Markets Retreat After Gaining
The markets opened strong and then slipped as buying support was evidently weak and sellers were still calling the shots on Wednesday
On Episode 406 of The Core Report, financial journalist Govindraj Ethiraj talks to Vivek Kumar, economist with Quanteco Research.
SHOW NOTES
(00:00) The Take
(05:09) Markets retreat after gaining, as weakness persists
(07:37) Oil prices slip again on weak demand and China stimulus disappointment
(08:41) Gold buying in India slows as prices hit record highs
(10:00) Interest rates unchanged
(19:55) New formats for recognising climate risk in the financial system are coming
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 Thursday, the 10th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: Why is Nestle hiring an ex Amazon person?
The first assignment for fresh management trainees in Hindustan Unilever (HUL) would usually be to spend two months in a small and remote village, like Etah in Uttar Pradesh.
It's an era most FMCG veterans, from HUL and also heading other organisations, fondly recall.
Mostly for how it shaped their outlook and understanding of the Indian consumer.
But what happens when the consumer and the distribution pipelines start shifting, as they are now, from physical to digital or a complex hybrid of both.
Nestle India, maker of Maggi and KitKat has hired a replacement for 26-year-old company veteran Suresh Narayanan who retires next year.
Interestingly, the incoming CEO’s last job was with Amazon for 8 years though he worked with Unilever for more than 20 years before that.
The Amazon part may not be a coincidence.
There are two interesting themes at play in the succession playing out for Nestle India’s top job.
First, Nestle has chosen to go for an outsider. This is unusual for multinationals like Nestle, Hindustan Unilever and Procter & Gamble, among others, particularly in the consumer products space.
Particularly since these companies pride themselves on their internal growth and succession pathways which kick in almost the day a management trainee steps into the office.
To skip the internal succession route would suggest Nestle feels it needs skills the company might not have internally.
Following that, the new hire comes from Amazon and not for example, another consumer products company which sells a similar suite of products.
So it’s the ecommerce experience that is presumably important here, apart from all the other constant factors of brand, market and consumer experience.
This is a different world from the early days of a HUL management trainee I mentioned earlier.
HUL’s Etah ritual probably started in 1979 when then chairman T Thomas sent management trainees to stay there for two months to instil confidence among villagers to adopt artificial insemination of cows to improve milk yield.
Sudhir Sitapati, now CEO of Godrej Consumer, writes of how when he joined HUL in 2000, he and his batchmate were sent to Etah and their hosts were a poor farming family in Bakarai village.
Former HUL chairman M S Banga once reminisced to me about taking open air cold water baths in Etah as a management trainee.
Most consumer product companies would most likely have similar initiation rituals for their managers given that this is the part of India where the bulk of their consumers reside, whether for soaps, personal care, beauty or foods.
But digitally savvy consumers are increasingly likely to consume differently, even if they are in the same physical locations.
India has close to 800 million internet enabled smartphones with a robust payments system for transactions and the logistics infrastructure to deliver to most places or pincodes.
Significantly, for both HUL and Nestle, the share of ecommerce to total sales is growing and currently stands around 7%.
HUL’s CEO Rohit Jawa said recently that e-commerce was growing faster than modern trade and modern trade is outpacing general trade, a trend that seems secular.
E-commerce is segmenting into different models, including beauty commerce, grocery commerce, and quick commerce, he further told website Moneycontrol.
Nestle said a few months ago its e-commerce biz continued to accelerate with significant growth in quick commerce along with click & mortar, driven by brands such as Kitkat, Maggi noodles, and others.
This is not to say that a stay in Etah will not be useful or productive for a management trainee in a consumer products company.
But what they will try and learn in these places is likely to be different from their predecessors a few decades ago; a different lens and approach to selling.
In the earlier era, you had brand managers who focussed on brand marketing, proposition and then a distribution tail which included warehouses and distributors.
The structure of this actually goes back to the pre-GST era when states had different local taxes and transport of goods was highly constrained.
In the new era where direct channels are growing, the nature of distribution and marketing is changing fast.
For example, there was no role for influencers earlier because sales were driven by, lets say, physical outreach campaigns including in-shop posters, pamphlets and other merchandise.
Or conventional media like television and print advertising.
The new consumer product company CEOs have to think differently and perhaps unlearn many of the things that brought them to their current position.
Because the new markets have to be driven by understanding and execution that is driven top down.
The realisation is obviously there already but the change will take longer to come.
Nestle’s hire is a sign of times to come.
