On Episode 880 of The Core Report, financial journalist Govindraj Ethiraj talks to Pratik Gupta, CEO and Co-Head, Institutional Equities at Kotak Securities Ltd.

SHOW NOTES

(00:00) Stories of the Day

(01:00) Why markets are bracing for RBI moves on depreciating rupee

(03:01) Why oil markets could enter the red zone very soon

(07:18) Fuel price hikes are necessary but not sufficient

(24:11) The global palm oil market is in turmoil with Indonesia exerting state control over prices.

(24:54) Nvidia reports $58 billion net income on $81 billion sales, up over 85% in last quarter.

Check out our Live Earnings tracker: https://earnings.thecore.in/

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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 22nd of May, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes..

Why the markets are bracing for the Reserve Bank of India's response to the depreciating rupee

Why oil markets could enter the red zone very soon, fuel price hikes are necessary but not sufficient, and why foreign portfolio investors are staying away right now.

The global palm oil market is in turmoil with Indonesia, the largest exporter, exerting state control over prices.

NVIDIA demand goes parabolic, says founder Jensen Huang, as company reports a $58 billion net income on $81 billion of sales, which is up 85% over the previous year.

Markets, The Rupee, Oil and Bonds

The Reserve Bank of India is considering, expectedly, options to stabilise the rupee, including an interest rate hike, more currency swaps, and raising dollars from overseas investors. Top officials at the Reserve Bank have held a series of internal meetings to discuss possible courses of actions following the rupee falling to a fresh low of almost 97 rupees to a dollar this week, according to a Bloomberg report.

As the core report discussed on Thursday, these options are also the most likely and least panic-inducing. Other ones include restrictions on overseas investments, though that and a possible reduction in the liberalised remittance scheme, LRS, for Indians taking money overseas can actually have the opposite effect and accelerate the flight of capital. Indonesia, as we mentioned yesterday, and the Philippines have already raised rates.

While these are smaller countries, they too have high import dependency on crude oil like India. Indonesia's rupiah has fallen 12% against the dollar under President Prabowo Subianto, who has pursued what Reuters describes as an interventionist agenda that has been unpopular with investors draining foreign exchange reserves to their lowest in two years. The rupiah was down barely a day after Indonesia lifted rates and stocks have fallen as the move to centralised exports deepened investor concerns that have already put Indonesia at risk of a credit rating downgrade.

A report from Standard Chartered's India economists put out on Thursday say that they are expecting 50 basis points of rate hikes to 5.75% against 5.25% right now in this year, that's 26 to 27 beginning in June, on a higher consumer price inflation view at 4.9% as opposed to 4.7% thanks to the spillover from the revised wholesale price inflation forecasts of 8.1% against 4.7%. So essentially a 50 basis rate hike possibility. The report says a hike would help to anchor sentiment and consequently any second order effects on the rupee and or inflation. It also emphasised the urgent need for policymakers to roll out interim measures to raise US dollar funding limit the import bill to contain the pace of depreciation.

Meanwhile, a Reuters report says that the oil market likely has about three months before tightening supplies begin to bite in earnest, pushing inventories to critical lows, triggering sharper price gains and ultimately forcing demand destruction and broader economic pain. Oil markets could soon enter a red zone as global stocks deplete and as demand picks up during the summer travel season, CNBC quoted the head of the International Energy Agency speaking on Thursday. IEA Executive Director Fatih Birol said the single most important solution to the Iran war energy shock is a full and unconditional reopening of the vital state of Hormuz.

If it fails to reopen and no new oil is coming online from the Middle East, an ongoing drawdown in global stockpiles combined with an uptick in demand during the summer travel season means oil markets may be entering the red zone in July or August, Birol said. Meanwhile, oil prices did edge up higher on Thursday as investors were monitoring the peace talks between the United States and Iran, while supply tightness and US inventory drawdowns provided some support, according to a Reuters report, which added that Brent was trading around $104 per barrel following Iran's announcement of steps to tighten its control over the state of Hormuz. Back home, the markets were still broadly holding, though a little weaker than Wednesday.

The Nifty 50 and Sensex were lower. The Nifty 50 ended 4.3 points to 23,654, and the Sensex was down 135 points to 75,183. In the broader markets, the Nifty mid-cap was down but very slightly, and the Nifty small cap up about 0.6%. A Business Standard report quoted VK Vijay Kumar of Jiojit Investments saying that the fourth quarter results have been so far good.

