On Episode 1003 of The Core Report, financial journalist Govindraj Ethiraj talks to Aditi Nayar, Chief Economist at ICRA Ratings as well as Anindya Banerjee, Head of Research at Kotak Neo.

SHOW NOTES

(00:00) The Take

(00:50) Large Caps Continue To Take A Beating, Reliance Hits 18-Month Low

(03:04) Mutual Fund Inflows Hit Fresh Records

(03:58) Why China’s Gold Strategy Is Important To Note

(04:59) Why Inflation Is Nearing A 2-Year High

(12:33) Is The RBI’s Strategy Of Reducing Speculation On The Rupee Working?

(19:29) The Latest Nobel Prize For Economics Goes To…

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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 Tuesday, the 13th of October and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

Large caps continue to take a beating. Reliance hits an 18-month low

Why inflation is nearing a two-year high.

Mutual fund inflows hit fresh records.

China's gold strategy is important to note.

Is the Reserve Bank's strategy of reducing speculation on the rupee working?

And the latest Nobel prize for economics goes to…

Markets, The Rupee, Gold and Mutual Funds

Oil prices have started rising near two-week highs as expected following expanded military action in West Asia, mainly renewed Houthi militant attacks against Saudi Arabia, which also negated the somewhat positive news in the Western Hemisphere on potentially fresh Russian diesel exports to the United States and a Russia- Ukraine energy ceasefire. Saudi Arabia said on Monday it was dealing with more drones and strikes, even as it extended the suspension of operations at Riyadh airport, which has been hit by numerous missiles over the last week.

Saturday saw a deadly strike when 12 people were killed and more than 300 injured, and another strike on Sunday killed one person and injured nearly a dozen. Brent crude futures were up again on Monday to over $106 per barrel, the highest since September 29th. Indian markets, which opened positive on Monday morning, reversed their after flipping back and forth.

The benchmark indices were sharply down, with the Sensex falling 547 points to 71,924 and the Nifty 50 falling 157 points to 22,363. In the broader markets, the Nifty mid-cap and small-cap were up 0.08 and 1.4% each. Large caps continued to take a hammering and thus bringing down the indices.

Reliance Industries hit an 18-month low, down 1% on the Bombay Stock Exchange. Reliance shares have now fallen about 26% in 2026, compared to a 15.5% decline in the BSE Sensex, and it has corrected about 28% from its 52-week high level of 1,611, touched on the 5th of January 2026, according to Business Standard. Meanwhile, the rupee rose about 1% on Monday after the Reserve Bank announced several measures over the weekend to temper dollar demand in spot and derivatives markets.

It rose to ₹95.77 per dollar from ₹96.73 on Friday, being its best single-day gain since April, Reuters reported, and more on the rupees shortly. Meanwhile, India's retail inflation was higher than expectations at 5.54% in September 26 from 4.83% in August even as food inflation rose to 7.74%. Investors are still piling on into mutual funds as they seek better returns for their savings. Inflows into Indian equity mutual funds hit a five-month high of ₹38,000 or about $4 billion in September, thanks to record monthly investments despite overall market weaknesses.

Equity funds have drawn net inflows for a record 67 straight months. Overall inflows rose 31% from August, Reuters quoted data from the Association of Mutual Funds in India on Monday. Mid- and small-cap funds attracted record inflows at about ₹7,840 and about ₹9,000, up 12% and 13% each.

Inflows through systematic investment plans rose slightly to another record of about ₹32,500 or about $3.4 billion, which also in a way helped offset the foreign portfolio outflows of $3.75 billion in September, the Reuters reporter summed up. And if you were looking for signals on gold, here is one. China is importing record amounts of gold, and its central bank has bought gold for 23 straight months, and it's importing more of the precious metal than ever CNBC reported, adding that the buying spree reflects Beijing's push to cut its dependence on the dollar and Chinese households' lack of safe alternatives, with analysts expecting sustained demand for the bullion in a struggling economy.

The People's Bank of China added about 23 tonnes in September, its biggest monthly purchase in about three years. CNBC quoted State Administration of Foreign Exchange data, extending what it called the longest purchasing streak since at least 2015. So Chinese households and companies have spent about $158 billion importing more than 1,000 tonnes in the first eight months of 2026, and that exceeds the roughly $96 billion and 886 tonnes imported in all of 2025.

The variation you see is obviously because gold prices have shot up since then.

