain matter, it's your savings that are getting drained out.
There are a few larger issues.
The RBI has been ringing the alarm bells on excessing small-ticket loans for more than a year now.
It has been specifically warning against small loans going towards stock market investing, including in more risky derivatives trading or other instruments.
The governor said a few months ago:
“Excess leverage through retail loans mostly for consumption purposes needs careful monitoring from a macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards as well as post sanction monitoring of such loans."
Many of the people who take such loans are India’s youth.
So this is not just a business problem but a social problem too.
Because if it was just a business problem, it would have been easier to address and solve.
There is no doubt that the last four years or so has seen unprecedented growth in the consumer loan space.
One could always argue that this is an outcome of overall economic growth.
And there could be some truth in it.
But it is equally true that India is seeing levels of borrowing on one end and market speculation on the other that is quite disproportionate with many other economic indicators.
Regulators have to be alert and they will be hauled over the coals if it were to emerge that they were sleeping on the wheel.
But there is little a regulator can do if companies who enter the space have a basic disconnect between their purpose.
There is considerable potential for banking and banking and financial services in India.
Addressing this market in a commercially relevant way is important for economic growth and social progress.
It is also important to understand who the consumer is.
YV Reddy’s statement is important to understand, not just as an academic exercise but also while framing business strategy.
And that brings us to the top stories and themes
Markets receive fresh set of positive cues, will they respond
Oil prices soften once again.
Gold hits a fresh record. Safe haven is back.
A Donald Trump presidency means tariffs could go up, as promised. What does that mean for Indian industry ?
Making sense of a slowdown.
Markets & Cues
The big question facing Indian stock markets is, what cues is it or will it respond to, apart from sector specific ones, for example somewhat negative cues in automotive and relatively positive among IT stocks.
There is no larger force of the kind that propelled stocks to the levels we are seeing right now, apart from of course liquidity itself.
The counter force right now of course is FIIs who have sold heavily in October, to the tune of around $8 billion so far, close to highs in absolute numbers though lower in relative terms.
On Friday, the stock markets recovered with the BSE Sensex reversing a three-day losing run to rise 218 points at 81,224.75 level. The Nifty50, too, ended at 24,854.05, up 104.16 points.
Bank stocks did well on Friday.
In the broader markets, the mid cap index was up slightly but the small cap index was down.
On Wall Street, on Friday, both the S&P 500 and the Dow Jones Industrial Average surged to new record highs Friday, sealing six straight weeks of gains, CNBC said.
The Nasdaq Composite was meanwhile led by a post earnings jump in Netflix.
The three major averages clinched their sixth straight positive week, also marking the longest string of weekly advances in 2024 for both the Dow and S&P 500, CNBC said.
Netflix stock price rose 11% on Friday after the streaming giant beat Wall Street’s earnings and revenue estimates in the third quarter, while reporting a 35% jump in ad-tier memberships from the prior three-month period.
Procter & Gamble also reported better-than-expected earnings, while revenue fell short of estimates, CNBC said, adding more than 70 S&P 500 companies have reported earnings this season. Of those, 75% have beaten expectations, according to FactSet.
Interestingly, while the US is bracing for the presidential election, the markets are doing well.
Analysts told CNBC this is atypical for an election year.
“Usually it’s the other way around — the market’s hesitant, and then it does well after the election. Now we’re getting the reverse of it and … Maybe you get the opposite of what we had — stocks will be strong into the election and then have some volatility fall on the election,” he said.
The same analysts also attributed this outperformance to investors already pricing in a win from Republican nominee and former President Donald Trump, whose policies would be more business friendly in terms of taxes and regulations.
And more on that and what it could mean for India in a short while.
Oil
Oil prices have fallen, posting their fall, posting its largest weekly decline in more than a year, even as fresh moves emerged to end the conflict in the Middle East and on the other hand, China’s crude demand slipped.
Brent is now closer to $73 a barrel.
On the demand side, data from China showed apparent oil demand fell from a year earlier, even amid tentative signs of economic improvement in the world’s second-biggest economy and the world’s largest crude importer, Bloomberg reported.