The negative impact of the energy crisis will be felt in the first quarter of fiscal 27, but if crude prices continue to decline or decline, the remaining quarters will be reasonably good. Meanwhile, the Reserve Bank of India was active in the market on Thursday, deploying heavy dollar sales via state-run banks before markets opened to halt a persistent slide in the rupee after several all-time lows, according to bankers who spoke to Reuters. The rupee hit almost 96 to the dollar on Thursday morning on the trading screens and then finally closed at Rs 96.37 against the US dollar.

Meanwhile, more bond news following on from yesterday. The US 10-year treasury bond has risen half a percentage point since the war started, and its yield is around 4.6%. The Indian 10-year government bond yield is about 7.1%, that's about 250 basis points more than that of the US, and thus on paper Indian bonds offer better returns. Now, the gap between US and Indian bond yields, according to a Business Standard report, is now near historic lows.

The US-India 10-year yield spread had peaked at about 5.9% in 2016, while the average is about 4.1%. This means technically that it reduces the cushion foreign investors earn for holding Indian bonds over safer US treasuries. While this does not mean a crisis for India's bond market, it does change the conversation around foreign investment in Indian debt, according to that report, and investors must now weigh the shrinking yield advantage against rupee depreciation, taxation, liquidity risks, policy uncertainty, and of course larger emerging market volatility. Also, if the rupee weakens sharply against the dollar, the higher Indian yield can lose appeal for an unhedged foreign investor, according to that Business Standard report.

Meanwhile, India's peak power demand has hit a record high of 270.7 gigawatts on Thursday, with some regions facing power cuts thanks to an ongoing and rising heat wave or heat peak power demand has now crossed the peak projections that at least we are aware of, for which the government was prepared in terms of power generation. Now that of course was before the war started on February 28th and the energy shock set in. So we have obviously the problem of short supplies in some energy, particularly gas, and of course rising temperatures.

Delhi recorded its warmest May night in 14 years, with the mercury at about 31.9 degrees, and the India Meteorological Department or IMD has issued an orange alert for Delhi because of those persistent heat wave conditions and daytime temperatures are expected to remain high or rather dangerously high, ranging between 45 and 47 degrees Celsius.

Why are Fuel Price Hikes in India is necessary but Not Sufficient?

Kotak Institutional Equities last week put out a report that said the recent fuel price hikes in the country were necessary but not sufficient. According to the report, the central and state governments' recent actions to economic fallout of the ongoing West Asia war may not be adequate to address India's growing macroeconomic challenges.

The continued stalemate in the West Asia war with the blockade of the Strait of Hormuz may require further measures from the government, all of which will likely impact growth. I reached out to Pratik Gupta, CEO and co-head Institutional Equities at Kotak Securities, and I also asked him whether pitching more aggressively to overseas investors could reverse the current capital flight.

INTERVIEW TRANSCRIPT

Govindraj Ethiraj: Pratik, thank you so much for joining me. So I'm picking up on the most recent developments in terms of India's fiscal response to the West Asia crisis and one of them of course is raising of petrol and diesel prices and we've had two rounds. In the first round we raised it by three rupees for petrol and diesel, the second round which was this week was 90 paise and by all indications we could see further increases as many have been arguing for.

So my first question is from a investor market's perspective, how do these actions appear from a sentiment point of view or in terms of suggesting how the government is responding?

Pratik Gupta: So Govind, as you rightly pointed out the price hikes have come through but in our view they're still not sufficient especially in the context of what is required to be done in the current environment. We are likely to be hit with a very large current account deficit. At Kotak for example we are projecting that even if oil stays at $95 per barrel for the year as a whole, FY27 year as a whole, current account deficit is likely to increase from 1% last year to 2.5% this year and bear in mind a $95 average oil price assumes roughly $110-$115 for the first six months so there's already a somewhat optimistic assumption I would argue given how the Strait of Hormuz remains locked and closed and oil traffic from there continues to be disrupted. So therefore we think a lot more needs to be done.

This hike is perhaps a step in the right direction. The government on its part is obviously they have a duty to try and protect the weaker sections of society and try and minimise the impact of the West Asia crisis but you know the longer this crisis continues it will become very difficult for the government to not pass on the hike to consumers. Other countries, you look at China for example, they've hiked prices by roughly 20-odd percent.

There are many countries in Europe which have hiked petrol and diesel prices at the pump by anywhere from 50% to 70-80%. In India this is barely a 4-5% increase so far. At some point it will be beyond the government's ability to carry on with these kind of subsidies and losses for the economy as a whole.

Both the implications are very significant.

Govindraj Ethiraj: Right and if I can ask you a bit of a primer question, what happens when current account deficit goes from 1% to 2.5% as you pointed out just now?

