On Episode 917 of The Core Report, financial journalist Govindraj Ethiraj talks to Puneet Pal, Head - Fixed Income at PGIM India Mutual Fund as well as Sanjay Lazar, Aviation Expert.

SHOW NOTES

(00:00) Stories of the Day

(00:50) Falling Oil Prices Lift Markets Again

(04:08) How Are India’s Fixed Income Markets Responding To Rising Bond Flows?

(13:18) Indigo Launches A Lite No Cabin Baggage Fare, Will This Work In A Market Like India?

(20:12) Meta Wants To Offer Cloud Infrastructure Like AWS And Azure

(21:50) Another Deep Seek Like AI Model Is Here

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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 feedback@thecore.in.

Good morning, it's Friday, the 3rd of July, and this is Govindraj Ethiraj, broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

Falling oil prices lift markets once again.

How are India's fixed income markets responding to rising bond flows?

Indigo launches a light no-cabin baggage fare. How will this work in a market like India?

Meta wants to offer cloud infrastructure, just like Amazon AWS and Microsoft Azure.

And another deep-seek-like AI model from China is here.

Markets, Oil, Tech Stocks and IPOs

The optimists in the market believe the second half of this year should see a pickup in earnings, even as foreign portfolio investors return, even if marginally.

Now, this of course depends on which sector we're talking of. Kotak Institutional Equities, for instance, put out a note yesterday saying that they believe, in the case of IT services, the first quarter of the current financial year, or the quarter gone by, will be weak on revenues impacted by the West Asia crisis and elevated productivity pass-throughs in managed services contracts. June is a seasonally stronger quarter, says the note, but not this time.

And many large companies in IT services will struggle to hit the midpoint of their full year 26-27 guidance. It also says that the rapid improvement in frontier model capabilities forces us to bake an additional gen-AI deflation, cutting revenue estimates by about 0-1% and fare values by up to 21%. And it says that challengers will continue to outperform incumbents, there is some good news, at least for those looking to invest in IT stocks.

So, TCS amongst the incumbents and CoForge, Hexaware, and Indigene are amongst the challengers, according to Kotak. Now, as we discussed yesterday, foreign portfolio investor selling has slowed down in recent weeks, pointing to the possibility of some reversal in the works. Some fund managers are already saying they're reducing their exposure to markets like South Korea and Taiwan, which had run up hugely and have switched to India.

South Korea specifically has seen massive outflows and also pressure on its currency, a situation somewhat similar to India, though in South Korea, as we know, most of the action is confined to two stocks, Samsung and SK Hynix, while in India it's been pretty distributed. But the key thing is this, which is oil prices that are continuing to fall, including for the third day on Thursday, as concerns over supply disruptions eased after Qatar said Iran and the United States had made progress in talks over the state of Hormuz, according to Reuters, adding that Brent futures were more than $1 down to about $70.50 a barrel. So around $70 a barrel on Thursday afternoon, which is also the lowest level since February 27th.

And back home, a falling oil price trajectory is helping Indian markets. The Nifty 50 and Sensex extended gains, with the Nifty 50 ending up 169 points up at 24,175, and the Sensex 579 points to 77,502 on Thursday. Broader markets also were positive.

The Nifty mid-cap and small-cap were up 0.48 and 1.25% up. While the outlook for coming months is less bearish than it was a few weeks ago, markets will definitely be hit with a massive IPO rush. Some 238 companies are planning to collectively raise an estimated Rs 470,000 crore through initial public offers, making it one of the most active issuance pipelines in recent periods, according to a report in Business Standard, quoting Prime Database.

The pipeline, of course, includes names that we've been talking about, like Jio Platforms, National Stock Exchange, SBI Funds Management, among others. Interestingly, IPO activity was resilient in the first half of the current calendar, which is really the six months that just went past. And 27 companies raised about 22,000 crores, according to Prime Database.

The IPO rush is obviously betting on and leaning into the same domestic liquidity that has given foreign portfolio investors an exit running into over $50 billion in the last year.

How are India's fixed income markets responding to rising bond flows?

