On Episode 940 of The Core Report, financial journalist Govindraj Ethiraj talks to Aditi Nayar, Chief Economist at ICRA as well as Devender Singhal, Equity Fund Manager at Kotak Mahindra Mutual Fund.

SHOW NOTES

(00:00) Stories of the Day

(00:50) Indian Markets Stay Hesitant As Global Markets Hit Fresh Highs

(04:55) Air India Gets A New CEO

(05:34) Why India Is Revising Its GDP Projections Upwards

(13:51) Indian Auto Industry Body Backtracks On Ethanol Fuel Study

(15:26) The Case For Multi-Asset Funds

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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 Thursday, the 6th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes...

Indian markets stay hesitant even as global markets hit fresh highs.

Why India is revising its GDP projections upwards.

India's auto industry body backtracks on ethanol fuel study.

The case for multi-asset funds.

And Air India gets a new CEO.

Markets, Forex and the New Air India CEO

The global markets are once again hitting record highs. The stock 600, Europe's headline index, touched a record high on Tuesday, closing about 0.7% higher that day.

The stock tracks about 600 large, medium and small capitalisation companies across 17 countries. That's in Europe and is up 10% this year and is essentially the continent's equivalent of the S&P 500, according to CNBC. On Wall Street, futures were up again on Wednesday, building from the prior session.

SpaceX shares fell on Tuesday after it released its first quarterly report since going public in June. The space firm said that capital expenditures had jumped sixfold to $18.5 billion in the second quarter, but the figure was ahead of analyst expectations, though the majority of the spending was going towards AI. AMD, the other chip giant, also fell 7% in pre-market after posting adjusted earnings that were ahead of street estimates, but only slightly, according to CNBC.

But as we've discussed earlier, this is no longer a tech-only rally. We talked about Caterpillar yesterday, and now it's Disney, which rose more than 3% on better-than-expected earnings. Enthused once again by the prospects of a deal on the West Asia war, on Tuesday, the S&P 500 was up close to 2%, to close above 7,700 for the first time, and the Dow gained another 900 points for a record close.

Back home, Indian markets were hesitant once again on Wednesday as they weighed a positive undercurrent from earnings and the uncertainty in West Asia, with repeated promises of a deal on the horizon. The baseline assumptions are obviously shifting away from a worst-case scenario, with the Reserve Bank of India now projecting GDP growth for the current year a little higher at 6.7%, on more on that in a moment. The Nifty 50 and the Sensex rose as the Reserve Bank of India held rates at 5.25% and maintained a neutral stance, all of which was expected.

The Reserve Bank of India projected GDP growth at 6.7%, and headline inflation at 5%, compared to the earlier estimate of 5.1%. With all this in the background, the Nifty 50 closed up 9.75 points to 24,624, and the Sensex 152 points to 78,581. The broader markets were also up Nifty mid-cap 0.18 and Nifty small-cap 0.7. Retail demand for a stake sale in Life Insurance Corporation by the government lagged institutional interest, leaving the individual investor portion undersubscribed after the government increased the offering size to about $3.3 billion, according to a report in Bloomberg. The two-day offer for sale, which closed on Wednesday, attracted bids for about 69% of the shares, which were set aside for retail investors, Bloomberg said, quoting BSC Data.

Interestingly, there was strong institutional demand on Tuesday, which prompted the government to increase the size of the sale to 6.5%, from the initially planned 2.5%. Either way, this makes the transaction the country's largest secondary share sale conducted through a stock exchange platform and the second-largest equity fund raise. The rupee ended at its highest level in a month on Wednesday. Thanks also to lower crude prices, the rupee opened higher, though it fell to about Rs.95.11, its strongest closing level since July 7. India's foreign exchange reserves have now risen to a three-month high of Rs.692.9 billion, or about $693 billion.

As of July 31, Reuters quoted data from the Reserve Bank of India, issued on Wednesday. Reserves were up nearly $10.5 billion compared to the previous week, and this was the biggest surge since the week ended January 30. The Reserve Bank of India has got close to $37 billion via foreign currency non-resident deposits raised by banks through July 31.

The Reserve Bank of India governor also said on Wednesday that India was not considering an early closure of this programme, which is attracting deposits from India's roughly 35-million-strong diaspora, and the Reserve Bank expects robust inflows until the window shuts in end September, according to a Bloomberg report, which also quoted the governor, Sanjay Malhotra, saying, we do hope to get good, healthy flows going forward. Elsewhere, since we've been tracking this, Tata Group-owned Air India has announced former Ethiopian Airlines chief Tewolde Gebremaryem as its CEO, succeeding New Zealander Campbell Wilson. Air India's new CEO, Willie Walsh, also took charge this week.

Though his appointment was announced earlier, he came from the International Air Transport Agency, or IATA, and before that worked with British Airways and was a pilot. Needless to add, this is a tough time for India's aviation industry in general and Air India in specific.