Pratik Gupta: The overall current account balance in dollar terms, if you assume let's say last year for example our current account balance was roughly $37 billion. At $95 this goes up to $100 billion. So what that means is you need that much of capital flows to service that current account deficit.

Now in an environment where foreigners are selling in the equity market, NRI deposits also, especially given the disruption in West Asia where Indians are working in the GCC countries, the Gulf countries, the remittances also might get impacted. So it's a tough ask to expect that you will get $100 billion as you see in the last nine months, one year, capital account flows have been negative. So therefore the direct impact is one, the rupee weakens.

We've already seen that to some extent. There is risk of more downside of this situation continuing. Second, the RBI that is forced to intervene to try and manage the volatility which sucks out liquidity that leads to higher interest rates, imports become more expensive, inflation goes up.

So and that in turn eventually leads to higher interest rates, slowing down of the overall industrial side of the economy.

Govindraj Ethiraj: Right, okay. So let me ask you now the sentiment side. I mean a lot of people including investors both in the country and outside are watching the government's responses to understand or to try and predict whether or project whether we are in control of this situation.

I mean more than the specific of whether it's three rupees or 90 percent because it's clear that more will come. What's your sense? I mean when you talk to your clients, do they have a sense that we are responding efficiently and effectively in as much as we could in a situation like this or are we slightly behind the curve or with the curve?

Pratik Gupta: Actually as far as investors are concerned, there are different dynamics. For them, they're not looking at India in an isolated prism. They are looking at India in the context of other investment opportunities out there and then it goes beyond just this West Asia crisis.

That is obviously one of the most important current pressing issues and yes there is an expectation that the government will be forced to pass on the increase in energy prices to consumers whether it's petrol, diesel, urea, remittances will get impact. But the second thing is also they're looking at slowdown in the economy. India is unfortunately seen as a loser in the AI race which is going on globally.

Only a few countries around the world are benefiting. Foreign capital is gravitating towards Korea, China. So the rupee depreciation is another factor which is spooking foreign investors.

As you know, these guys invest in dollar terms and they don't look at the rupee returns. If the rupee returns are 10 percent but the rupee depreciates by 10 percent, the net dollar returns are zero. That is one big factor which unfortunately is a consequence of the West Asia crisis with oil prices going up, our current account deficit going up.

That is putting pressure on the rupee as well and that's unfortunately a vicious cycle we're caught in and until there is clarity on when this trade of hormones reopens and when oil supplies resume, oil prices cool off, till then unfortunately it's going to be a bit difficult to attract foreign inflows. So that's another factor and then there are other sort of minor irritants which are out there. Things like a capital gains tax on FPIs for equities, withholding tax on debt investments by FPIs, the overall paperwork hassle for a foreigner who has to open a new FPI account for investing in India.

These are all issues which frankly a lot of progress has been made over the years but still I think a lot more can be done.

Govindraj Ethiraj: As you look ahead now that we know this is going to last for a while and you projected yourself that you're looking at a $95 average price which means prices would be typically more than a hundred dollars maybe for the rest of the calendar year from all indications. What is this going to mean for the markets as a whole in terms of let's say the direction in which it will go and the flows that could come or not come both again domestic as well as international?

Pratik Gupta: So let me maybe begin by giving you a perspective on you know what the current consensus view is. The general perception is this war will end sometime soon. The definition of soon varies depending on whom you speak to, a few weeks to a few months.

At this point no one's expecting this to go beyond August-September so that's the sort of consensus view that sometime in the next two-three months the Strait of Hormuz will reopen and oil will start flowing from there. It'll take some time to ramp up but clearly by August-September-October things will come back to normal. That's the general sort of view and therefore this is a short-term blip.

India has sort of managed the crisis somewhat okay so far. We haven't taken a very big knock. The currency has depreciated but you know if you can manage another three-four months we'll be back to normal.

The concern is this goes on one longer than expected in terms of disruption in oil supplies and oil prices staying high and not just oil. When I say oil I mean oil, gas, urea, everything. NRI remittances and so on so that's point one.

Second is we're not even factoring in the risk of a really bad monsoon this year. Some global forecasters including our own IMD are projecting a weaker than normal monsoon. How bad or how good we'll know only frankly late June-early July is when you'll really get to know.

So till then frankly investors are not taking this very seriously. Weather patterns are notoriously difficult to predict. And third is the impact of the AI juggernaut which is going on around the world.