Index-eligible bonds attracted the largest monthly foreign inflow since the category was introduced in 2020. Global funds invested $5.2 billion in June, nearly offsetting the $5.5 billion they withdrew from local equities, according to a Bloomberg computation.

Overseas demand has strengthened after India offered tax breaks for overseas investors, buying government bonds, and also took other steps to support the rupee, including by attracting or making NRI deposits in India more attractive. While the bond inflows do provide a reprieve, they are unlikely to revive overall capital flows on their own, according to that report. Nevertheless, what are the other trends in the fixed income side that are visible right now? And what are the markets telling us about interest as well? I spoke with Puneet Pal, head of fixed income at PGIM, India Mutual Fund, and I began by asking him how he was seeing the markets right now.

INTERVIEW TRANSCRIPT

Puneet Pal: So I think obviously the sentiment has improved in the bond markets. I think that's the starting point. And apart from the slew of measures which the government announced in terms of giving exemption on capital gains and withholding tax to the FBIs and RBI increasing the scope of fast QT's eligible for participation by FBIs, especially at the longer tenure, I think the immediate gainer has been the bond market in terms of the sentiment improvement and also the fact that we got a kind of a peace deal in the Middle East and as a result of that we have seen a very sharp fall in crude oil prices from above $90 right now to close to $70. So all these factors have helped the bond markets across the curve.

We have seen the yields coming down quite sharply. I mean the 10-year benchmark yield, if we look at, it's down by almost 20 basis points, more than 20 basis points since the start of June. So we have seen a decent amount of, I will say, fall in the bond yields right from our near bond security to our 10-year and the longer and 30-40 years, in fact, where the yield drop has been pretty sharp.

Govindraj Ethiraj: And is there a phase that you could contrast this with in the past where you've seen similar movements in yields?

Puneet Pal: Not really because the last time we had such a kind of situation when S&R deposits were encouraged by RBI was back in 2030. That time it was accompanied by rate hikes on the contrary to what we have seen from RBI right now, which is on hold in terms of policy rates. So I will say that there is not much of a comparison.

That time our CPA, in fact, was in double digits. We were not an efficient targeting centre then. The efficient target came after that.

That time it was more a question of manholes instability, which RBI tried to address by both rate hikes and encouraging dollar flows. This time I think it's more of a measure to soothe the market nerves and to address the immediate problem of a BOP deficit, which was anticipated prior to these measures. Now, in fact, with these measures, the expectation is that probably the BOP will be in a surplus this year.

So I think it's more of a tactical measure, which RBI has taken. It doesn't indicate any macro instability because our inflation is far lower. It's within the inflation targeting framework that we have right now.

The only concern was the outflows driven by FDI sitting in the equity markets and a lack of a MAC FDI inflow, which was basically zero over the last two years or so. And BOP, which was negative over the last two years. So I think it's more to address the external account rather than anything else.

Govindraj Ethiraj: Right. I mean, this is sort of, if you were to take a step back, as you said, you know, we are seeing net foreign portfolio outflows in equity and net inflows in debt. What does that tell us about the way portfolio investors are looking at India at this point of time? And even as they're sort of drawing a line between debt and equity?

Puneet Pal: It's more a question of relative positioning because in debt, if we see right now, we have YTD from January this year, we have seen more than 5 billion of inflows coming in. Majority of them have come in this month, which is June. I mean, we are talking on 1st of July, but overall, I think it's a question of relative positioning, I will say, because after this tax break, so tax assumptions, which government announced, obviously, FDI is finally attractive.

It also makes inclusion in the Bloomberg Global Aggregate Index a possibility. So in that, I will say that the debt inflows have come up, whereas on the equity side, probably it's a question of the relative positioning and other things. But from a debt perspective, it's more a question of tax assumptions.

Obviously, this makes the return to the FDI is more attractive. And also the fact that the increased probability of inclusion in the global indices, especially the Bloomberg Global Bond Index.

Govindraj Ethiraj: Right. And once that happens, I'm assuming the expectation is that there would be more flows because it gets hooked to passive funds. My other question is, how are you seeing flows from a domestic investor point of view?

Again, I'm talking about fixed income now. And have there been any shifts or changes or trends, particularly this year?