New India GDP Projections

The Reserve Bank's six-member monetary policy committee kept the repo rate unchanged at 5.25% at its meeting from August 3 to 5. While maintaining a neutral policy stance, the standing deposit facility rate remains at 5% and the marginal standing facility MSF rate and the bank rate continue at 5.5%. The Reserve Bank also lowered the consumer price inflation forecast for the current year from 5.1 to 5% and raised real GDP growth projections from 6.6 to 6.7%. Now, despite the rise in input costs, core inflation, which excludes food and fuel, remained unchanged at about 3.9% during May and June, the Reserve Bank of India governor said on Wednesday at the credit policy meet, and also added that the core inflation excluding precious metals is expected to remain subdued in the near term, indicating that demand-side price pressures remain contained.

He also said the economy continues to demonstrate resilience despite an uncertain global environment. Private consumption remains robust. Investment activity is being supported by strong construction activity, capital goods production, and healthy bank credit growth.

External demand has also remained resilient with strong services exports complemented by recovery in merchandise exports. I reached out to Aditi Nayar, chief economist at rating agency ICRA, and I began by asking her how she was reading the latest policy statements and some of the concerns that she had going forward.

INTERVIEW TRANSCRIPT

Aditi Nayar: Our last GDP projection for FY27 is also 6.7%, although depending on the week and depending on the mood in West Asia and the crude oil prices, I may or may not think that there is a downside risk associated with that 6.7%, but that's where we've been for the last few weeks. And incidentally, our CPI inflation projection is also 5%, so you know, quite similar to what the MPC has now said. Very minor tweaks, just 10 basis points each, but I think they're kind of a signal that there is some amount of confidence in how the Indian economy is going to weather the uncertainty coming out of West Asia as well as the monsoon.

Govindraj Ethiraj: Right, and if you were to strip away West Asia, what are the other factors that you're looking at or zeroing in on, particularly domestic?

Aditi Nayar: Domestic is mainly an exogenous factor, which is the monsoon. So you know, we had a terrible June, we had a very good July. Now the sowing deficit has come down to low single digits.

At this point in time, if you had reasonable rainfall in the month of August, which is when the bulk of the remainder of the sowing has to happen, we'll probably end up with a sowing deficit of only 1 to 2%. So I think we're looking much better in terms of the agri situation than what we were five weeks back when we were looking at a 40% deficit in June. So I think that has definitely been a positive.

Of course, the monsoon may not end up being very good in August. That's still a risk. The El Nino is still meant to be a very harsh El Nino.

So we don't know how that's going to really play out in the next two months. But at least the situation is looking much less stressful or much less concerning than what it was at the end of June.

Govindraj Ethiraj: Right. And I know going into this credit policy, there was no expectation of any rate change or a rate hike. But what's your sense, not just within India, but from what you're seeing around the world?

Aditi Nayar: See, globally, the degree of transmission of commodity prices to inflation differs in different countries. And in India, one of the reasons that the transmission to our CPI is on the softer side is because we have retail selling prices of petrol and diesel, which are not changed very often. So that kind of protects you from the vagaries of a situation like what we're in right now.

So in the last six months, we've literally had crude oil prices going from sub 70 to more than 110 and back and forth. In fact, of course, as the Indian economy, we've had to deal with periods where crude oil prices have been above 90, above 100, above even 110. But this two-way volatility is relatively unexperienced in the past in such a short period of time.

So when you have this kind of two-way volatility, then certainly having a CPI, which is not so volatile by itself, that is something which is a positive factor for monetary policy and being able to cut through what is essentially an exogenous shock coming into the Indian economy. And also it then softens the second round impact because your first round impact itself, the petrol and diesel prices are high, not every day, the way that they would be in the US, for instance, but at thought out intervals, then even the second round impact gets contained. And when you're a price taker, I'm not really sure monetary policy should be having to react every time petrol and diesel prices jumped on $10 to a barrel.

Govindraj Ethiraj: Right. Okay. The other thing is, or the other point that the Reserve Bank Governor made was that they're not looking at curtailing or slowing down on the FCNR deposit schemes, which would suggest that they would still like lots more to come in.

What's your reading of that?

Aditi Nayar: Look, I think the numbers definitely so far are much better than what the initial expectations were. I still don't think we're clear on whether this is net flows or if this is sort of gross flows, because the whole question of our people breaking and rebooking existing FCNR deposits, definitely we need more clarity on that, because if this is our net number, then it's fabulous. But if it's a gross number, then we also need to know what the net number is.

Govindraj Ethiraj: Right. So my question is really, if we were to keep pulling in more dollars, I mean, and that was the objective. I mean, how do you see that affecting currency or given what it was supposed to do or whether it's achieving that objective?