And that brings us to the top stories and themes of the day
Markets retreat after gaining, as weakness persists
Interest rates unchanged.
Oil prices slip again on weak demand and China stimulus disappointment
Gold buying in India slows as prices hit record highs
New formats for recognising climate risk in the financial system are coming.
Markets Slip Again
The markets opened strong and then slipped as buying support was evidently weak and sellers are still calling the shots on Wednesday.
The Sensex shed 167.71 points to settle at 81,467.10.
The Nifty50 was down too, around 31.20 points to close at 24,981.95.
Interestingly, while China portfolio flows are now wavering as investors are holding out for more sops or stimulus measures, that is not helping Indian markets, at least for now.
The Reserve Bank kept the repo rate unchanged at 6.5% for the 10th consecutive term and more on that shortly.
China Markets
Stock Markets in general can act like a spoiled child whose needs cannot be satisfied with a single bar of chocolate.
Chinese stocks listed onshore suffered their biggest drop in more than four years as traders grew impatient over the pace of Beijing’s stimulus measures and weak holiday-spending data hurt sentiment, Bloomberg reported.
The CSI 300 Index plunged 7.1%, erasing its advance from Tuesday, when mainland markets reopened after the Golden Week holidays.
The gauge held somewhat after the Ministry of Finance said it would hold a briefing on fiscal policy and then selling pressure resumed to lead to the first loss in 11 days, Bloomberg reported adding an index of Chinese stocks listed in Hong Kong fell further after sliding more than 10% Tuesday.
Earlier, the National Development and Reform Commission, China’s economic planning agency, used the government’s first briefing after a weeklong national holiday to announce that 200 billion yuan ($28 billion) in spending would be advanced from next year.
Analysts were however forecasting a fiscal package worth as much as 3 trillion yuan or more than ten times in the pipeline, Bloomberg reported.
“I don’t know what the chairman of the NDRC was thinking with this,” Alicia Garcia Herrero, Asia Pacific chief economist at Natixis SA, said hours after the briefing.
The point is that the markets are looking for a fiscal stimulus as well.
Put simply, hard cash.
“Frankly the more they wait to clarify, the worse it can be because people will realise there’s no fiscal side to this stimulus — that it’s all monetary, propping up stocks and so on. And that’s quite dangerous.”
Iron ore, base metals and oil prices fell and more on that shortly.
All this means is that China will be in play for longer, as a market that will potentially pull more capital away from other parts of the world and most notably India.
Oil Prices Fall
Meanwhile, oil prices also fell after China’s NDRC did not provide fresh stimulus measures.
This also illustrated once again how important the demand side of the equation is and how weak it is.
On the other hand, we are still facing heightened risk in the middle east and markets are still expecting and anticipating a strike by Israel on Iran’s oil facilities.
Global benchmark Brent crude and US benchmark West Texas Intermediate both lost 4.6%, snapping five-session rallies.
Iron ore and base metals slumped following the DRC's comments, and Hong Kong shares had their worst day since 2008, falling almost 10%, Bloomberg reported.
Chinese officials said that they would speed up spending while largely reiterating plans to boost investment.
Rebecca Babin, senior energy trader at CIBC Private Wealth Group told Bloomberg adding. “Geopolitical premiums tend to fade as fewer headlines emerge, even when underlying risks remain present.”
Gold Prices Up
With Dussehra around the corner and Diwali a little further down, gold buying typically would step up at this time of the year.
But that is looking difficult because gold prices have now hit a record peak again, also a sign of strong demand.
Remember, prices had come down after import duty cuts in the July Union Budget.
The duty cuts to 6% from 15%, brought local prices down to a four-month low of 67,400 rupees ($803.16) per 10 grams.
Since then, they have risen by 13.2% to a record high of 76,331 rupees, tracking a rally in global markets.
The president of the India Bullion and Jewellers Association (IBJA), told Reuters that with prices bouncing back right before the festivals, demand might end up being 20% lower than usual in terms of volume."
Association officials also said buying habits were shifting with consumers spreading their purchases throughout the year and focusing on price rather than waiting for specific occasions.
According to Reuters India's gold imports jumped 216% in August versus the previous month to 136 metric tons as jewellers anticipated strong festive demand.
But the subsequent price surge led imports to drop 60 tons in September, dealers have estimated.
Meanwhile, gold prices have softened in international markets overnight as traders watched US macroeconomic data.
