On Episode 905 of The Core Report, financial journalist Govindraj Ethiraj talks to Siraj Hussain, former Agriculture Secretary to the Government of India (and frequent columnist on agricultural and food production issues) as well as Ambareesh Baliga, Market Expert.

SHOW NOTES

(00:00) Stories of the Day

(01:00) Markets Are Coasting On Hopes Of Oil Prices Staying Down

(06:18) What A Surge In IPOs Means For The Market

(12:17) Why The Rupee Is Likely To Stay Under Pressure For A While

(14:35) Decoding The Government’s Drought Plans And Why Farmers Have To Switch To Drought Resistant Crops

(25:11) Why The Price Of The Next Iphone Could Be Much Higher Than Expected

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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 19th of June and this is Govindraj Ethiraj broadcasting and streaming weekdays, usually from Mumbai, India's financial capital, but in transit right now and will be so till the morning of Monday.

Our top stories and themes…

The markets are coasting on hopes of oil prices staying down

Oil flows from West Asia could resume faster than expected and some demand dynamics

What a surge in IPOs means for the markets

Why the rupee is likely to stay under pressure for a while

Decoding the government's drought plans and why farmers have to switch to drought-resistant crops

And why the price of your next iPhone could be much higher than you would expect.

Markets, The Rupee and Oil

The complexity of the global geopolitical energy system was revealed once again as Ukraine stepped up attacks on Russian oil infrastructure, thanks to which Russia is now shipping near record volumes of crude, forcing more or rather ever more barrels into the global market even as production falls.

So even as the state of our minds is opening up and more oil has begun flowing, global supplies are strong and thus contributing to downward pressures on prices. Year-to-date average flows of about three and a half million barrels a day exceed the annual averages for each year since Russia invaded Ukraine in February 22 according to a Bloomberg report. Brent crude is currently just under $79 a barrel.

Meanwhile, the big traders on Wall Street are betting that oil countries like Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, Bahrain and Qatar will ramp up output and flows faster than earlier expected, which could also lead to oil prices going down sooner. With China's lower demand, any hint of higher export totals will benefit lower prices, CNBC's Brian Sullivan wrote on Thursday, adding that he was projecting pump prices to fall in the US further in the next two weeks and they've already begun falling, he pointed out. Elsewhere, an impending wave of oil that's been trapped inside the Strait of Hormuz is set to rush into Asia, possibly swamping oil refineries.

According to Bloomberg, some 31 supertankers capable of carrying about 62 million barrels of crude are stuck inside the Persian Gulf and set to sail out once the waterway opens up, Bloomberg said, quoting Signal Group data. The oil could take about a week to get to India or about three weeks to East Asia. Interestingly, Asian refiners are already well supplied for this month and next, according to that Bloomberg report.

So the war is eased off for now. Oil is beginning to flow again and a fresh set of mega IPOs are also set to swamp the markets. It's back to business, but of raising money.

The National Stock Exchange has unveiled plans for potentially the largest IPO so far, which could raise around 30,000 crore rupees. Several institutional and individual high net worth investors will exit. State Bank holds a 3.2% stake in the company.

Life Insurance Corporation or LIC is the largest shareholder with a roughly 10.7 or close to 11% stake and is not expected to dilute its holding in this IPO. Other investors include the New India Assurance Company, National Insurance Company and the Oriental Insurance Company and foreign portfolio investors like Canada Pension Plan Investment Board, Morgan Stanley and Temasek. The IPO could comprise up to 148.9 or close to 150 million equity shares or nearly 6% of NSE's paid up capital of a face value of 1 rupee each with no fresh issue component.

NSE shares are currently trading at around 2055 rupees per share in the unlisted market, according to a business standard report. So it is an offer for sale, which means the exchange will not receive any of the proceeds from this offering. Instead, it will go to the selling shareholders.

There are more IPOs, of course, including from Reliance, Jio and Manipal Hospitals, among others on the continue to see vast amounts of wealth transfer from investors, often retail to existing investors, founders and promoters. More on the IPO and its impact in a moment. Back to the markets, the benchmark indices managed to end higher for the fifth session in a row on Thursday.