Aditi Nayar: See, it was meant to stabilise the rupee. It's done that. The rupee, we're not again in that situation where every day you are worried about a new all time low being hit.

Right. So it's definitely stabilise that. We also have a large forwards book, which may or may not be getting matured simultaneously and basically absorbing part of the inflow which has come in so far.

So possibly with a little bit of a time lag, we'll have better clarity on some of these offsetting issues. In any case, even if there is a flood of money which comes in, let's say, towards September, as we're getting into a busy season, it's not going to be terrible for the liquidity situation for liquidity to be easy during the busy season. As it is, there's a lot of sort of concerns around the fact that deposit growth is lagging credit growth.

So maybe this would be something which will sort of lay out for the positive.

Govindraj Ethiraj: Right. As you look ahead, what are the kind of factors that are either concerning you or that you're watching with maybe more a positive frame of mind?

Aditi Nayar: See, let me put it this way. Every two months when we get the consumer confidence data from the RBI, both for urban and rural areas, it's just plunging. Right.

It's coming down steadily since January. However, high frequencies have held up really well. We haven't seen that volume impact coming through either from the basic high frequency data that we monitor every month or even from the Q1 results of corporates.

What has been affected is margins because prices have not been increased. You know, if you think a problem is temporary, you try to absorb it instead of pushing it, the impact on your consumer. That's exactly what happened in Q1.

Unless you really have corporates start to feel that higher commodity prices are permanently here to stay, not permanently, but here to stay for, you know, not just a week or two, but for a much more prolonged period of time, you will still see the inflation impact getting absorbed by margins and you may still continue to see volume growth being very good. But even in this round of the data, we have seen the consumer confidence coming down. Business expectations are also down.

It's just not really showing up in terms of the volumes yet.

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

Aditi Nayar: Thank you.

SIAM Backtracks Letter on E20

The Society of Indian Automobile Manufacturers, known as SIAM, which represents the major auto companies in the country, has withdrawn a letter written to the Ministry of Petroleum and Natural Gas that had flagged concerns over contamination of E20 fuel that caused problems with vehicles, citing the need for further authentication, according to a Business Standard Report. In a statement, the SIAM said that the communication in question was part of routine and ongoing technical deliberations that take place between various stakeholders, including industry bodies, oil marketing companies, auto OEMs, or original equipment manufacturers, and testing agencies. The industry body also said that some of the numbers quoted in the communication needed authentication through collection of elaborate data from various regions across the country, followed by a comprehensive consultation with their member OEMs.

Now, the auto body's backpedalling is obviously not helping the cause since it seems implausible a body that has technically more access to data around engine performance than anyone else. It is now saying the referred numbers reported in the media needed authentication. In the now withdrawn letter, SIAM had apparently noted that investigations revealed there was corrosion or wear caused by high chloride presence traced to the fuel used in vehicles that suffered issues with E20 fuel, while highlighting the highly detrimental effect of chloride to engine parts.

Besides, SIAM members had also flagged excessive moisture-condensing E20 fuel dispensed at retail outlets, stating that high moisture above 1% causes separation of fuel and paralyses the vehicle immediately after fuelling.

Multi Asset Allocation Funds

Multi-asset allocation funds are hybrid funds that must invest a minimum of 10% in at least three asset classes and could include equity, debt, and an asset class like gold, silver, or real estate. Multi-asset funds have also done well in the last year thanks to a big jump in gold and silver prices, which have of course since retreated but are still higher than where they started from.

Many fund managers have also been projecting multi-asset funds or schemes as an option in this current market, or particularly this current market, which has been somewhat flat for a while. So how are multi-asset funds looking like right now? What are the prospects? And how are fund managers themselves approaching these diverse range of assets? I reached out to Devinder Singhal, equity fund manager at Kotak Mutual Fund, who manages about $5 billion across multi-cap and multi-asset strategies. And I began by asking him how he was viewing the universe right now.

INTERVIEW TRANSCRIPT

Devender Singhal: Asset allocation has always been an integral part of any client's portfolio. So whether you do it directly with your own counsel or with the help of an advisor, but there are vehicles which can do it for you as a one-stop shop. So multi-asset allocation falls into that category.

And I think if one has to look for the risk-adjusted returns over a longer period of time, this category fits very, very nicely in an investor's portfolio, giving her access to equity, debt, commodities, sometimes reads and bids and international equities also. Going forward, if you have any other asset class, that can also be incorporated. So rather than, you know, having multiple vehicles being used, if you want to have just single vehicle and diversified asset, this is one category to put your funds to.

It gives you that peace of mind, agility to move across assets as and when need to, and it's a much more tax-efficient way to build long-term wealth for the investor.

Govindraj Ethiraj: Right. And what's your sense of how things have been in the last few years? Because there has been some scepticism about the ability of multi-assets to sort of beat the market.

