Indian Markets Have A Bigger, Earnings Challenge
The Indian markets are weak, but not so much because of tariffs, which continues not only to hang over the markets, but swing in new directions every day
On Episode 647 of The Core Report, financial journalist Govindraj Ethiraj talks to Moses Harding John, President & CEO at IndusInd International Holdings Limited, Mauritius as well as Chirag Doshi, Executive Director, LGT Wealth India.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Indian markets have a bigger, earnings challenge
(03:49) How Wall Street’s big brokerages are projecting a 15% fall in S&P500.
(05:11) The rupee is close to its record lows, what is keeping it there, despite the dollar’s weakness.
(17:14) The Federal Reserve might actually want to cut rates, what does that mean for India and capital flows?
(23:56) SAP Labs to add 15,000 fresh jobs in Bangalore with AI focus.
(25:15) Build On Blockchain
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 Wednesday, the 6th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. The top stories and themes for today,
The stock markets have a bigger earnings challenge.
How Wall Street's big brokerages are projecting a 15% fall in the S&P 500.
The rupee is close to its record lows, but what's keeping it there despite the dollar's weakness?
And the Federal Reserve might actually want to cut rates. What does that mean for India and capital flows?
Elsewhere, SAP labs to add 15,000 fresh jobs in Bangalore with an AI focus.
The Markets On Wall Street
The Indian markets are weak, but not so much because of the tariff sword, which continues not only to hang over the markets, but swing in new directions every day.
Earnings are still a question mark and it would appear that if earnings were stronger than what they were, then the markets too would have responded, at least to some extent. The rupee is fighting its own battle linked to some extent to foreign portfolio flows into India, which are not picking up. So where will America's tariffs on India land finally? Remember the latest threat that's Tuesday evening is promising higher tariffs quite literally today.
It's tough to say because the demands presently are devoid of logic and are more a reflection of a geopolitical and foreign affairs breakdown rather than economic. And then there are areas where the tariff levels are, for lack of a better word, mind-boggling. President Trump told CNBC's Squawk Box on Tuesday that planned tariffs on pharmaceuticals imported into the United States could eventually reach up to 250,000, the highest rate he has threatened so far.
He said he will initially impose a small tariff on pharmaceuticals, but then in a year to a year and a half maximum, he will raise that to 150% and then 250%. Now, what that could do to America's healthcare system is something, of course, Americans have to think about. From here, there is too much time being wasted in debating the non-debatable.
For instance, Trump saying that India's economy is dead and pundits rushing to point out that it is not. It reminds me of my parents telling me as an eight-year-old that I was not a fool just because someone on the playfield called me one. India has, of course, rightly called out the U.S. for singling it out for its purchase of Russian oil when both the U.S. and the EU are also trading actively with Russia.
And all of these are, of course, or are open secrets. To recap, Trump on Monday night accused India of buying Russian crude oil and then reselling it at a profit. Presumably, he was referring to refined products.
He said that India does not care how many people in Ukraine are being killed by the Russian war machine and because of which he would substantially raise the tariff paid by India to the U.S. What he means, of course, is the tariff to be paid by U.S. consumers and then perhaps divided by both importers and exporters from India, that is. Back home on Tuesday, the Sensex was down 308 points to 80,710. The Nifty 50 was down 73 points to 24,649.
The broader indices were also down with Nifty mid-cap hundred going down about 0.4 percent and the small cap about 0.1 percent. More on the rupee later, but oil prices are now below 68 dollars a barrel, so softer than before, even as there appears to be rising clamour from Indian motorists against the blending of ethanol at 20 percent with petrol and the fact that this is not only affecting fuel efficiency, but also affecting various parts within the engine. Now, the blending has been happening for some time, but the response to it seems to have obviously come up now.
More on that later this week. But it does mean that India is technically importing lesser crude oil to match demand than maybe what it would have otherwise done. Meanwhile, Wall Street's biggest firms are warning clients to prepare for as much as a 15 percent market pullback as high equity valuations are conflicting with souring U.S. economic data, according to Bloomberg.