Interest Rates Unchanged
The Reserve Bank of India (RBI) on Wednesday kept the repo rate unchanged for the tenth consecutive time at 6.50 per cent but changed its monetary policy stance to neutral from withdrawal of accommodation.
This was of course no surprise at all.
RBI Governor Shaktikanta Das said in his statement that despite the change in stance, the six-member Monetary Policy Committee (MPC) remains focused on bringing the headline inflation to 4 per cent on a durable basis.
Five out of six members voted in favour of holding rates, the Business Standard reported.
“Keeping in view the prevailing and expected inflation-growth dynamics, which are well balanced, the MPC decided to change the monetary policy stance from withdrawal of accommodation to ‘neutral’ and remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth,” said the monetary policy statement, adding that the change in stance provides flexibility to the MPC while enabling it to monitor the progress on disinflation which is still incomplete.
The RBI says it remains mindful of the risks to inflation in the months ahead.
It has highlighted adverse weather conditions, ongoing geopolitical conflicts, and a rise in select commodities as the key threats to its inflation forecast.
All eyes are on a potential rate cut in December, even as concerns remain on food price inflation.
Rating agency Crisil said the Reserve Bank of India (RBI) adopted a ‘neutral’ stance but kept the policy rate unchanged.
While this signals circumspection, it also underscores the likelihood of a rate cut in December.
It is obvious that high food inflation is constraining Mint Road. To be sure, non-food inflation stayed significantly below trend at 2.3% in the first five months of the current fiscal, Crisil said, adding the outsized US Federal Reserve rate cut of 50 basis points in September marked complete and a decisive turn in monetary policy among major central banks. Yet, for emerging market peers, domestic inflation concerns are at the front and centre.
Crisil also said they anticipated a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, in response to the expectation that food inflation will decline.
I reached out to Vivek Kumar, Economist with Quantico Research and began by asking him
INTERVIEW TRANSCRIPT
Vivek Kumar: Yes, as you rightly said, the pause on ripple rate continues, while there has been a shift in the policy stance from withdrawal of accommodation to neutral now. Now essentially what it means is that the RBI as a rate-setting body is now going to look at both inflation and growth, basically the balance, in a more neutral perspective. Earlier, as you can recall, the focus was primarily on aligning inflation to the target.
It's not that the objective has been done away with. I think what the governor tried to emphasize in the policy press conference was that a large part of that battle against inflation has been won, and it's now a matter of fine tuning. It's now a matter of alignment with the exact target.
So if you notice, for the first time in the post-COVID phase, the RBI's average of four quarters ahead inflation has dipped below four and a half percent. While I know there is an exorbitant amount of focus on what the RBI is forecasting for the year as a whole, for example, FY25, people do talk about the 7.2% GDP growth number, four and a half percent CPI inflation. But from an NPC perspective, I think the forward-looking estimates on a four-quarter rolling basis, basically what they do is look at one year ahead, what is the picture looking like.
And the forecast for FY25 have just about half-shelf life now left for them. It makes more sense to go beyond FY25 and take a peek as to what kind of thought processes RBI adopted. And here we notice that for the first time, the inflation forecast has dipped below four and a half percent.
So that is, at least for us, a clear indication of some success in terms of aligning the inflation with the four percent target. And this is happening at a time, Govind, where willy-nilly there is some downside risk to growth which has emerged, although RBI, we do accept that they have not put it in terms of numbers. And they have not also talked about in terms of risks, because their forecast continues to remain at 7.2% GDP growth. In fact, even the Q1 number of GDP for the next financial year is still more than 7% as far as RBI is concerned. They have not really factored that in. But given how globally things have changed in the last one month, especially being the elevated nature of geopolitical disruption, the downside risks to global growth is something that is now pretty much active and pretty much on the table.
That needs to be taken into account. There are also some very recent signs of slowdown in the Indian economy. If you look at the last one month of high-frequency real activity indicators, for example, core sector data that was negative, PMIs, while yes, we do accept that the levels are still healthy, but nevertheless, they are decelerating.
No doubt the levels per se are still healthy, but there is a deceleration. And even the tax collection, for example, GST, E-waivers, they are now showing some deceleration. Not entirely unexpected, because if you see where the market forecasts are, market is a tad below RBI in terms of the current year's GDP growth projection, even for next financial year.
So RBI doesn't give any forecast for FY26. But if you look at their monetary policy report, which comes out biannually, then they have a model-based estimate for GDP growth, as well as for CPI inflation. And that model-based estimate still talks about a 7% plus GDP growth in FY26.