Puneet Pal: Not really. So we have not seen too much of inflows into long duration bond funds. Domestically, again, the taxation remains unattractive from a fixed income standpoint as compared to equities because here it's a marginal rate of tax, which is applicable.

So you're not seeing any shifts in the longer duration or major inflows coming to longer durations.

Govindraj Ethiraj: Right. And what about investing? I mean, the fixed income investments on the private side, are you seeing any changes there or any differences?

Puneet Pal: I think that space has been growing, though we at PGM, we don't manage any private credit funds as such. We don't have any offerings in that space. But overall, that space in particular has seen a lot of interest and a lot of flows right now.

But over the last three, four years, they have been strong inflows into that space.

Govindraj Ethiraj: Right. And as you look ahead, what are you looking out for? I mean, you did mention that, you know, once, I mean, now that there is some semblance of a peace process in West Asia, obviously leading to lower crude oil prices as well, there is a sense that things will get resolved.

So parking that aside for a moment, what else is on the horizon? What are the signals that you're looking out for?

Puneet Pal: So obviously, I think the next figure is going to be the monsoons, how they fare over the next couple of months. Because in the month of June, we have seen almost 41% of deficit rainfall and a very high degree of, I will say, concern regarding how it pan out in the next couple of months. So the monsoons, even if they do improve, it can definitely impact sowing in some of the areas.

So I think from a food inflation point of view, which directly has an impact on fixed income investments or returns or the projection of monetary cycle going ahead, I'll say that monsoons and a derivative of that, which is going to be food inflation, will definitely have an impact. And secondly will be how the global bond yields behave. Because we have seen major central banks taking a slightly hawkish stance in terms of monetary policy.

We have seen the ECB hiking rates. We have seen the Fed actually indicating a rate hike and the markets in the US are factoring in no rate cuts further. Perhaps they are factoring in right now a rate hike by the US Fed.

In the emerging market space, we have seen Indonesia hiking rates by 100 basis points, right? So I think domestically, it's going to be monsoons, the impact on food inflation, which probably will be clear two months down the line. And also in relation to the global market developments on how the worldwide bond yields behave.

So these are the two crucial factors for fixed income investments going ahead.

Govindraj Ethiraj: Satchin Goyal Right. And therefore, how are you seeing the interest rate environment in India? I know we are on hold right now, but do you think that could change?

Puneet Pal: In fact, the RBI going out after the MPC policy, I think he had an interaction, I think in the last week, wherein he pushed back against expectations of an immediate rate hike. And also the fact that the crude oil prices have fallen. Our inflation is within the target which RBI has within the inflation targeting framework.

So we do foresee interest rate hikes in the second half of the year, which is October onwards. We expect 50 basis points of policy rate hikes purely from our point of view that our interest rate differentials that the rest of the world are narrowing because they are hiking and we are not. And also the fact that even if the inflation were to undershoot the revised RBI target of 5.1 for FY27, even then we need to maintain a real positive rate of return in the sense that the real rates are right now negligible if we take 5.1 as the forecasted inflation and five quarters as a repo rate. So we need to make our real rates positive. And from that perspective, we expect 50 basis of policy rate hikes beginning the second half of the year.

Govindraj Ethiraj: Puneet, thank you so much for joining me.

Puneet Pal: Thank you very much.

What is Adani’s Latest Venture into Mining?

Adani Enterprises and Abu Dhabi's international holding company plan to invest about $11.5 billion in an aluminium project in Odisha state. The MOU includes building a value chain consisting of a 4 million tonne per annum alumina refinery, a 2 million tonne aluminium smelter, and 1 million tonnes of downstream facilities, according to a presentation of the agreement signing event that was broadcast live on Thursday and reported in this context by Bloomberg. When executed, it would mark the country's largest foreign-directed investment in mining and metallurgy, according to an official in the Odisha state government.

This is also Adani Group's second multi-billion dollar investment announcement this week. Earlier this week, Adani Ports and Special Economic Zone got a $1.4 billion investment commitment from Mediterranean Shipping Company in the form of in the Visinjam port project.

What is Indigo’s New Fare Bracket?