More significantly, in the longer term, the International Energy Agency forecast that rising global supply could lead to a sizable surplus next year while OPEC earlier this week trimmed its forecasts for oil demand growth this year and next for a third consecutive month.
Gold hits a fresh record
Gold prices hit crossed $2,700 an ounce for the first time as concerns over escalating conflicts in the Middle East and a tight US election race prompt investors to flock to safety, Bloomberg reported, adding that bullion has climbed as much as 1% to $2,720.17 an ounce, beating the all-time high set in the previous session.
Gold was not alone. Silver too jumped, by 5.5% to the highest since 2012.
Gold is about 2.4% higher for the week, with haven demand outweighing other macro headwinds that would normally weigh on the precious metal after US reports on Thursday diminished bets on the scale of Federal Reserve easing.
Auto Exports Are Up
Domestic sales might be slowing but exports are strong for India’s automotive sector.
Automobile exports from India in the first six months of the current fiscal year rose 14 per cent year-on-year, led by gains in shipments of passenger vehicles and two-wheelers.
According to Siam data, the overall exports in the April-September period stood at 25,28,248 units, up 14 per cent as compared with 22,11,457 units in the year-ago period.
"Key markets like Latin America and Africa, which had slowed down for various reasons, have bounced back. This has been the main reason for exports coming back," Society of Indian Automobile Manufacturers (Siam) President Shailesh Chandra said in a report in Business Standard.
Automobile exports declined 5.5 per cent in FY24 due to the monetary crisis in various overseas markets.
What If Trump As President Raises Tariffs
A significant promise or threat depending on how you want to read it is the likelihood of import tariffs rising sharply in the US were Donald Trump to come back as President, something clearly the stock markets seem to be betting on.
The WSJ says in a new article quoting experts that a new Trump term may assume that “the global trading system of the late 20th century is not sustainable.
“The endgame here isn’t some kind of negotiation where we all get back to 1995,” when the World Trade Organization came into force. Rather, it’s a “fundamental rebalancing.”
So what has Trump called for ?
Well, says the WSJ, he has called for an across-the-board tariff of 10%, later suggested 10% to 20%, and at least once even said 50% to 200%.
He has proposed a tariff of 60% on goods from China, or maybe more. He has also proposed reciprocity, or U.S. tariffs that match those of its partners.
Remember, the discussion on Harley Davidson bikes facing 100% duties into India ?
If it turns out that the tariff on China is 60% and the rest of the world is 10%, the U.S.’ average tariff, weighted by value of imports, would leap to 17% from 2.3% in 2023, and 1.5% in 2016, according to Evercore ISI, an investment bank.
That would be the highest since the Great Depression, after Congress passed the Smoot-Hawley Tariff Act, which triggered a global surge in trade barriers.
So what does this mean or how should Indian exporters see this and where could this go and could it become a face-off ?
I put this question to Ajay Srivastava, Founder of the Global Trade Research Initiative (GTRI), a former senior official with the Directorate General of Foreign Trade in India.
INTERVIEW TRANSCRIPT
Ajay Srivastava: The US is very, very reluctant to open its economies and it's taking all the steps to close its borders. Mr. Trump started this after 2018 when he imposed tariffs on steel and aluminium. So this is not new.
What he is saying is not new. He is in the habit of talking about these things. And of course, translating his talk into the decisions into real tariffs.
And China has faced a major brunt and India faced the brunt only on steel and aluminium. So of course, if he comes to power, he may increase, but he will be ignoring plenty of reports from within the US that it's increasing the prices for the consumers. It's not helping with job creation.
So it's not helping them. But Trump being Trump, he can very well do it. And if you talk about impact on Indian exports to the US, you know, we have a big trade surplus with the US and the surplus may come down.
But I think if he imposes on India, two, three things are there. One, this will not be legal. You know, world trade, they happen under the WTO trade rules and each country has committed how much max tariffs it can charge on a particular product.
For example, India has committed that on the steel it cannot charge more than 40%. So today tariffs are 20% on steel. I can make it to 30% without violating the WTO rules.