Morgan Stanley, Deutsche Bank and Evercore have all said that the S&P 500 index is due for a near-term drop, thanks to a darkening economic picture. Driving that concern is the expanding fallout from Trump's trade war, which also leads to slowing consumer spending, diminished economic growth, rising unemployment and likely inflation, which could go up, according to Bloomberg. It also quotes Morgan Stanley's strategist Mike Wilson's seeing a correction of up to 10 percent this quarter, as Trump's policies put more pressure on consumers and corporate balance sheets.
Evercore is expecting a 15 percent decline. Interestingly, over the last three decades, the S&P 500 has performed the worst in August and September, losing about 0.7 percent on average each month, compared to 1.1 percent gain on average across other months, according to Bloomberg data.
Where could the rupee go?
The rupee was down further on Tuesday, on the back of escalating trade tensions.
The rupee closed at Rs. 87.80 to the US dollar, down slightly from Monday's close of Rs. 87.65, but it did hit a low of Rs.
87.88 on Tuesday. Now, this is just a little shy of the all-time low of Rs. 87.95 hit in February.
Now, this obviously brings it very close to the all-time high of Rs. 87.95 hit in February. On the flip side, the rupee's recent slide may help soften the blow from higher US tariffs, according to economists who spoke to Reuters and other bankers pointed out that the rupee would have probably crossed the 88 mark if it was not for intervention by the Reserve Bank of India, or likely intervention by the Reserve Bank of India via government-owned banks.
So, the rupee is the worst performing major Asian currency so far this year, with peers like the Taiwanese dollar, the Singapore dollar, Thai baht, and the South Korean won all appreciating between 6 to 10 percent, while the rupee has declined 2.5 percent. Against a basket of Asian currencies, the rupee has declined about 3.9 percent since the 1st of April, according to HTFC Bank quoted by Reuters. I reached out to Moses Harding-John, CEO of IndusInd International Holdings and also Director of Reliance Nippon Life Insurance, and I began by asking him why the rupee was sliding, despite the dollar also staying soft, and what were the fundamentals of the rupee in his reading.
INTERVIEW TRANSCRIPT
Moses Harding John: See, the fundamentals of the rupee have been improving, if you see from the current account deficit number. The current account deficit of GDP has gone down to 0.6 percent, which is very promising. And last quarter Q4 of FY25, the current account has turned surplus.
So, the fundamental factor driven by the current account deficit is improving. The problem started on the capital account. For FY24, we have a surplus of around close to $64 billion, which has turned negative to around $10 billion.
That means we have encountered a $75 billion demand in the system. And the issue of my capital account started on September 24, when foreign portfolio investors started pulling out, and then came Trump's tariff issue in 2025. So, from then on, the rupee had been very volatile.
If you see from Q1, FY25, from $88 to $83.77 by May 25, and back to $88 now. If you align that to the dollar index, the recovery from $88 to $83.77 is in perfect alignment with the dollar index fall from $110 to $97. But the jump reversal from $83.5 to $88 has happened on the basis of dollar index recovery from around $96.5 to $100. So, this alignment is not perfect. That's why, if you look at during this time of losing $75 billion of capital account, RBI had been accumulating dollars for foreign reserves. That means at $83.5 to $85, the RBI has been buying aggressively. And RBI also is buying gold aggressively. So, the $75 billion shortfall plus the additions to the gold reserve and foreign currency reserve caused the problem of $83.5 to $88 between May and August. So, this is the overall thing.
So, it's all straightforward mathematics, nothing fundamental. But this Trump's tariff has caused negative sentiment on our export front, on the foreign currency inflows that's keeping the rupee on tenderhoods at this point of time. But my personal view is that the worry on tariff is I think short-lived.
So, rupee weakness beyond $88 is not sustainable. And the fair value probably as of now will be around $86.5 to $88.5. I think that's the range I would look for for the next couple of months.
Govindraj Ethiraj: I'll come back to that in a second. So, what has driven this kind of shift in the capital account?
Moses Harding John: Well, basically, the first thing that started was that Indian stock was overvalued. Number two, the sustainability of growth momentum, 6.5% to 7% when the world was shrinking. So, basically, it's not India 's negative sentiment.