Continued weakness in crude oil prices obviously helped. Crude oil prices, as we just mentioned, are just under $79 a barrel. So clearly they're in a holding pattern of sorts, waiting for more progress.

The Nifty 50 has now risen about 4.5% in 5 sessions and closed 82 points higher at 24,168 and the Sensex rose 254 points to 77,409. In the broader markets, the Nifty mid-cap and small cap are up 0.4 and 0.47% each. The rupee was higher too against the US dollar for the fifth consecutive session, also logging its longest winning streak in a year.

It ended at Rs 94.33 and having gained about 1.5% in the last five sessions, according to Reuters. Meanwhile, you must be aware of some of the concerns around private credit investments in other markets like the United States. Private credit has been projected as relatively safe in India, mostly because of higher risk weightages and conservative investing approaches, at least according to the players we've spoken to in recent months.

Though in the US, there are private credit funds facing stress because of withdrawals. Meanwhile, Australia's corporate watchdog is investigating a number of private credit funds and warning industry managers to make sure their asset valuations are grounded in realistic assumptions before an end-of-the-month reporting deadline, according to a Bloomberg report. The Commissioner of the Australian Securities and Investment Commission said, We're absolutely and 100% unequivocally ready, willing and able to use our full suite of regulatory enforcement tools, adding that it is such an important area because private credit is growing in importance in so many investors' investment portfolios.

And finally, tracking the response by central banks to dollar pressures, Indonesia's central bank has raised its key interest rate for a third time in about a month, extending its aggressive efforts to stabilise the rupiah and shore up investor confidence, according to Bloomberg, which added that Bank Indonesia lifted the benchmark BI rate by 25 basis points to 5.75% on Thursday. So this move follows a surprise hike on the 9th of June and a bigger-than-expected 50 basis point hike in May, bringing the total increase to 100 basis points this year in Indonesia.

What a surge in IPOs means for the markets?

With the National Stock Exchange IPO and other big IPOs or initial public offers closer to hitting the street, what is it looking like from an overall sentiment point of view? I reached out to veteran market analyst Ambarish Baliga and I began by asking him whether the NEC IPO could be a turning point that many have been waiting for.

INTERVIEW TRANSCRIPT

Ambareesh Baliga: The way I see it is, it could have a positive impact on the market. Because people generally say that when large IPOs come, in fact, sucks out liquidity from the markets. But I think there's enough liquidity with the Indian investors, both retail as well as the funds.

So I don't think that's going to affect the liquidity. Even if it affects the liquidity, it could be for a very short time. But these IPOs possibly give a chance to a number of people to, in fact, I mean, gain from the allotments.

Because these are very large IPOs, so the chance of an allotment is decently high. In case the valuations are decent, even as far as NSE is concerned, we are still expecting that the valuation should be in the region of 5 lakh to 5 lakh 30 thousand crores. If that is the case, yes, I think there'll be like decent amount left on the table for the investors.

If all these large IPOs, if they're leaving enough on the table for the investors, I think that will regenerate interest in the IPO market as far as the retail investors are concerned.

Govindraj Ethiraj: And you're seeing the IPO market sort of behave differently from the secondary market?

Ambareesh Baliga: See, typically the IPO market, I mean, gets back into shape when the secondary markets have done well for a while. But at the same time, I mean, investors need to get allotments and need to make money from the IPO allotments. So that can happen only when you have large IPOs which don't get oversubscribed, I mean, 200 times or 400 times.

So the chances of allotment are better. And if they have left enough on the table, you are making some money immediately on listing. So that's what triggers the interest back in the IPO market.

Govindraj Ethiraj: And would you say that this has happened in the last couple of years? Because let's say September 24th, the markets have been subdued and down, but we've also seen many IPOs come and go, including maybe good ones or classified as good ones. Do you see this changing the trend, the next round changing the trend in any way?

In fact, this could change the trend, no doubt.

Ambareesh Baliga: Because I mean, once these IPOs are successful, which is what is expected, you'll have a number of, I mean, those lined up IPOs, which possibly have not been hitting the markets because they're waiting for some sort of a trigger. So all of them will start coming into the market post that.