Why Inflation Is Nearing A 2-Year High

India's headline inflation rose to 5.54% in September from 4.82% in August, a development that could put pressure on the Reserve Bank to raise interest rates. A Reuters poll of economists had pegged the figure at 5.4%. Inflation has been rising for 11 straight months and has touched a 22-month high in September.

Food inflation was up 7.7% in September from 5.97% in the previous month, with prices rising faster in rural India than in urban India, as per data put out by the Ministry of Statistics and Programme Implementation. A quick throwback, in January inflation was 2.74%, so we've clearly come a long way. The September figure is based on the Consumer Price Index but with 2024 as the base year and is provisional.

Onion prices recorded the sharpest year-on-year increase amongst key items, rising about 108% in September compared to about 48% in August. I reached out to Aditi Nayar, Chief Economist at ICRA Ratings, and I began by asking her how she was reading the numbers and the outlook ahead.

INTERVIEW TRANSCRIPT

Aditi Nayar: See, we were expecting the inflation to actually harden in this month. We had projected it to go up to 5.4%, so it's coming a little bit higher than what we had thought. And the main reason for that is food prices which have hardened much faster than what we had expected.

Now, the context of course is we've had a terrible monsoon, and there is going to be some pain that lies ahead for some specific items as far as food is concerned. And you know, we are looking at the reservoir levels which have not replenished as much as last year, of course, but are also much lower than the historical averages. So the implications for the Rabi crop aren't looking that great right now.

So Kharif, the sowing got protected by the fact that we started off with very good reservoir storage and the fact that we had great rainfall in the month of July, which is the key month for the southwest monsoon. And now we are concerned about how the Rabi sowing is going to kick off and the implications of that overall across the food basket in the second half of the year.

Govindraj Ethiraj: So if you could break that down, for example, we've seen onion prices go up more than 100%, but parking that for a moment, how are you seeing the implication of what you just said, which is the fact that there's not enough rain, of course, and reservoir levels are lower than historic averages, on what could happen to crops and prices of those crops?

Aditi Nayar: So basically, what we're worried about is that when the reservoir levels aren't very good, and you're still in the midst of an El Nino, and potentially you could end up with a winter rainfall, which is subpar as well, then a lot of what the area that gets sown in the winter season tends to be rain fed. So if you don't have very good prospects for the winter rain and your reservoir levels aren't that great, then there is a possibility that the sowing could be a lot lower than last year for the Rabi crop, whereas for the Kharif crop, the shortfall was limited to just 1%. So that would have an impact on the overall amount of food grain, etc.

that we produce, the total volume, the area that gets sown, as well as the yields thereafter. So both would get impacted potentially, and sowing could get delayed beyond the normal kind of date. So that is also something that would have an impact on the gestation of the crop, etc.

Govindraj Ethiraj: So which crops would we be specifically looking out for in terms of price impact and therefore impact on household budgets?

Aditi Nayar: No, it's too early to say for the Rabi crop how the farmers are going to move things around. So, I don't think there's any point of looking at the Rabi impact. So far, two of the crops that we were worried about, like sugar and onion, at least in the month of October, their month-on-month trends are much cooler than the spikes that we saw in September.

So that's kind of like good news. So it's still a little bit of a wait and watch. And overall, like I said, the Kharif sowing really wasn't that bad.

And also, it's gone down by 1% y-on-y. But last year was quite substantial sowing. So I'm hoping that the price impact will not end up being that terrible, at least from the Kharif point of view.

You know, we're still going to be in wait and watch mode. So let's see how that pans out.

Govindraj Ethiraj: Got it. What about the non-food components of price inflation?

Aditi Nayar: See, broadly, there are upticks across a number of the divisions that we've seen. But when we look at the core or the trimmed core, those are still not at alarming levels. So it is food and the base effect related to that, that is creating a concern with the headline inflation.

Now, going ahead, we know crude oil prices have been elevated for a while now. If they're going to stay there, then at some point, the retail selling prices for petrol and diesel will have to go up. When and by how much?

That is going to have an impact on the first round and the second round for the CPI inflation trajectory.

Govindraj Ethiraj: You were seeing prices of fuels go up or the need for them to go up in the near term?