And some local aviation developments, IndiGo, the airline said on Wednesday it had introduced lower fares for passengers travelling with only cabin baggage, even as carriers try and unbundle services to lower their ticket prices.

Last month, Air India also introduced a basic economy fare without complementary meals for price-conscious travellers. The new fares for IndiGo kicked in on July 1 and will be eligible for travel starting July 15. So the fare will provide passengers with a lower base price, with an auto-assigned seat at no additional cost, and cabin baggage of up to 7 kilogrammes.

Now this could lead to some logistical issues as I see, particularly at the point that you will be at the gate, about to enter the aircraft or maybe at check-in. So how will it pan out or could it pan out? And the other question is really if fuel prices are already turning around, including for jet fuel, will all of this matter? I reached out to aviation expert and former Air India customer relations team lead Sanjay Lazar and I began by asking him how he was viewing these latest schemes.

INTERVIEW TRANSCRIPT

Sanjay Lazar: Yes, very interesting developments in the Indian market. We've seen both Air India and on the back of Air India Indigo announcing this light fare. It's an idea whose time has come.

It's something that is in operations across Europe, frankly. Very Southeast Asian low-cost carriers also do it. So this is the way to go.

I've just travelled on, you know, full-service carriers like British Airways, Air France, KLM within Europe and all of them have similar no-meal, no-check-in baggage fares. They also have hand baggage fares. I mean, it's one way of reviving demand which has dropped year on year from last year because of the war, because of the fuel prices and the hike in tickets which have gone up by 20 to 30 percent.

So there is a drop in some demand. I think it's a very interesting move that Indigo has made and I do see that it's meant to compete with Air India. Remember, Air India has cut back about 20 to 27 percent of domestic routes.

Indigo also has slashed back some because there are empty seats on aircrafts. The way to revive demand has got to be lower fares because fares have gone through the roof now and they're really unaffordable. People are now looking at alternates like Vande Bharat and stuff like that in India.

So I think it's a great way to go.

Govindraj Ethiraj: Right, and jet fuel costs have now come down and we also just saw an announcement of Air India cutting fuel surcharge. So it's likely that in the next few days, if not weeks, we'll see overall pressure on the fuel side of things coming down. So how do you see that panning out then for airlines and particularly who are competing with each other?

Sanjay Lazar: Absolutely right. Air India has reduced its fuel surcharge from 280 to 200 I believe on North American and Australian routes and the fuel sales that they had for UK, Europe was 205. It's now brought down to I think 125 as per their notice.

I see this as a positive development. Also remember we've seen a cutback in capacity to North America and Europe by all, whether it's Indigo or Air India, you know they've slashed back. I do see this also as a measure of showing the customer that oil is dropping so we are leaning back those charges.

Airports have taken a large hit also because there's a lot less traffic that's flying out. Therefore we will see a little softer demand right now but I think in the next three months, and I had said this a couple of months ago, two quarters of hell. So probably by Diwali or late end of the year you will see you know a robust traffic demand picking up because there is always some tension with you know war in the Middle East and you know US being involved.

So that has played a lot on the minds of passengers. I think that will slowly dissipate. I do see fuel going you know south as well as prices.

We will see a drop very soon in the tickets as well.

Govindraj Ethiraj: Right and do you see any challenges on the operational side? You know passengers don't like to be herded into different categories and sections until they get used to it of course and how do or how could airlines better manage this?

Sanjay Lazar: Well you know it's not that as though they're reinventing the wheel. This has been done, it's being done probably a separate counter for people with handbags or just check in online with because Indigo has said they will pre-book them in seats. So that's one great thing.

They just have to check in online, they've got hand baggage and they go. It'll probably come on their boarding card as a separate category altogether. So operationalisation I do not see.

I think it's where the meal and non-meal for the full service carrier Air India happens. That's where it's a little more tricky but they've managed it so far. I've travelled on a meal non-meal slash flight already and I've been pretty okay on that.

I've also seen how British Airways and how Air France handles it. It's amazing and in fact in Europe they literally don't even give you any service.