But the US doesn't have this flexibility. They have committed very low levels of the highest tariff they can charge from the countries. For example, for steel, it's less than 4%.
Now when they're increasing it to 25% or 40%, they are in clear violation of the WTO rules. So first, apart from what happens to the trade, we'll take them to the WTO. Number one.
Number two, we say, okay, if you feel our tariffs are high, we are very happy to offer you zero tariff entry to your products. Happily do an FTA with us. We are offering zero tariffs facility to Asia and Japan, Korea, North Switzerland, Norway, Australia.
So please do an FTA. We are happy to do that. But the US wants unilateral tariff increases.
They don't want to give concessions to other countries. So this is not the bilateral trade game. They want to be like my way or highway.
So first I say, they will be in violation. If they increase tariffs unilaterally, they will be in violation of their WTO commitments. Number two, if they want, they can talk to us for an FTA, but they don't want an FTA.
Right now we are negotiating the Indo-Pacific Economic Framework. It's a FTA sort of trade agreement with 15 countries led by the US. India is also part of it.
But tariff cuts are not part because the US is not comfy with those things. Third, if he goes ahead and increases the tariffs. So we'll do what we have done earlier in 2019.
When they increased the tariffs on steel and aluminium in 2019, we calculated how much it is hitting us and the same amount. We did the Excel calculations and we increased the duties by the same amount on different products on US imports. We'll do the same.
So it will be like a race to the bottom for all the countries.
Govindraj Ethiraj: What did we do at that time in 2019? What did we increase import duties on?
Ajay Srivastava: So Trump in 2019, he increased tariffs on steel and aluminium, not only on China, but on most other countries, including India. So what we did is we didn't talk to Trump or anyone. We calculated how much of tariffs, how much of the revenue they are collecting out of India's exports of steel and aluminium and the same revenue we did by calculations and we ensured that the same revenue is charged on the imports from them.
That's why we released a customs notification increasing tariffs only on the products from the USA. It's very rare for India to do this, but just to respond that we are not weak and we can also take retaliatory action, we did that. And was that lifted later or?
Some parts last year, both the countries said, okay, we'll agree to drop some tariffs and some disputes at the WTO and we dropped tariffs on most of the items. But it was through bilateral concessions and negotiations.
Govindraj Ethiraj: While we may retaliate and so will other countries, I'm assuming if the US were to increase tariffs and like I said, the figures are quite varying and I'm going by reports in various newspapers, including the Wall Street Journal, which say that, which are the quote Trump saying that he's talked about 10%, 20%, 60%, even 100 and 200% for different maybe products, but also some base level. In the short term, could that hurt India's exports and where if so?
Ajay Srivastava: So my presumption is that if they're importing, if they are putting high tariffs on India, they'll be putting on, already they have put on China, they would put on most other countries. So it's the US versus rest of the world game and everybody will be at the equal disadvantage and most so the US consumers, because we are uncompetitive on many products, but we have cheap labour and we can start manufacturing most things. The US cannot manufacture garments, textiles, labour-intensive things because their per capita income is so high and the hourly labour rate is so high.
And whatever tariffs they're increasing, it will be hurting them most.
Govindraj Ethiraj: Right. So you feel that even if Donald Trump were to become president, you're saying that eventually it's not likely that he will impose those kinds of sweeping tariffs, maybe only on China or, which of course they're already doing in some cases.
Ajay Srivastava: So my guess is he has that flamboyant cowboy type personality. He is in the habit of throwing big numbers and you know tariffs are not always big numbers. He says, as you said rightly, he used the example of Harley Davidson where duties were more than 100 percent.
Then last month, he said about wine where duties are 150 percent. These are the highest tariffs of India. So India's highest tariffs are 150 percent.
Guess what's the highest tariff of the USA? 350 percent. Highest tariff of Japan 450 percent.
South Korea more than 600 percent. But this doesn't mean the highest tariff, they don't represent a country's tariff schedule. For example, our average tariffs are just 17 percent.
