Will Markets Pick Up on US Cues?
India's benchmark indexes were up nearly 1% on Friday, regaining a fair part of their losses in the previous season
On Episode 447 of The Core Report, financial journalist Govindraj Ethiraj talks to DK Joshi, Chief Economist at CRISIL Ltd.
(00:00) The Take: The De-dollarization Debate Heats Up
(05:09) Will markets pick up on US cues?
(07:19) Oil prices slide further on demand woes
(08:32) What is the arc of India’s GDP Growth?
(19:38) Bank credit to NBFCs slows
(20:39) US recommends severe duties on solar panel imports from SE Asia
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 2nd of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
Before we start, it is the second day of the first week and the first working day of the last month of 2024.
Does time not fly? What do you feel ?
The Take
A few weeks ago, the national secretary of the India Bullion & Jewellers Association told me he was expecting gold prices to be impacted by the BRICS countries or Brazil, Russia, India, China and South Africa forming their own gold exchange.
“BRICS is also trying to bring in its own currency, the BRICS countries are trying to trade amongst themselves. So what will be the value of the US dollars ? The de-dollarisation has already started taking place, he pronounced somewhat ominously.
Was it, I wondered ?
However, some 8,000 miles to the west, incoming US president Donald Trump must have heard him and similar voices because he released a dire proclamation over the weekend from Mar A Lago, his residence in Florida.
Go find another sucker, he said, vowing a 100% tariff on BRICS countries if they made any move to replace the US dollar.
He then sought a commitment from the BRICS countries “that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty US Dollar or, they will face 100% Tariffs and should expect to say goodbye to selling into the wonderful US Economy.”
The trigger appears to be the BRICS summit that took place last month in Kazan, Russia where participating countries promised all kinds of noises about an alternative currency.
They were evidently nudged by a report released by the Russian finance ministry and central bank which hinted at finding an alternative to the ` `weaponised dollar’.
India’s external affairs minister quickly clarified that India had no intent to go against the dollar and also seemingly distancing from the concept of a BRICS currency. The second part is logical of course as the concept of a BRICS currency or similar appears wild at this point.
It is however a fact that Indian policy makers have been talking of a de-dollarised world for a while now.
Which is a fair objective but many, including this writer, have argued this was too early in the game to be dreaming of rupee as a reserve currency and so on.
Barry Eichengreen, professor of economics at University of California Berkeley wrote a stinging piece two weeks ago saying that creating the euro took 34 years.
“It necessarily built on a half-century of other steps that deepened European integration and established shared political institutions,” he says.
But even then, he argues, the euro in any case has shown no signs of challenging the dollar, or even of modestly denting its global supremacy.
So while India is right in thinking in that direction, assuming all of this will fructify tomorrow, as any number of WhatsApp forwards would have you believe, is obviously in the realm of fantasy.
As Eichengreen says policy makers in emerging markets have in fact offered a long list of possible substitutes for the dollar. None of their proposals has borne fruit.
He then says how in 2009, People’s Bank of China (PBoC) Governor Zhou Xiaochuan suggested replacing dollar reserves with the International Monetary Fund’s (IMF) Special Drawing Rights.
It soon became apparent that no one was particularly interested in holding—much less using—an artificial asset pegged to an arbitrary currency basket.
The Indian ambitions were linked to India’s somewhat exclusive and high intensity purchase of Russian crude oil in the last couple of years and the desire to settle in Rupees.
Till it emerged the Russians started complaining.
Russia has accumulated billions of rupees in Indian banks which it can’t use, Foreign Minister Sergei Lavrov said in May last year in a report in Bloomberg.
“This is a problem,” Lavrov told reporters in Goa on the sidelines of the Shanghai Cooperation Organization meeting. “We need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now.”
So dedollarisation as a grand objective will perhaps take a back seat for some time, till the world figures out what is going on in Trump’s mind at any given point of time.
Trump’s weekend attack is a good time to also remind ourselves that we have many problems to fix before thinking of the rupee as a reserve currency and equating it to arriving on the world stage amidst much pomp and glory.
India’s growth is slowing sharply, company earnings are falling and economists are now using the word normalisation to mean that India does not really have the potential for blockbuster growth.
We have to improve our own growth and economic prospects before thinking of projects that are presently beyond our means and capabilities.
Even as we remind ourselves that Trump was voted in with the objective of Making America Great Again and would thus serve his base ahead of all other considerations.
Our top stories & themes
Will markets pick up on US cues ?