And the market consensus on FY26 GDP growth is even lower, at somewhere close to 6.6, 6.7. So there is a gap between market's estimate or market's perception on growth and RBI's own perception on growth, or at least the anticipation. And this, at least as far as we are concerned, we believe will be one of the prime factors why the current shift in stance makes sense in an unsaid way. It hasn't been said, but this is what probably means.
And last but not the least, Govind, there is a lot which has happened on the global monetary policy front in the last one month, starting with the Federal Reserve. And not just Federal Reserve, now it's gone much beyond that. We did a very interesting exercise where we studied the rate movement of more than 150 central banks across the globe.
And what we found was that this is the third time in the history that the number of central banks easing their monetary policy is the highest. So it kind of looks like a coordinated central bank easing across the globe. And this is the highest since the global financial crisis.
The previous high was during COVID. That was understandably so. After that, the global financial crisis.
And it's the current episode which is the third highest in the history of central banks easing their monetary policy. So a lot has changed. And RBI is also kind of somewhere hedging that risk by stating that without the mutual policy is much more appropriate.
It gives them time. It gives them a flexibility to move in either direction. But all of accommodation stance was slightly more unflexible, slightly more rigid in comparison.
And the degrees of freedom were much more restricted in the previous times.
Govindraj Ethiraj: Last question. Looking at all this, I mean, you've talked about some of the indicators not looking so good and some slowdown setting in. What's your sense?
I mean, what should the monetary policy ideally be from your perspective, regardless of what the Reserve Bank does?
Vivek Kumar: So from our perspective, I think half of the financial year is already behind us now. And the kind of momentum that is probably in store, we should be able to hit somewhere close to the 7% GDP growth mark. The risk would probably be much more concerning for FY26 because that is where adverse impact of geopolitical disruptions plus the likelihood of a political change in the US, which raises many questions on the global trade front as well.
So all this would probably start manifesting in FY26 rather than FY25. And monetary policy, we all know, works with long lags. So whatever RBI does now on the interest rate side will have an impact on both real activity as well as inflation indicators, maybe four quarters down the line.
But that is the kind of lag which typically is associated with the transmission of monetary policy to economic variables. So we would ideally expect RBI to start acknowledging some of these risks and start pruning their monetary policy rate with respect to the expected inflation, which is expected to moderate further in the next financial year. And in fact, start taking into account some of the growth risks on the table as well.
So according to us, if we have to take a four quarter ahead or a six quarter ahead view, then one should ideally start calibrating the monetary policy rate lower. Having said so, Govind, there is one important...
Govindraj Ethiraj: Vivek, thank you so much for joining me.
Vivek Kumar: It's a pleasure, Govind. Thank you.
Climate Risk To The Financial System
In another sign and recognition of the importance of climate risk to businesses and projects in specific and the financial system in general, the Reserve Bank of India or RBI has stated that climate change is emerging as one of the significant risks to the financial system.
The RBI has also argued for regulated entities like banks to undertake climate risk assessments for ensuring stability of their balance sheets and that of the financial system.
Such an assessment requires, among other things, high quality data relating to local climate scenarios, climate forecasts, and emissions.
The problem the RBI says is that available climate related data is characterised by various gaps such as fragmented and varied sources, differing formats, frequencies and units.
To bridge these gaps, the Reserve Bank proposes to create a data repository namely, the Reserve Bank Climate Risk Information System (RB-CRIS) comprising of two parts
The first part will be a web-based directory, listing various data sources, (meteorological, geospatial, etc.) which will be publicly accessible in the RBI website.
The second part will be a data portal consisting of datasets (processed data in standardised formats). The access to this data portal will be made available only to the regulated entities in a phased manner.
Ratan Tata Is Unwell
Ratan Tata, chairman emeritus of one of India's biggest conglomerates, Tata Sons, is in critical condition in intensive care at a Mumbai hospital, two sources with direct knowledge of the matter said on Wednesday.
Tata, 86, said on Monday he was undergoing routine medical investigations due to his age and related medical conditions.
A representative for Tata did not immediately respond to a request for an update on his condition on Wednesday.
In a statement published on his social media profiles on Monday, Tata said he remained in good spirits and that there was no cause for concern.
Tata became chairman of the autos to steel conglomerate in 1991 and ran the group founded by his great-grandfather more than a hundred years ago until 2012.
The US Justice Department is considering asking a federal judge to force Google to sell off parts of its business in what would be a historic breakup of one of the world’s biggest tech companies.