We've already seen layoffs in many parts of the world. As far as India is concerned, IT services and BPO services which is one of the biggest services exports for India, they have slowed down. Net hiring by IT and BPO companies is actually coming down.

Salary hikes are much more muted this time around. There is a strong headwind over there. Those headwinds in my view will actually intensify in the coming quarters as you start getting agentic AI coming and impacting companies.

Eventually I think the long term once we're through this two-three year transition period will be okay. But for now there is a headwind. So therefore while positioning is somewhat favourable in the sense most global investors are underway to India, I would not say that they're in any rush to come back to India.

If anything in the very short term that I'm saying the next say month or so, month and a half, there is the risk of further downside. The medium term view is still a lot more constructive. Assuming you know things normalise in the next three-four months, we still have a lot of things going for us.

Obviously the demographics, the overall macro health of the economy is still not so bad. We have a lot of you know the FTAs which have been signed around the world. The manufacturing engines will start kicking in sometime from next year.

A lot of infrastructure development is happening. Logistics costs are coming down and so on. Lots to be said on the positive side but that's more from a medium term perspective.

The concern is more in the short term, the next say you know one month or so.

Govindraj Ethiraj: Right and you talked about portfolio investors really moving their funds out of India and likely to do so for another month or so maybe more and putting it in AI and that's something that we've seen for almost a year now. Now my question is a little more specific. So portfolio investors are of many kinds.

I'm talking about foreign portfolio investors. Many invest long term, some invest short term, some invest more in technology, some less. Are you saying that or is it your experience or feeling that all of them are uniformly pulling out from India which they are of course and all putting it in the same bucket that's AI?

Pratik Gupta: No not necessarily. As you rightly said you get all types of FIIs. You have the sovereign wealth funds, you get the global long onlys, you get the India dedicated long only funds, you have the hedge funds and the boutique sort of investment funds out there.

I would say across the board everyone is at this point in time somewhat cautious on India. Uninterested in India is probably the correct word less than some of them are less cautious on India. If anything you know there are debates going on oh well we did well by buying staying underweight on India is it time to maybe reduce the underweight a bit which means increase allocations to India a little bit but no one's in any hurry until this West Asia crisis sorted out and trade of hormones reopens.

Till then everybody's saying we'd rather miss the first five percent of any rally rather than take the pain and because the risk is more to the downside in the short term than to the upside. So most of the global investors of all kinds have reduced their activity levels quite significantly in India. We see this in terms of not just in terms of flows in terms of queries in terms of visitors coming to India in terms of participation in IPOs and blocks and QIPs and so on and so forth.

So it is I would call it more lack of interest and interest in more in other markets and it's not just only AI markets in fact there are many other markets like Brazil for example that's you know doing well more because of commodity not necessarily AI. India unfortunately is right now not in the happy camp where we have decent growth and attractive valuations our valuations are also still somewhat expensive at 19 times one year forward PE for the nifty.

Govindraj Ethiraj: Right if you look at the emerging market universe and I know that we've been underperforming is it your sense that investors and portfolio investors again foreign portfolio investors are pulling out from other markets as much as they're doing from India in a proportionate way. I know everyone's pouring into South Korea or Japan or some of these markets but are they pulling out equally from other markets as well in the emerging market universe at least?

Pratik Gupta: Not as much just to give you an anecdote in September 2024 just after the BJP's reappointment few months after that when the market picked out India's weight in the global MSCI EM index was roughly around almost 20 percent. We're now down to just slightly under 12 percent. So one it's been a very sharp collapse in prices.

Second flows have definitely turned a lot more negative for India than for other countries and these are not like I said these are not just AI specific markets. Third I'll contend you anecdotally and I'll share a conversation I had with one large global EM fund manager and they have a allocation of just five percent to India versus the benchmark weight of almost about 12 percent and he was getting calls from his asset allocators why you even five percent in India can't you go lower? So that's sort of mood and sentiment on India that it is unfortunately very very negative right now.

This in a way is one could argue is a potential opportunity sign of pessimism or too much of pessimism. I would argue unfortunately we're still not there because valuations are still not attractive enough like I said 19 times what downside risk to earnings we might actually be at 21 times and more risks with the monsoons and the AI and whatnot and if what if the oil crisis carries on even longer than expected. So unfortunately we're still not there as yet.

Govindraj Ethiraj: In the past when we faced similar situations one of the responses one of them not all of them is to go on a road show meet investors in the financial capitals of the world talk to them spend time with them try and understand what their concerns are and try and assuage their concerns or apprehensions if so. We need to do more of that and will that help? I'm not saying that's going to reverse everything overnight obviously not but is that one of the things that we should be doing as a country?