Our industrial tariffs are 13.5 percent. Weighted average tariffs are 9 percent. But those numbers are small numbers.
They will not interest you. Trump has to make noise. So he'll be using, he'll be picking and choosing.
I hope the same principle he applies while imposing duties on certain items and then we can talk better.
Govindraj Ethiraj: In the situation that he does become president, do you see that, let's say, companies who are more engaged or connected with global trade have to really be now on their feet or thinking very carefully about how things could evolve?
Ajay Srivastava: So my friends say that we should royally ignore Trump and basically he is into the heat of the elections. He is picking many things just for internal consumption. He may not take such actions.
Govindraj Ethiraj: Right, Mr. Srivastava. Thank you so much for joining me.
Ajay Srivastava: Thank you so much. Thanks for calling me.
Is there a slowdown in the air?
There are a series of data points that are now likely pointing to the economy slowing down.
While we have been reporting the inventory build up in passenger vehicles as one symptom, among others, there are now more signs, says veteran economic journalist and columnist Shankkar Aiyar in a new article in The New Indian Express.
In that he points out how on August 8, the Reserve Bank of India presented a bullish outlook for the economy, projecting GDP growth for the year at 7.2 percent. Governor Shaktikanta Das stated that India’s GDP will grow at 7.1 percent in the first quarter, 7.2 per cent in the second, 7.3 per cent in Q3 and 7.2 per cent in Q4.
Three weeks later, the Ministry of Statistics informed that India's GDP growth had slowed down to 6.7 per cent in the first quarter.
Elsewhere, companies like Bajaj Auto have already warned that the coming month will see slower sales. Reliance has already missed estimates in previous quarters.
Aiyyar also quotes a report published by analysts of Motilal Oswal Financial Services estimates that the second quarter will see the slowest earnings growth for Nifty companies in 17 quarters.
I asked Aiyar, why is this happening and what could be the solutions ?
INTERVIEW TRANSCRIPT
Shankkar Aiyar: Well, these signs have been there from the fourth quarter of the previous financial year and I've been sort of tracking some of the pattern of sales and spend. And so the belief was that because of elections, the government spending, which sort of leads CapEx in India, would be interrupted during the elections and then there will be a pickup post the formation of the government. Now, I've been tracking some data.
So I look at commodities, I look at consumer durables, but I look at what is at the frontier, which is 100cc bikes, oil, foodstuff, and how it impacts and I speak to a lot of people. So there has been a consistent sense among those I speak with is that while we recorded eight plus percent growth in the previous year, why doesn't it feel like it's an eight plus percent growth? And there's a lot of debate about that.
And increasingly in the last three months or so, it felt less and less like an eight percent growth. And then the data first came. So I think that it's still in the incipient stage.
I still feel that this is kind of where we were in 2018 and 19, which before we hit the bottom, in a sense, if one looks at the pre-pandemic data, one can see, you know, in 2018, 19, we were sort of waffling around, around the six plus percent area. Now, six plus percent is very good for most countries, not good enough for India.
Govindraj Ethiraj: Hmm. Got it. So one of the things you've also talked about is basically the driving force of government expenditure or capital expenditure, and that's declined both across states as well as the central government or federal government.
So why is that happening?
Shankkar Aiyar: Well, there is a weather element in this which one must recognize, which is you had unusually hot summer and an unusually wet monsoon. So August, I think, just like the hurricane season in the US, we seem to have extreme weather seasons in August and in May. So there has been a bit of that, but that aside, I think the government's ability to allocate, deliver, channel money, it's not enough for the government to sort of allocate something in the budget.
There has to be follow up steps to push capital expenditure and that would be preparation. So by the time the government allocates and by the time the state governments actually do the projects, it's like six months. So ideally, what the government should be doing is having ready to bake projects and then you allocate funds and move that.
And this has been spoken about, but I don't think it's getting done. And which is what is reflected in the data which is put out by even the finance ministry in its August note has sort of expressed concerns about this.