Oil prices slide further on demand woes
What is the arc of India’s GDP Growth ?
Bank credit to NBFCs slows.
The US recommends severe duties on solar panel imports from SE Asia.
Markets & More
India's benchmark indexes were up nearly 1% on Friday, regaining a fair part of their losses in the previous season and thus ending the week higher.
The BSE Sensex rose 0.87 percent during the week to 79,803, and the Nifty 50 jumped 0.94 percent to 24,131.
On Friday, the Sensex was up 759 points while the Nifty was up 216 points.
While the markets could react to the lower GDP numbers, corporate results have been reflecting the slowing economy already but the numbers as we will discuss shortly were a surprise.
The broader markets outperformed the Sensex and the Nifty as the Nifty Midcap 100 index climbed 2.5 percent and Smallcap 100 index rallied 5 percent over the week.
Elsewhere, foreign investors are still selling, at around $2.5 billion in November, attributed to rising US bond yields, a strong dollar and weak economic signals here.
In October, FPIs sold around $11.2 billion and are at a net outflow for 2024 of close to $2 billion now.
Meanwhile Nine of the 10 Adani Group stocks ended higher, with Adani Green surging 22% and Adani Energy climbing 16%, recouping some of the losses triggered by a U.S. indictment against key officials last week, Reuters reported.
The volatility in the Adani stocks over the last two years is of course something that would take some guts to ride out.
Wall Street continues to give off strong signals though it is not clear whether that will help here.
The Dow Jones Industrial Average and S&P 500 hit new highs on Friday amid a shortened trading day that capped a strong month for equities, CNBC reported.
The Dow climbed 188.59 points, or 0.42%, to end at 44,910.65. Both the Dow and S&P 500 notched new intraday and closing highs.
The Dow and S&P 500 have notched their best months of 2024, CNBC reported.
Oil Prices Slide
Oil prices traded lower amidst low volumes thanks to the Thanksgiving holiday and on uncertainty about OPEC+’s production plans.
Brent shed 1.3% to settle below $72 a barrel.
War risk premiums are seemingly lower as a cease-fire deal between Israel and Hezbollah is holding up at this point.
The dollar slowed after an eight-week winning streak, making commodities priced in the currency more attractive.
The big question is if OPEC and its allies will revive curtailed production amid expectations of a glut next year.
The group’s online gathering is now scheduled for Dec. 5, but OPEC+ delegates said earlier this week that talks have begun on delaying restoring output again.
Crude has traded in a tight range since the middle of October, flipping between weekly gains and losses.
GDP Growth
India’s Q2 GDP growth has come in lower than expected 5.4%, leading to several economists now cutting their full year forecasts for FY25.
Most feel that the second half of the year would witness a higher growth rate due to a pick-up in capex and consumption.
GDP growth for the full year as things look could be around 6.3-6.5%, sharply lower than the 7.2% projection of the Reserve Bank of India (RBI).
Columnist Shankkar Aiyar pointed out in New Indian Express that GDP growth was now the slowest in nearly two years.
Moreover, the reality of a slowdown has been manifested in high-frequency data on consumer demand visible across sectors and corporate earnings which, by one estimate, have hit a four-year low.
Indeed, a study by Motilal Oswal suggests Nifty earnings may be dismal and grow by a modest 5 percent this year. Worsening the picture is a steady erosion in urban wages impacting consumption.
Interestingly, he points out that the Reserve Bank of India on October 9 recorded that growth was slower in the first quarter, but asserted that GDP growth in the second quarter would touch 7.2 percent.
It turned out to be 5.4%.
Manufacturing and mining have fallen sharply and at this point agriculture, at 3.5 percent, is growing faster than manufacturing, Aiyar points out.
I reached out to DK Joshi, Chief Economist, Crisil Ltd and I began by asking him why these low numbers, going by how economists were responding, were a surprise ?
INTERVIEW TRANSCRIPT
DK Joshi: The GDP growth did surprise on the downside quite a bit. Some indicators were already showing some signs of weakness, but what surprised was that the growth came much lower than what the market was expecting, what the forecasters were expecting, and even what the central bank was expecting. So, what caused this slowdown is the key issue, and here I think if you look at the supply side of GDP, you find that last year we saw very good growth in manufacturing, we saw very strong growth in investments.
In the second quarter of GDP that came out for this fiscal, I think both of them have slowed down pretty sharply. So, some of the factors are transitory in nature for the slowdown, some of them are cyclical in nature. So, there is going to be a rebound in the next two quarters.