It's a valuation adjustment on the stock market. And people also started looking at debt as a more attractive asset than equity. And foreign investors are more skewed towards equity, not debt.
So, that creates the imbalance in the asset classes that drove the rupee. And RBI also, in my view, in retrospect, RBI shouldn't have defended the dollar vigorously when it was below $85. Rather, they would have let it go till $80.
Then at this point, the bank would have stabilised around $83.5 to $85. I think that's one of the reasons I see the rupee at $88 now.
Govindraj Ethiraj: So, what do you feel is the current policy then? So, in the beginning, or not in the beginning, not too long ago, it was to defend. Then along the way, I think there was a sense that we should let go.
So, today, is it a little bit of both or more of the former?
Moses Harding John: See, if you look at the long-term perspective of India, the optimist is there, the rupee should head down towards $75 to $80. That's the right fundamental level for the rupee over time. But this transition from $88, $90 to $70, $75 should be triggered by real flows.
India turning into a sustainable current account surplus economy from the export boost. And number two, foreigners returning to the Indian markets. So, if the same, the $75 billion that goes out, if it comes in, then the dynamics changes.
So, the portfolio investors will come into India, seeing the next rerating process that could trigger in six to 12 months when we see the GDP number of 526, and also export boost, making India a current account surplus economy. So, fundamentally, I am very confident in the rupee. Structurally, the demand, the day-to-day lumpy demand supply flows, which RBI manages, having there should be not too much of tightness and probably letting a volatility of 3 to 5 rupees, rather than holding on to a tight range of say 85 to 86 half or whatever.
I think that plays a kind of uncertainty in the market.
Govindraj Ethiraj: And the other question is to do with how the rupee has been performing vis-a-vis other Asian currencies. Now, in the past, I mean, there was a certain, let's say, consistent movement between the rupee and other Asian currencies, maybe including Thai Baht or South Korean won and so on. But now there seems to be a clear divergence.
Is there a reason for that? Or does this go back to your earlier point about the Indian rupee marching on its own beat?
Moses Harding John: See, if I connect Indian rupee to Chinese yuan, which is the largest where we have a deficit also, I don't see a major impact. And comparing rupee to Thai Baht, which is a much smaller economy, and they are also aligned to the kind of tariff differentiation between India and them. I think that's where it will play.
Moreover, I think as far as the rupee is concerned, we should track Chinese yuan. And if you look at the euro currencies, they have gained tremendously. So the euro exports, Indian exports to the euro zone have gained tremendously because even the euro has gone from 80, 85 levels to three digit numbers.
So the benefits to the exporters are from the euro zone and importers got hit. And Chinese also, I think the importers tend to benefit because that increases the dumping. So overall, I don't see a major impact beyond the euro zone and China.
Govindraj Ethiraj: Right. And if I can supplement that last question. So all of this is obviously in some ways advantageous to India at a time when tariffs are so high, isn't it?
Moses Harding John: See, ultimately tariff, depending upon the pricing capability, if our exporters are able to raise the tariff and pass it on to the consumers of the US, then it's a different ballgame. So that's the balancing factor that comes into play between the purchasers and sellers. And what is the leeway available for an Indian manufacturer to price the tariff so that they remain profitable?
Because you can't bring the product at a loss. So that will cause the capacity squeeze in the domestic market. I think that's where the catch comes into play and where the uncertainty revolves.
We get clarity on the tariff in the next couple of months.
Govindraj Ethiraj: Moses Harding, thank you so much for joining me.
Moses Harding John: Thank you. Thank you. My pleasure. Thank you.
Earnings Stay Weak
Aggregate profit growth for some 38 of the nifty 50 firms that have reported so far is at 7.5 percent, according to Motilal Oswal Financial Services. Another brokerage, Jeffries, has said that full-year earnings per share estimates for 113 companies on the MSCI India Index have been trimmed by 1.7 percent, with growth now projected at 8 percent, according to Reuters.