Devender Singhal: Actually, on the contrary, last one year, multi-asset as a category has a phenomenal event. Reason being that equity markets were basically sideways and on the downside trend. If you look at the larger market or the Nifty 50 or the Nifty Midcap, the returns are basically low, significantly or even negative.

Whereas the commodities part of the portfolio has done exceptionally well, despite the correction which we saw post-February. So in fact, multi-assets as a category is one of the best performing category over the last two years therein. But the unfortunate part is that people have only associated multi-assets with precious metals contributing to the growth, which is not the case.

You know, at various points in time, each part of the portfolio has contributed meaningfully to this asset class's performance.

But, you know, we have been having one multi-asset for the last 24 years almost. And any investor who has been there in a fund on a 7-year rolling plus, the minimum return has been 10%.

If somebody has been there for more than 10 years, you know, at any point in time, the minimum return is close to 14%. So unlike, you know, that these asset classes are volatile, but if you be there on a longer term, then the near-term volatility, you know, paves way for long-term build generation.

And as an investment community, we have delivered that, you know, multi-asset have delivered better risk-adjusted returns for the investor, many a times beating the equity market returns also.

Govindraj Ethiraj: Right. Okay. So as you look ahead now, how is the approach sort of playing out or how is it likely to play out?

Devender Singhal: See Bhuvan, I think at the core of any long-term build generation, equity has to be a large contributor to that. We have a similar opinion right now that over the next 5, 6, 10 years, you should see a low double-digit at least returns on the equity side, and which is a very high probability. Because that is the kind of nominal GDP growth rate we expect.

That is the kind of corporate earning growth rate we expect going forward. So your equity exposure would be the mainstay. Your gold and silver would add some bit on that.

But, you know, not all asset classes should be from perspective returns. You should look at which asset class can lower your risk put on the portfolio, which can do better when other things are not doing good, and which is where, you know, asset class diversification comes into picture. But I think as a category, if you look at it, anybody who's having 65-70% on the equity side, then the balance between gold and debt, I think low double-digit returns is definitely possible with some bit of luck, I would say.

Govindraj Ethiraj: So let me ask the same question or a similar question from the other side. How do fund managers keep abreast of such a diverse set of assets or asset classes? I mean, traditionally you would say, okay, an equities fund manager is focused on equities and therefore looking at a universe of stocks.

Fixed income is looking at a universe of debt instruments and so on. But when you say multi-asset, you're obviously looking at all of this multiplied by maybe four or five times. So what are fund managers or how are fund managers managing this?

Devender Singhal: A very interesting question, Govind, and we have a method to this. So for the asset diversification part of the fund, we look at quantitative tools, which helps us determine how much should go in which asset class. Once that is decided, then you have an equity specialist, you have a debt specialist, and you have an arbitrage specialist, which looks at individual part of the portfolio.

And so much, for example, we have a commodity specialist also. So once the equity allocation is decided, the debt allocation is decided, how each part of this portfolio would be managed is there with the experts, which is why you see multiple managers in this asset class category.

Govindraj Ethiraj: Got it. And you mentioned real estate as well. Are there sort of any categories that are looking more promising at this point as you look ahead?

Devender Singhal: No, I totally believe that, you know, for a longer term basis, equity should be the mainstay of the portfolio. But I did mention that, you know, as a tool to diversify, we can also look at, you know, investment classes like REITs and INVITs in this fund. Unfortunately, the market is not very developed, and the liquidity also is, you know, very poor and come in patches.

So we are also testing waters, but I'm sure going forward, this category would also develop and would give you the kind of liquidity which an institutional investor would require to have it actively in the portfolios.

Govindraj Ethiraj: Right. You know, to kind of ask you a more current question, we've had or we seem to have had a good quarter one in terms of performance. And I guess the markets are waiting for something like that, because for many companies, it's been a turnaround of sorts after many quarters of, let's say, less strong performances.

So how are you seeing that? And how do you see that playing out into stock prices and the markets overall?

Devender Singhal: Yeah, so Govind, exactly that is how it is paving out. Q1 numbers have been generally much better than what the market perceived them to be or expected them to be. The even better part is that the commentary which is coming out from the conference calls post results is even better.

Companies are expecting a better second half than what the first half would be. So I think this would basically pave way that earning growth momentum should be pretty strong. I think with some bit of luck on the energy side, and you know, with the forex, we should basically, have a pretty decent FY27 and definitely FY28.

I don't think any earnings cut for sure, which was there at the start of the year. Yes, I think energy has basically been a pretty volatile part of it. And we are dependent on that to a large extent.

So hopefully with this situation getting resolved, I think we should have a breather on that count. So overall, yes, good times ahead for the corporate earnings to be.

Govindraj Ethiraj: Got it. Devender, thank you so much for joining me.

Devender Singhal: Thanks, Govind.