What I mean by transitory is that, for instance, there was very heavy rainfall, which led to slowdown in mining and which reduced the demand for electricity in the second quarter. The exports did not do well at all, and that also weighed on the manufacturing demand. So, these are temporary factors which have reversed already in the beginning of the second half of this year.
But there is also some cyclical factors. I mean, for instance, we have RBI raising interest rates that tends to slow the economy down, and that also is partly a reason for some slowdown in growth. And also, I think we've also seen high inflation, food inflation, and food inflation eats into the discretionary spending power, particularly of the poor.
So, that's also responsible for slowdown. So, I think the way I would look at this is that last year, in 2023-2024, we saw 8.2% GDP growth, which was way above the potential rate of growth that India has. And now I think it is returning to the potential, and our forecast was 6.8%. There is some downside to that number because the second quarter has come much lower than we expected also. So, clearly, I think there's going to be some downward revision. We are in the process of revisiting our outlook.
Govindraj Ethiraj: Right. So, you said two things. One is transitory and one is cyclical.
So, what are the cyclical components? And slightly more broader question, how do you know that something is cyclical?
DK Joshi: Well, cyclical means that if central bank is raising interest rates, I mean, they are engineering a slowdown in the economy because right now the situation we have is food inflation is high. The overall economy was doing reasonably well. So, there is a risk of food inflation transmitting to the other parts of the economy, the segments that are doing well.
So, to ensure that that transmission is muted or doesn't happen, I think central bank is trying to slow that part down. I mean, for instance, it raised interest rates and also tightened credit conditions. And I think that tends to slow down credit.
Via that, it has an impact on growth as well. So, that is cyclical in nature. Now, RBI is expected to cut rates going ahead, and that will engineer a cyclical upturn in that sense.
And also, I think the second factor for cyclicity is the fiscal policy of the government. Fiscal policy of the government is turning more restrictive in the sense the deficit GDP ratio is coming down, which means the fiscal impulse is weaker now. So, fiscal policy is also in a way contributing to the slowdown in economy.
So, these are more, I think, cyclical in nature. And I think as since economy was doing well, so it was time to reduce the fiscal impulse.
Govindraj Ethiraj: How would you look at cyclicality on the demand side?
DK Joshi: Well, demand, I think, so demand is essentially, if you're talking of consumption demand right now.
Govindraj Ethiraj: Yeah. I mean, how do we know whether it's picking up, stabilising, transiting?
DK Joshi: Well, I think, so let's look at it this way. So, what happened last year? In 23-24, private consumption fell to 4%, whereas the overall GDP was 8.2%. Now, that is linked to poor performance of agriculture because almost about 57% of the rural households are engaged in agriculture. So, if agriculture doesn't do well, that impacts their consumption. So, that is one part which this year agriculture is expected to do well. So, this will help in a way.
Government spending was not that strong last year. We are presuming that the government consumption spending will improve this year. It did somewhat better in the second quarter as well.
And then the expectation is food inflation will come down because the Kharif harvest has been good, although vegetable inflation is still quite high. But the general expectation that is built into the forecast that almost everyone is making is that the food inflation will come down and that will increase the spending power or discretionary spending power of households. So, in a way, compared to last year, I think agriculture will support consumption revival.
It's rural economy is doing better than the urban. Now, urban is getting impacted by high interest rates because interest rate penetration is higher in urban areas. Urban is also getting impacted by the fact that food inflation is high.
And particularly for the lower income segments, the food inflation reduces the discretionary spending power because they are facing an overall higher inflation than the higher income groups are facing because food has a much larger weight in the consumption basket of the bottom 20% of the people. So, it disproportionately adversely affects them. So, these are the factors which are influencing consumption in that sense.
So, consumption can pick up if government decides to spend more in the economy in terms of consumption spending, subsidies increase. I think those factors can lead to consumption pickup. It can also pick up if inflation comes down because I think right now the consumption in the lower deciles has been impacted more.
I think that's what the data shows. And that will get a pick, I think, if food inflation reduces. Food inflation still has an overall weight close to 40% in the basket and more so for the poorer people.
So, all these factors will play a role. So, what we are saying is because consumption slid so low last year, so there's a base effect which is going to pull it. And rural economy will support consumption this year.
Last year, consumption was coming from the urban areas. So, this year, it's going to reverse.
Govindraj Ethiraj: Right. So, what I'm trying to also understand, DK, is what is the arc of growth here? I mean, for example, let's say you said that, okay, we were at a high level, which was unusual.