Govindraj Ethiraj: Right, but if you were to look back now, and let's say, look at the IPOs that have gone public or raised funds and mostly for offers for sale and not really investment into the company, how would you say the experience has been?

Ambareesh Baliga: No, see, the experience has been decent in quite a few IPOs which have come recently. And at the same time, I'm talking only of the main board IPOs, not of the SME IPOs, or where again, I mean, people have made money, no doubt. But I mean, quite a few of the recent SME IPOs have oversubscribed 400, 500 times.

So let's not even talk about that. But then when we talk of the main board IPOs, yes, people have made money, no doubt. But then we have not had too many IPOs in the recent past because the secondary markets were not doing too well.

So merchant bankers as well as the issuers were in fact holding back their issue. Like I said, once we see a bit of a success out here, I mean, all these people will come back because there's a huge pipeline for IPOs.

Govindraj Ethiraj: Got it. And how are you seeing the signals from the secondary market at this point? Of course, the war seems to be ending, oil prices have gone down, and now below $79 a barrel.

But at the same time, the markets seem to be fairly cautious. Markets are a bit cautious.

Ambareesh Baliga: I mean, after the recent move up post this announcement, markets are cautious because President Trump is someone whom you can't really trust as to what he may say tomorrow. I mean, he's very volatile. So clearly the markets are still not very sure whether it will get signed off tomorrow or there could be a slip between the cup and the lip.

So I think once it gets signed tomorrow, I think the next couple of days, maybe the next two, three weeks, you should see a very good rally in the market because we've been waiting for this moment for the last three months.

Govindraj Ethiraj: Got it. And are there any other signals that you're seeing in terms of what is standing out in this market and whether we can, I mean, signals that just suggest that we could actually break out from the level of subduedness we've seen in the last couple of years?

Ambareesh Baliga: A certain breakout, I think possibly need to wait till the end of July because issue with India as such is monsoons. I mean, it is expected that this year's monsoons will be the worst in the last 10 to 11 years, close to 90% of average, which is supposed to be quite poor. And we've already seen that the province also hasn't been too great.

It's reached Goa, yet to really hit Maharashtra decently well. So, I mean, even in Mumbai, I think they're expecting it somewhere post 22nd or 24th of this month. And normally we see monsoons by early June.

So it's been a decent delay. But I think what people would wait for is the spread of the monsoons. So I think that is what we'll know possibly by mid-July or end-July.

And if that shows that it is better than where we are right now, I think the markets will take it positively because as of now, I think the markets have started discounting the fact that the monsoons will not be good. So anything better than that, I think the markets will react positively. And the major catalyst anyway has been this accord.

So if that is done, I think we should see new highs for the market by possibly Diwali or so. Because the other thing is on earnings. And earnings anyway, the next two quarters, most of the analysts and investors have discounted that it will not be too great.

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

Ambareesh Baliga: Thank you, Govind. Always a pleasure.

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Speaking of IPOs, Reliance could announce the path to its telecom business IPO Reliance Jio at its 49th Annual General Meeting today, amongst other announcements that are expected, including updates on its current and newer investments in areas like renewables and battery storage. The stock price of the oil-to-chemicals major is down 17% from its 52-week high, mostly in tandem with rising oil prices.

Why is the rupee likely to stay under pressure?

The rupee's rise in the past few days, thanks to lower oil prices, is likely to be constrained by the Reserve Bank's unwinding of its sizable foreign exchange forward book and hedging of interest obligations on foreign currency deposits raised by Indian banks, according to Reuters, which added that the Reserve Bank's short dollar forward book is estimated to have ballooned to an all-time high of nearly $110 billion, up from about $96 billion in April.

This follows persistent Reserve Bank intervention across both domestic forwards and non-deliverable forward markets to support the rupee, and the forward book, according to Reuters, is poised to expand further with banks passing on the currency risk from foreign currency inflows raised by them to the Reserve Bank of India via swaps, something that we've been talking about in recent episodes. The report also says that state-run enterprises and lenders are expected to add to this build-up through dollar-rupee swaps with the Reserve Bank to hedge their external commercial borrowings. All of this were, of course, part of the package or set of packages announced to stabilise the rupee.