Earnings growth for Indian companies have now been in single digits for five consecutive quarters, below the 15 to 25 percent growth seen between 2021 and 2024, which also led to a roughly 160 percent jump in the nifty 50 index, according to Reuters. Meanwhile, a new report from Kotak Institutional Equities has said that the first quarter 25-26 earnings season, that's the quarter that just went, shows a continued weakness in consumption, muted IT services demand, and weak loan growth for banks. It also said that aggregate earnings were broadly in line with their estimates and consensus estimates, and also that a muted outlook across sectors had caused it to initiate further cuts in consensus earnings estimates.
Companies also reported decent revenue growth, it says, but there's a bit there. The bulk of the beaten revenues came from one non-interest income growth of banks, that's large treasury income, one-time gain from investment income for big companies like HTFC and Reliance. In the case of Reliance, it was for the oil to chemical business and sale of assets.
Kotak also says that they expect the final aggregate earnings growth for the nifty 50 index to be in the mid-single digits, given the likely sharp earnings decline in the case of ONGC, amongst others. The report also says that the quality of earnings of the nifty 50 index for the current year remains poor, with construction materials and metals and mining companies contributing 32 percent and 25 percent of incremental net profits of the nifty 50, and consumer companies would also continue to struggle with weak volumes and profitability. Major auto companies also saw weak demand and a decline in margins.
Banks and IT services reported weak trends in line with expectations. Kotak also said that banks, or rather most banks, were comfortable with their asset quality, with only a select few banks highlighting weak asset quality in the unsecured retail and MSC segments, which presumably means broadly it is good news or at least relatively good news.
Two Interest Rate Events
There are two interest rate events coming up. The Federal Reserve in the United States, which could signal and then lower interest rates, the expectation that this could not happen or this would happen was not there a week ago. What has changed is a revised jobs report, which suggests more underlying weakness in the economy than previously thought, for which the head of the Statistics Bureau is being fired.
Now, the contradiction is interesting. The present administration in the U.S. wants lower interest rates and is also willing to sack the Federal Reserve Chair for not lowering them. The Federal Reserve might now want to reduce interest rates precisely because of that latest jobs data.
But this data is also what the administration is dismissing as wrong and politically motivated. So, who do you believe? And back home, we have more tariff challenges, which may have limited impact on the economy, but the knock-on effect, as we've been arguing, including on business decision-making, is huge and has already happened. So, will India cut rates right away or wait? There are two schools of thought here.
One school is expecting a 25-basis point cut right now. Another school feels not yet. I reached out to Chirag Doshi, Chief Investment Officer, Fixed Income at LGT Wealth India, and I began by asking him how he was reading the markets, given how things have changed so suddenly in the U.S. and what that could mean for overall flows, and then his views on the credit policy.
INTERVIEW TRANSCRIPT
Chirag Doshi: The data coming out from the US and the chatter is now that the Federal Reserve will have to cut rates where the probability of it earlier was a bit lower but now 89% probability that in October the Federal Reserve will move 25 basis points and by the end of this year 50 basis points of rate cut is expected. Now what happens is when the expectations of the market towards FOMC easing increases then the flows definitely start moving towards the US markets first. That's the initial reaction because you would want to capture the rally that would happen over there but having said that gradually what happens is that the flows to the other economies also start moving because you will see that when the Federal Reserve cuts the dollar weakens and then markets would say that the emerging market currencies or where there is yield where the yield spreads are much higher for example in India where the yield spreads are as high as 120 to 150 basis points you will also start seeing flows coming to those economies as well.
Govindraj Ethiraj: Right and I'm going to come to both the equity and the debt question in a minute. So the first event was the Federal Reserve event and you're saying even if the interest rate cut happens and it happens in October in anticipation a lot of flows will start moving around from what I've understood. In India too there is no specific expectation of a rate cut but there seems to be no hope perhaps if that's the right word because of the tariffs and so on.
What's your sense?
Chirag Doshi: I also agree that there is definitely a window which has opened up for the RBI to cut rates by another at least 50 basis points is what my view is. I think you have inflation which is totally under control. The inflation is heading lower than where RBI had projected it earlier.