And now we are at a more normal level. And I can see the word normalisation being used elsewhere too. So, that seems to suggest that this is how far it can go in terms of overall growth, give or take a few percentage points.
DK Joshi: Yeah. So, let me give a little bit of, maybe take a half a minute for the historical perspective. If you look at GDP data from 1991 to 2000, the year before the pandemic, the average GDP growth is 6.2%. So, you can say that the track record of growth has been of high growth, which is above 6%. And that seems to be the potential during that period. After that, I think we got the pandemic and we got ups and downs in the economy. But a decade before, I talked about three decades, but just a decade before the pandemic, we grew at 6.6% per annum. So, now I think given the fact that the focus has been on the supply side, which is creation of infrastructure, there is a productivity improvement that takes place from that. Also, digital infrastructure has moved really fast. I think we believe these will contribute to growth in the coming years.
And our assessment is that the potential rate of growth at this juncture is 6.7% per annum. And that is our long range forecast also for till the end of this decade. 6.7% is the potential. When you start touching 8%, then you're growing above the potential. When you come back to 5.4%, you're growing below the potential. Now, here, I think the transitory factors have a bigger role in bringing the growth down to below the potential right now.
And some of these will reverse in the coming quarter. So, that's why I think the average growth or the second half growth will be much higher than 5.4% that we saw.
Govindraj Ethiraj: We've seen a lot of push, let's say, coming in because of government spending or public expenditure. And that has obviously benefited growth overall. What's your sense when you look at the other factors in terms of, let's say, either tax collections or state finances, do you see the government or governments being able to maintain that high trajectory of public spending?
DK Joshi: Well, I think if you look at investments, there is a clear indication that government investments have been trailing right now, both for the centre as well as for the states. I think for the first half of the year, the central government investment is only 37% of what it has budgeted for the full fiscal year. So, it's trailing.
So, it needs to speed it up to push growth. And states also, I think we looked at 15-16 states and they are also, compared to what they budgeted, they are close to 30-31%, I think. So, which means that they have a lot to do in the next couple of months.
So, investment push from the government has been much weaker. Consumption push has been somewhat better than what it was in the first quarter of this year. But I think our sense is that both investment push and consumption push reflect more in GDP in the second half.
Govindraj Ethiraj: DK, thank you so much for joining me.
DK Joshi: Thank you, Govind. Always a pleasure.
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Meanwhile, India's Goods and Services Tax (GST) collection for November 2024 came in at Rs 1.82 lakh crore, in gross terms, exhibiting a growth of 8.5 percent on-year.
Bank Credit to NBFC Slows
The growth in bank credit to non-banking financial companies (NBFCs) declined sharply to 6.4 per cent year-on-year (YoY) in October 2024, compared to 18.3 per cent in the year-ago period, dragging down the growth of overall credit to the services sector, according to the Reserve Bank of India’s (RBI) sectoral deployment of credit data quoted by Business Standard.
Retail credit growth in the "other personal loan" category, which primarily consists of unsecured credit, fell sharply to 15.8 per cent YoY in October 2024, down from 18.3 per cent in October 2023, largely due to a decline in growth in other personal loans, vehicle loans, and credit card outstanding.
This of course is a continuing phenomenon now.
In November 2023, the RBI had raised the risk weight on NBFCs by 25 percentage points to pre-empt the build-up of potential risks in these segments.
The overall growth in credit offtake by the services sector dropped to 14.1 per cent YoY in October 2024, compared to 20.4 per cent YoY, largely due to reduced growth in credit to NBFCs and the trade segment.
The outstanding bank credit to NBFCs stood at Rs 15.36 trillion in October 2024, compared to Rs 14.44 trillion in October 2023.
US Duties On Solar
Solar imports from Southeast Asia are being unfairly sold in the US below their production costs, according to initial findings of a Commerce Department review which has suggested duties of as much as 271% to counteract the practice, Bloomberg is reporting.
The preliminary determination released Friday marks another victory for US solar panel makers that argued those cheap imports are harming their business and undermining government investments meant to nurture a domestic supply chain.
The crystalline silicon photovoltaic cells — and modules made with them — are coming from Cambodia, Malaysia, Thailand and Vietnam, countries which provide the bulk of US supply of that equipment today.
The investigations represent the latest bid by US manufacturers to confront overseas rivals. After similar duties were imposed on solar imports from China roughly 12 years ago, Chinese manufacturers responded by setting up operations in other Asian nations that weren’t affected by the tariffs.