Pratik Gupta: So, that actually, at the corporate level and, you know, brokerages like us or investment firms, they're already doing that. But, unfortunately, the reception is quite lukewarm to lack of interest. The number of meetings one gets is relatively limited. Folks are obviously, their attention is elsewhere. So, this is a very low level of interest for India in the last 20 years, which I've seen, maybe some remind me of back in 2002-3-4 or maybe even the 2013 period just before the taper tantrum crisis. But the one difference this time around is it's not really India's issues to resolve this time because this oil crisis is a global issue. No one can predict geopolitics, what's going on in the minds of Trump or the Iranian IRGC, how are they planning to sort things out. It's just way too complex for any particular individual. If anybody is doing that, they're just effectively punting, and that's obviously not what professional money managers do. So, they're just sort of staying on the sidelines, saying, look, until this issue is sorted out, we think there's a lot more downside to India. The government has to pass on a lot more of the impact of this West Asia crisis to the consumers. That, in turn, will lead to inflation, higher interest rates, weaker rupee, tighter liquidity, slower economic growth, slower corporate earnings. Therefore, the valuations will become even more expensive. Therefore, we are not investing in India right now. We'll review it. We're not saying no to India from a long-term perspective, but there's absolutely no hurry right now. What India should be doing is, frankly, more of the austerity measures which the prime minister talked about. And that is where, frankly, whether it's the government, state governments, corporate India, individuals at the household level, all of us needs to be, we need to be. Sort of doing that to protect the downside.

Govindraj Ethiraj: Right. In all of this bloom, I'm sure there are some silver linings, and some of those silver linings maybe are playing out in the context of themes within the markets or companies, for that matter. What are you seeing?

Pratik Gupta: One thing which is already playing out to some extent is, for example, the very strong balance sheet at the macro level, at the, you know, central government level, the banking system, corporate debt, that is all, you know, that's one thing over the last 20 years we've really deleveraged quite a bit. So, that's something which investors appreciate, and that's something which we should continue to stay focused on. And that's why you're seeing a lot more interest in, let's say, companies with strong balance sheets, strong governance, who can withstand an economic downturn better. There is lesser interest in highly leveraged companies or any company which has low governance, poor governance, but is talking up a lot of growth because this is not a growth environment. We are, in fact, in a slowing economy. So, that's point one. Second is the infrastructure build out that's been going on and still continues, especially power, for example, and the tnd lines. Clearly, a lot of interest over there. The banks, obviously, which are especially the large private banks, which are well positioned, relatively well positioned, that's second. And third is, with the ftas being signed all across and the u.s tariff situation also hopefully, you know, we had settled at 18 percent. Hopefully, you sometimes the next few months we'll settle that also once and for all. So, that's leading to some interest in companies which have more of an export focus, which also benefit from the currency depreciation. And I don't mean the it services companies because, unfortunately, there is still the ai risk out there. But pharmaceutical exporters or auto actors or textile exporters, we are seeing interest over there.

Govindraj Ethiraj: Right, that's a good note to end on. Pratik, thank you so much for joining me.

Pratik Gupta: Thanks a lot.

How is Indonesia Handling its Palm Oil Exports?

India imports roughly 40% of its palm oil imports from Indonesia, where palm oil prices have fallen after President Prabowo Subianto unveiled plans to impose state control over exports of several key commodities, including palm oil.

A Bloomberg report said the Southeast Asian nation produces more than half the world's palm oil, and the plan would require all exports to go through a government-created company, which apparently is aimed at curbing under-invoicing and giving authorities a greater say on price, but also risks alienating buyers. Now, this obviously will have a rolling impact on Indian imports, and that's something that we're going to track in the coming week.

What are NVIDIA’s recent Sales Figures?

Chip giant NVIDIA reported record sales and income on Wednesday, thanks to a surging demand for data centre computing and AI agents.

Sales for the April quarter touched $81.6 billion, and that's up 85% from the year-earlier period. And net income was at $58 billion for the quarter, roughly three times the year-earlier numbers, and about 36% higher than the number predicted by analysts. Jensen Wang, CEO and founder of NVIDIA, said in a conference call on Wednesday that demand had gone parabolic, and that, he said, was because of the era of agentic AI.

A Bloomberg report said the record high sales were also driven by growth in NVIDIA's data centre segment, especially sale of computing hardware, which includes the company's graphics processing units, or GPUs, as well as other chips. Sales of networking hardware tripled from a year ago to about $15 billion, also a record.