Analysts at Goldman Sachs said in a note quoted by Reuters that they did not expect a appreciation in the rupee on the back of these inflows, and the flows are likely to be absorbed by the Reserve Bank of India through rebuilding of its forex buffers, including unwinding a significantly large short dollar forward book. So, India's foreign exchange reserves have fallen from a peak of about $728 billion in March to about $681 billion right now. An HDFC bank economist told Reuters that the Reserve Bank of India's drive to rebuild its forex reserves alongside the sizable overhang of its forward book are expected to be a drag on the rupee and keep its upside limited.

The economist said that dollar inflows could be used to run down forward book maturities of up to one year, which stood at about $44.6 billion as of April 26. Moreover, the hedging of interest obligations on foreign currency deposits is also expected to further cap the rupee's upside. The Reuters report says assuming deposit inflows of about $50 billion, broadly consistent with estimates from bankers they've been speaking to, and applying a 6% annual interest rate over an average maturity of four years, banks would need to hedge nearly $12 billion via forward dollar purchases with implications for both spot and forward premiums.

How Can Farmers Mitigate the Impact of a weak Monsoon?

India's monsoons have had a weak start and are unlikely to pick up before the 25th of June as the El Nino weather phenomenon takes hold. Nationwide monsoon rainfall was nearly 40% below normal as of Wednesday, according to the latest data from the India Meteorological Department quoted by Bloomberg, which added that the poor start is hampering the growing season for staples from rice to soybeans as well as disrupting key sectors like construction. It is one of the first indicators of how El Nino, which recently emerged, is beginning to upend global weather norms, says that report.

We reported yesterday that cities like Mumbai are already seeing sharp cuts, particularly for industrial and construction use. As concerns grow over a delayed and uneven monsoon, Siraj Hussain, former Agriculture Secretary of the Government of India, wrote in a recent Money Control column that he would urge farmers in rain-deficit regions to switch to drought-resistant crops and avoid sowing decisions that may force them to later replant in the season. I reached out to Mr. Hussain and I began by asking him to walk us through how this could pan out and how this year contrasted with previous years of deficient rainfall.

INTERVIEW TRANSCRIPT

Siraj Hussain: You see, dealing with shortage of rainfall is not new for Indian farmers. In many states, even in normal years, in many regions of India, there is a shortfall in rains. Even in normal monsoon years, even in excess monsoon years, there is certain regions, certain districts face shortage of rainfall, and therefore the farmers and the district-level officers know quite well what is to be done under these circumstances.

So, we have data till 17th of June, and what I can see is that in Kerala, the normal level of rainfall by this time is 345 millimetres. The actual rainfall is about 300 millimetres, so in Kerala, there is no shortfall. Similarly, in North Interior Karnataka, there is 1% extra rainfall, but there are certain regions in India like South Interior Karnataka, like Madhya Maharashtra, Gujarat region, Vidarbha, etc., where there is acute shortfall. So, in these regions, there is a contingency plan which has been prepared by CREDA, which is an organisation of ICAR. That plan is available with the state agriculture departments, and I hope that they have updated the plan, they have shared it with the district-level officers, and district-level officers are issuing suitable advisories. I'll give you one very good example of what it means to tailor that plan to the district level.

Now, we all think that toor and moong can be sown in less rainfall districts, but the Karnataka district plan, for example, shows that the sowing period for toor and moong is over, and therefore, it is recommended that farmers should go in for ragi, bajra, and minor minutes. What I am trying to say is that the plan is tailor-made for districts, for regions, and the farmers have to be given suitable advisories by local officers.

Govindraj Ethiraj: So, given where we are right now in terms of deficient rainfall, how do you see us being able to make up the gap in agriculture production, or again, if you were to look at history, are we able to make up, and to what extent can we bridge the gap by changing cropping patterns?

Siraj Hussain: I'll give you an example of 2015-16, when I was Secretary of Agriculture. It was the second consecutive year of drought. 2014-15 was also a drought year.

2015-16 was also a drought year. And Dr. Manmohan Singh, who was Prime Minister before Mr. Modi, always used to ask in various meetings, do we have food security to deal with two consecutive years of drought? So, this question was tested in 2015-16, and we came up with an answer that yes, India can cope up with a shortage of rainfall in two consecutive years.