Govindraj Ethiraj: Right. So the more fundamental question then, again, you've referred to various companies in the private sector, for example, Bajaj Auto, which gave a warning of sorts that sales would be down. And that seems to be the most definitive because it accounts for all the slowdown which would otherwise happen because of festival reasons or religious reasons and so on.
I mean, this is a pre-festival. Why is this happening? So why is consumption in India slowing down?
Shankkar Aiyar: So first, I mean, I must put to rest one theory which will float in the next one or two weeks and how sales have picked up. Now, obviously, if you haven't sold in August or if you haven't sold in September and you sell in October, you will have to average the two months. And then, you know, so there will be that bump up in theorization that will happen whether sales actually translate or not.
Bajaj Auto is a very interesting company in the sense that it is export oriented, it has a large export base and it is very strong.
Govindraj Ethiraj: It has two companies like Maruti and Hyundai and so on.
Shankkar Aiyar: Yeah. In the sense that Bajaj exports to maybe six, seven countries in different emerging market economies where two wheelers are bought. It also is in India in the premium segment.
It's not so much a 100cc bike guy. It's a premium segment. So this brings into question this theory that, you know, frontier products at the lowest level are not doing well because people are, there is premiumization, people are moving up the value chain that comes into question.
So that may play out after Diwali. So what we have in India just now is that a property market, which is probably peaking a stock market, which is at the peak and sort of is wobbly because of various valuation issues and money is actually going to gold. So you have a consumption issue at the higher level or first two quintiles of the income pyramid, which is moving that way.
In the bottom quintiles, what is happening is high inflation, unemployment and other regular Indian issues are impeding the ability of Indians to buy, say, whatever, you know, and the consumption data shows that consistently. I mean, in an economy which is growing at nominally around 10 plus percent, the fact that corporate earnings are in the mid single digits or five or seven percent tells you the gap between potential and performance.
Govindraj Ethiraj: Right. And as you look ahead, people will also look for solutions of some sort. So one solution, I guess, which you've also referred to is obviously lowering of interest rates.
Could there be anything else at this point of time?
Shankkar Aiyar: So I have been a big proponent of two things. One is that the government desperately needs to create a national grid for perishables. Just like you can make milk available, milk is just as perishable as vegetables.
You have a problem of food price inflation, which cannot be fixed by monetary policy. So there will be investments required from village level to top level. So this idea of the national e-market, e-farm and all that is not is not flying anywhere.
I think it's grounded like a large duck and some lake. So what they need to do is fix that problem. Second is that they should have state governments ready, plug and play projects which can receive allocations and the funding and execution.
So actually CapEx moves. And yes, I think there has to be a call on how the Reserve Bank of India looks at monetary policy. I mean, everything aside, they have to explain why they are addressing food price inflation, and why they haven't been able to address it for the last two years.
You can't go on saying that it's seasonal, seasonal for two years. The second part of the story is if you can't address food price inflation, park it in the fiscal basket and say, figure this out what requires to be done. Meanwhile, on the basis of core inflation, they should move the interest rates.
I mean, if globally interest rates are coming down and India keeps its interest rates high, you are imposing a cost on the economy. And that cost is both in investment, in infrastructure. We are spending about 11 lakh crores.
So just calculate if interest rates went down by 50 basis points or up by 50 basis points. What is the impact on the balance sheets of companies and the government? So the other part is that you are imposing a cost on consumption.
Do we accept that we need consumption which forms 60 percent of the GDP? Yes. So then how do we manage that consumption?
I mean, you know, I think there is also a political issue here, which is there's far too much rara raga about how India is doing vis-a-vis the other countries and all that is good. That is true. We are a true outlier.
But Indian exceptionalism has to stop at the borders because India's relative merit depends on how well India does in India. It's not how well you do in comparison to others, but how well you do to your own potential. And I think they might want to hire some coaches from the Olympics teams who will teach this thesis firmly that athletes perform to their own potential.
So India needs to perform to its own potential. And that is something that is a larger conversation.
Govindraj Ethiraj: Shankkar, that's a great note to end on. And that's how I think you've ended your article as well. Thank you so much for joining me.
Shankkar Aiyar: Yeah. Thank you, Govind.