Aditi Nayar: Look, our sort of house analysis a couple of weeks back was that the marketing margins were negative on petrol and diesel prices, given the crude oil prices that were prevailing at that time. And subsequently, while there has been a little bit of easing, we're still looking at Brent in northwards of $100 per barrel. So if the situation is there for a short period of time, then that's something that can be absorbed.

But if it's going to prolong, then definitely at some point, it will be difficult to not increase petrol and diesel prices. So you don't know when and by how much they really need to be increased. And therefore, projecting the CPI inflation trajectory is a little challenging at this point in time.

Govindraj Ethiraj: Right. And what's your sense on whether or not there could be or should be an interest rate hike in response to rising inflation?

Aditi Nayar: So purely from the monsoon and food point of view, I think December, we will get a rate hike. So one more 25 basis points, I think is it's pretty much on the cards. If crude oil recedes from here, and there is no need for petrol and diesel prices to be increased, then maybe we could stop with the cycle just being 50.

But if crude oil doesn't soften, and we do end up with petrol and diesel price hikes, then we may need more rate hikes coming in from the MPC as well.

Govindraj Ethiraj: Some of the economists believe or seem to believe that we should not raise rates, among other reasons to protect consumption, particularly at a time like this. Where do you stand on this and why?

Aditi Nayar: So a couple of things. See, typically when food inflation goes up, and when if you are in a position where petrol and diesel prices need to go up, then because that's something that you buy literally every day or every week, it very quickly transmits into inflation expectations and into disposable income. So it self-corrects demand in any case.

Now, I don't think that's why my base case right now is that this could hopefully just be a 50 basis points rate hike cycle. I don't think necessarily that you want to go in for a 75 or 100 basis points rate hike cycle at this point. However, if you're going to be looking at your average quarterly CPI inflation being higher than 6% for a couple of quarters in a row, then obviously, when you look at your flexible inflation targeting framework, you know, stopping at 50 may be difficult.

Govindraj Ethiraj: Right. So how are you seeing the rupee in all of this and the pressures that that might put?

Aditi Nayar: See, pressure, of course, is that when you anyways starting off with crude oil prices being very high and the rupee depreciates, then it just keeps widening the chasm that you need to cross in terms of your landed prices of fuels and your retail selling prices. So obviously, it's sort of vicious cycle that you get into. The RBI has done a lot.

And today, the rupee did recover quite well. So I'm hoping that that is something that I can sustain.

Govindraj Ethiraj: Got it, Aditi. Thank you so much for joining me.

Aditi Nayar: Thank you.

Is The RBI’s Strategy Of Reducing Speculation On The Rupee Working?

Banks have asked the Reserve Bank of India to ease one of the key measures it announced over the weekend to support the rupee and scrap a threshold above which the rule comes into effect, a Reuters report said.

The banks have approached the Reserve Bank through a forex industry body, seeking the removal of a mandate that banks make a 20% cash deposit with the Reserve Bank of India for forex derivatives used to hedge current account exposures. Broadly, the Reserve Bank measures, which were announced on Saturday and were a surprise, are aimed at curbing corporate demand for forward dollars that have put pressure on the rupee. The rupee, as we said earlier, has jumped 1% on Monday in response to those regulatory moves, which also included redirecting oil companies' dollar demand away from the spot market.

Reuters quoted CT Economist estimating about Rs 60-70,000 crore or about $6.3-7.3 billion of liquidity that could be absorbed even if importer hedging reduces substantially. I reached out to Anindya Banerjee, Head of Research Commodities, Currencies, and Interest Rate Derivatives at Kotak Neo, and I began by asking him how he was seeing the Reserve Bank's largest strategy playing out.

INTERVIEW TRANSCRIPT

Anindya Banerjee: This is a part three in a series of measures which RBI has taken this year. It started in March and April when the measures were more directed towards basically restricting the access to the NBF market. Then it was followed by the coordination between the RBI and the government to incentivise inflows to XNRB, ECB and the FBI investment in the debt.

And finally, these set of measures, which is again to snap out whatever speculation is happening in the garb of hedging. So I would see this as a sequence of steps, not in isolation, because RBI is trying to ensure that there is no scope for a speculative attack on the currency. So that's why we have seen these measures.

Govindraj Ethiraj: And why do you feel that there would be or is a speculative attack on the currency?

Anindya Banerjee: Because there are three factors which are now operating in the world financial system. You have got higher oil prices. In fact, the entire oil market is completely dislocated.