Right so there is room which has opened up for the RBI to manoeuvre rates lower from where they are right now. Also the growth that the RBI has projected is likely to shoot below that and to keep an economy like India to keep on producing jobs because you would need to create jobs for the new workforce that is coming in every month every year. We will have to keep rates lower so that that economic spur remains and hence I believe that another 50 basis points minimum is what RBI will have to cut and if Fed also cuts then it will be more easier for the RBI also to cut it but having said that even if Fed doesn't move from here we believe that RBI will have to cut rates further.
Govindraj Ethiraj: And 50 basis points sounds somewhat aggressive and would you have said the same thing a couple of weeks ago?
Chirag Doshi: Yes after the 50 basis points of cut that RBI did in the last policy and we have a policy which is coming up tomorrow. I think what RBI is trying to do is first trying to fix the liquidity transmission or the rate transmission via liquidity in place. Liquidity is ample right now it's closer to 4 trillion INR which is floating around the system.
RBI would come up with a liquidity framework which is not touched since 2020. I think this will fix some of the frictional liquidity issues that the markets are currently facing. After fixing that I think they would basically go for a rate cut as of now because clearly the real rates are higher.
The UGIC committee report says that it should be anywhere between 1.25 to 1.5. Currently it is higher than that so that clearly there is a space and scope for RBI to move rates forward.
Govindraj Ethiraj: Right last question so what else are you looking at or looking out for at this point Chirag whether it's in fixed income or overall markets?
Chirag Doshi: So currently we are positioning ourselves in a neutralish way. We don't want to be very aggressive on the duration side nor do we want to be totally on the lower end of the curve. So medium duration bonds and that too via the AAA, AA, AA plus is where we are positioning. So medium duration I mean is four to six years duration is what we know currently the risk reward is in favour because things can you know go wrong as you rightly said earlier that you know in one week the market's view has changed for the FOMC.
If something goes bad in the coming months you will see that the markets will fully you know tailspin I mean you would see that the rates would go higher so better to be in the belly in the middle and we also like credits because we think that the credit spread is likely to compress because of the huge liquidity that RBI is infusing. So trade transmission will happen and we will see that to continue in the next six months to one year.
Govindraj Ethiraj: If I can supplement that last question so the liquidity surge that we're seeing can be of course good but is there any downside to it at this point?
Chirag Doshi: Not really I think RBI is managing it in a corridor so RBI also absorbs liquidity right whenever it is ample and and it feels that the markets are getting more aggressive with the rates. So if the rates fall below the deposit facility then it's an alarm for RBI which RBI doesn't allow. So it's managing it very well within that liquidity adjustment facility corridor so I RBI would keep on maintaining that so I don't see a lot of downsides to it except that you know the banks start to lend aggressively which they have yet thought that's what RBI wants them to push to do right with so much of liquidity in the system that's what RBI wants the banks to do.
Govindraj Ethiraj: Got it. Chirag thank you so much for joining me.
SAP Steps Up
While India's merchandise goods economy is in the limbo because of U.S. tariff threats, the services economy continues to stay strong. And how strong is perhaps best evidenced by the fact that a city like Bangalore, with possibly the worst traffic in the world, at least I think so, continues to see investments and commitments pouring in.
The German SAP Labs has invested about €194 million to start its second campus in Bangalore. Even as it sharpens its AI focus, the second campus, located on the outskirts of Bangalore, which presumably is something people will thank it for, complements the existing one in the city's technology hub and has a capacity of 15,000 people, according to SAP Labs India chief Sindhu Gangadharan. SAP has already about 14,000 employees in Bangalore, and this addition could take the headcount to about 29,000.
The company also said, according to reports, that AI will be central to its product strategy as it seeks to enhance both client efficiency and the productivity of its developers, and SAP Labs India is SAP's largest R&D location outside its headquarters in Waldorf, Germany.
Build On Blockchain
And up next on our Wednesday special Build on Blockchain, I'm joined by Srinivas Rao Mahankali, or MSR, that he's better known as. MSR has worked for over three decades as an entrepreneur, as well as an ecosystem builder, and that's what is important in today's context, where we talk about blockchain, but about what enables the creation of interesting and exciting blockchain technologies and what goes into it, which is entrepreneurs, skills, and the right ecosystem in which they can bring all of this together.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: MSR, thank you so much for joining me today. So you built businesses as well as ecosystems and both of your businesses you have sold. So you have been an active entrepreneur and built those businesses over time.