Govindraj Ethiraj: So you're hunting for food anyways. Right so you were travelling just now, you said you were in Europe and you've been travelling with a bunch of airlines. How are you seeing or sensing the mood in terms of travel overall?

Do you think it's going to start coming back? This is also in the challenges we've seen in West Asia.

Sanjay Lazar: I do believe airlines in Europe and the UK are pushing really hard to bring back the customers. Wherever I travelled I did see a lot of empty seats. So let's understand that in peak summer we are not seeing that many full flights everywhere.

Most airlines have cut back on their routes. They're going to have to generate, find ways to generate demand again. It's not that it's dead, it is there.

It's the fear of war at the back of passengers' minds that has to dissipate and that will. I believe India will probably be the strongest rebound because you know Indians love to travel. You know we saw it post-COVID.

So they'll just be waiting for the fares to come down to normal and then run away on holidays right through Diwali right through next year. So I'm hoping fingers crossed that we can see a bounce back for Air India, Indigo, Akasa. And mind you Akasa has picked up a great deal during this period where Indigo and Air India have sort of you know slowed down their domestic monopoly so to speak.

So it's very interesting times in aviation. I think the next three months will be worth watching and I think a lot of innovation. We'll see a lot of innovation to drive the customer back into the aircraft seat.

Govindraj Ethiraj: So you're saying airlines like Akasa gained by not cutting back in this period? Definitely.

Sanjay Lazar: Remember Air India, Indigo were giants in those metro route sector. You know they literally every 15 minutes or 20 minutes or 30 minutes there was a one or the other flying Air India Express, Air India or Indigo at all times. So with the slight cutback you've seen the other airlines have got visibility.

Akasa being most prominent and a great comfortable flight, great aircrafts, everything you know really superb. So I can see them you know shining star on the horizon.

Govindraj Ethiraj: Sanjay, always a pleasure speaking with you. Thank you so much for joining me.

Sanjay Lazar: Thanks.

What is Meta’s New Foray Into Cloud Infra?

Meta Platforms or the owner of Facebook is developing plans for a cloud infrastructure business that will sell access to AI computing power and models, potentially taking on giants like Amazon Web Services, Microsoft Azure and Google Cloud.

According to Bloomberg, Meta, which has been rushing to secure expensive data centres and infrastructure to fuel its own AI ambitions, is forming a business to generate revenue from excess computing power sold to outside customers, according to sources who spoke to Bloomberg. Speaking of Meta, India has asked its subsidiary and arm WhatsApp to justify the implementation of a planned feature covering usernames and to freeze the rollout in the country, escalating a crackdown on messaging anonymity that began with Telegram, according to a government letter seen by Reuters. Earlier this week, WhatsApp said it had begun a phased global rollout, including in India, of the feature, which lets users reserve a unique username and eventually message others without sharing their phone numbers.

I don't know whether you have already secured your username, but I have. The government earlier temporarily blocked Telegram partly by the same anonymity concerns that it's now raised with WhatsApp, according to the Reuters report. The letter gave WhatsApp three days to respond and barred the rollout until the consultations with the government concluded.

Now, WhatsApp has about 500 million users in India and therefore, the whole matter is something that will be watched closely. WhatsApp said that it had built multiple layers of defence against scams into the feature, including limits on how many new people an account can contact and blocks and repeated attempts to guess a user's name.

What is the New Chinese AI model Overtaking OpenAI and Anthropic Models?

A model called GLM 5.2, launched last month by Beijing-based startup Z.AI, may be closing the gap in terms of interest for other Western interests, particularly after DeepSeek sent shockwaves last year.

GLM 5.2 has Silicon Valley buzzing with its coding and agent capabilities or the ability to execute complex tasks with minimal prompting that almost rival leading US offerings at a fraction of the cost in what some experts are calling a mini DeepSeek moment, according to the Reuters report. And here's the interesting part. The app has already climbed the user charts on third-party AI developer platforms like OpenRouter, where it now ranks above Anthropic's models, while executives from cloud data platform Snowflake to venture capitalists like Mark Andresen have lauded its abilities.

US President Donald Trump's former AI czar David Sachs said that we now have a Chinese open weight model that is as good as the currently available models from OpenAI and Anthropic.