Second, you have the US bond yields, the real and the nominal at multi-decade highs. You have the dollar index, US dollar overall, which is rising. So dollar oil is the three enemies of any emerging market currency.

Those are three in action. So in such environment, you tend to see a speculative pressure on currencies, which are large energy importers. And India is in that basket.

So just to ensure that the FX market is not prone to such kind of regulation, because I presume the amount of hedging which was happening from importers was also substantial over this year. Some of it is linked with a kind of, you can say, a herd mentality, which was coming into the market that the Indian rupee will keep on depreciating. And finally, it will break past the 100 mark.

So that's the reason why we have seen the importers hedging quite aggressively, something which we have not seen in the past. I think just the RBI was trying to bring some kind of check or a break in that behaviour.

Govindraj Ethiraj: Fed, and I'm going to come to one of the moves announced on Saturday in a moment. But conceptually, trying to inhibit speculation, has that worked in the past and not just in India or any other country?

Anindya Banerjee: So in fact, in that we have to understand that as long as your macroeconomic variables are in place, it tends to work. But at the same time, it depends on the macroeconomic background. So India has its positives and negatives.

Internally, the economy is strong. But externally, we have the headwinds in oil and dollar. But at the same time, we have to also look at the measures which have been used, like a new innovative measure which has come, which is basically like a forex reserve, which has been created for every long position on the forwards.

Now, what we have seen, we have seen this kind of a measure with the Chinese Central Bank has employed from time to time. And every time it has led to a substantial acquisition of the Chinese currency when they employed these kinds of measures. Because as I said, what happened in the market was the importers were very aggressively hedging their forward needs.

The exporter was holding back. So it created a demand supply mismatch. Now, with this measure, what's going to happen, the importer demand is going to come down substantially on the forwards.

And the exporter will be incentivised because of the higher forward premium. So make these measures effective in the short run, but in the medium to long term, it will finally come down to, again, oil, yields, and dollar. The capital flows, as we are seeing, it's already, I think, $11 billion in the last one and a half months outflow.

So that is not going to immediately change because those are largely linked with that trifecta. The oil causing higher yields. Higher yields means the interest rate differential is falling and that is taking capital out from the debt market.

Oil is also causing concern on the equity front. That's taking money out of the equities market. So that equation won't change immediately until and unless the external environment improves.

The capital flows will be a challenge.

Govindraj Ethiraj: Correct. Let me pick on one specific action that the Reserve Bank announced over Saturday. That's over the weekend.

And the banks appear to have responded by saying or asking the Reserve Bank to ease the measure to support the rupee and scrap the threshold above which that rule comes into effect. So could you tell us about what that measure means or rather is? And let me specify that it's the removal of a mandate that banks make 20% cash deposit with the Reserve Bank for forex derivatives used to hedge current account exposures.

So why is that a concern? And why was this likely not thought through?

Anindya Banerjee: As I said, this measure was basically quite successfully from time to time implemented by the People Bank of China. You can imagine it like as if it's how we operate on the exchange market. If you want position in derivatives, let's say futures, or in this case, we don't do forwards.

So there you have to pay a margin upfront. So as if the RBI is becoming the exchange and the banks have to pay the margin on behalf of the clients, the banks will of course pass on the cost to the client. So it's expected that 20% margin, if it is funded at 7% rate, it's 1.4%, 1.5% annualised is passed on over and above the forward premium. I think it is a thought through thing. It has been done with the whole intention that to snuff out the excess hedging, which was happening, as I said at the start, that are hedging much more than what we have seen in the past. And they were doing it because of the whole thought process that people keep on depreciating.

And it was doing that. So it creates a kind of a one-way bet in the currency. And just to break that pattern, RBI has come up with this innovative measure, though it is again, a leaf out of the...

Govindraj Ethiraj: People Republic of China, yeah. Anindya, thank you so much for joining me.

Anindya Banerjee: Thank you.

The Latest Nobel Prize For Economics Goes To…

American professors Robert E. Hall and Michael Woodford were awarded the Nobel Prize in Economic Sciences on Monday for their research on the microeconomic foundations of macroeconomic stabilisation.

Their work has demonstrated how economic models built on microeconomic foundations can help improve stabilisation policies by using these models. Governments and central banks can implement well-timed fiscal and monetary measures to reduce economic peaks and troughs. Hall is associated with Stanford University in California and Woodford is affiliated with Columbia University in New York.