So these were not very quick exits and you also sold them to large enterprises like IBM and National Stock Exchange. So you have a sense on how to build businesses and then subsequently you also worked in creating the ecosystems that helps build these businesses and therefore you have a good understanding of all sides. So let me start by asking you MSR, you know when it comes to creating a innovation ecosystem and we will come to blockchain and blockchain linked solutions very shortly.
What are the key ingredients that are required and that are there today and what is missing particularly in the context of the problems that we are addressing whether in finance or supply chain or fintech solutions and so on?
MSR: So first of all Govind, thank you, it's always an honour and pleasure to be talking to you and I am really delighted to be on this podcast. So yeah, so coming back to the question about ecosystems, right. So when you, a lot of my thinking on building ecosystems, part of it was based on my own experience as a first time, first generation entrepreneur.
And obviously things have evolved, economy has grown, etc. The startup system, when we started back then the word startup was not something which a lot of people were familiar with but I think it's fair to say in the last decade and a half the whole startup thing has become mainstream. So I think some of my thinking was actually shaped by a professor whom I had the opportunity to kind of engage with, a gentleman called Professor Daniel Eisenberg, Dan Eisenberg, Hex, Babson, Howard and he's built a lot of ecosystems, helped build a lot of ecosystems around the world in terms of how do you create, one is obviously the startup ecosystem, the other is SME types and the third is around large systems and a framing which I have articulated post that is to build ecosystems you really need very simply put or to some extent even simplistically put, it's about creating a combination of good seed, fertile soil and a favourable climate and let me just kind of build on that. So when you talk about good seed it is about, essentially about creating an entrepreneurial mindset. I think in India while we have a large and fairly thriving MSME sector, we have now 170,000 plus startups but for a country of our size and with the kind of challenges we have, we probably need, we have last count, last published data on MSMEs is that we had about 63 million MSMEs but I would think post pandemic and some other things we'd probably be around 40 million MSMEs today and about 170,000 plus startups, we probably need maybe about a million startups to start with to really become truly entrepreneurial as a country. So when you talk about seed it is about getting more and more people to think about entrepreneurship as a choice of career as opposed to the typical job seeker mentality, so that's one.
When I talk about fertile soil, it is about things like access to credit, access to capital, access to talent, then in terms of the last one around climate, I think we've made significant advances in simplifying business but I think there is still a lot to be done from ease of doing business, in terms of essentially making it much more both employer and employee friendly, entry, exit etc and just simplifying digitising, decriminalising and rationalising many of our complex compliance related issues and the last one is also around the power of role models, so how do you create, how do you make entrepreneurship really aspirational and something which people would strive for. Now to get all of this to happen, there are multiple stakeholders the way I see it, obviously entrepreneurs at the front and centre of everything but there are multiple stakeholders involved, there is large business have to be involved, they have to kind of pay it forward, they got there starting small but have scaled up, they have a kind of you might call it even an obligation to support those starting up early type of thing. Second is you need obviously government from a policy lens and we talked about ease of doing business and so on, then funding, be it banking, be it the VC or PE ecosystem, then obviously the academic institutions from where talent and research will come out, then industry associations which can play the role of mobilising all these entities together, so that's how a lot of my thinking was shaped, how do you bring these different people together and try and create a coalition of the willing if you will, which can then see what needs to be done to first of all make entrepreneurship aspirational to create a kind of ecosystem and I created a framing when I was at Tihar, essentially from particularly from an early stage entrepreneurship standpoint, which is I called it the 6M2P framework, so the first M is around motivation and mindset, how do you get more people to think about it as a choice, second is obviously access to money or capital, third one is around mentorship, fourth one is around market access because typically both early stage startups as well as SMEs have significant challenges in getting market access and then access to talent or manpower, one of the M's to look at and then policy, how do you create a set of policies which make it easier to do business and so on. So broadly this is how one has thought about it and I think fair to say that we did get a few things done, but like always there's a lot more waiting to be done.