Of course, we are much better prepared now as compared to 2015-16. Even that year, the shortfall in food grain production was just about 5.5% or something like that. So, not very much shortfall.

However, this year, it seems to be the rainfall is perhaps going to be much lower than previous occasions. And therefore, we should see lower production of rice, surely, but we have ample stock of rice. And therefore, there should be no reason for worry as far as public distribution system and distribution of even excess quantity of rice is concerned.

But there will be a shortfall in production of maize, there will be a shortfall in production of sugarcane, there will be a shortfall in production of cotton, for example, and there may be inflationary trends in vegetables.

Govindraj Ethiraj: You talk about drought-resistant crops. So, what are they and where do they come in, particularly in solving the larger agricultural gap?

Siraj Hussain: In the last few years, a number of seed varieties have been released, which ICR claims to be drought-resistant. In fact, they were released by the Prime Minister himself. But I'm not sure how much of that seed is available in drought-prone areas.

But there are certain varieties, especially of coarse cereals like ragi, I'll give you an example of ragi, which has been grown by farmers over the years, and these varieties are naturally quite drought-resistant. These are not hybrid, these are non-hybrid varieties. Now, there are seeds like GPU-28, GPU-66, etc., which are recommended for Karnataka, Karnataka region for ragi. Similarly, the plans are so detailed, what is to be done if there is delayed onset of monsoon from 15th June to 15th July, then early season drought, 16th July to 31st July, and so on. So, every period of 15 days, there are specific recommendations indicating the variety of seed which is to be sown by the farmers, how the irrigation is to be applied, what kind of interculture is to be done. The main question is, which I said in my article, that if farmers should not be forced, and there should be no occasion for farmers to sow any crop twice, because the first crop does not materialise, the seed does not grow, and therefore farmers are forced to sow the crop again, which means extra expenditure by farmers, which should be avoided at any cost.

Govindraj Ethiraj: And what's your experience in terms of farmers following these kind of guidances, and if they do or they do not, how does this affect their livelihood and their ability to really sort of stay sustained or continue to sustain their existence?

Siraj Hussain: You see, it is difficult to generalise because it depends on how much rainfall is coming in an area, what time it is coming, because for sowing of even these core cereals, drought resistant crops like ragi and smaller millets and so on, certain level of moisture is needed. So, unless it rains for two, three days, it is very difficult to sow any crop. You know, in a completely dry condition, no crop can grow.

So, some level of moisture is needed, therefore generalisation is very difficult. But having said this, I must say that farmers' incomes and livelihoods are affected not only by crops, but also by what happens to animal husbandry, what happens to goats, for example. You know, large number of farmers keep goats and animals in various parts of India.

It is a different matter that from time to time, unfortunately, we're reading papers that, you know, violence against transportation of cattle and goats, etc. But that is a very major source of income for farmers and goats are very much drought resistant. So, they do not require much water, they do not require much extra fodder.

Therefore, every support has to be provided to farmers who keep these other sources of livelihoods so that they can continue with their livelihood. And secondly, arrangement for drinking water has to be made in all these drought-prone regions. And one more very important thing for your listeners is that in areas where there is no sugarcane crop of ratoon, fresh sowing of sugarcane should not be taken up.

Now, it is not easy. State governments have to issue advisories, sugar mills have to be taken into confidence. But I think it is very important for both the centre and the state governments to issue suitable advisory to sugarcane factories, sugarcane farmers and plan accordingly.

Now, what happens to ethanol? I have been writing about it. You know, if maize production is going to go down, if government is going to reduce the allocation of 5.2 million tonnes of rice for ethanol, you can well imagine that, you know, this whole debate about going for flexi-fuel and 100% ethanol mixing, etc., where it will take us.

Govindraj Ethiraj: Right. If I can come back to the monsoons itself. So, this is an El Niño year and one reason why we are seeing such delayed monsoons and we are feeling it more maybe because we are in cities like Mumbai.

Do you feel that this is different from what you have seen in 2015-16 or is El Niño also following a sort of predictable pattern?

Siraj Hussain: No, you know, same pattern is not followed, generally speaking. The worst was 2009. So, at that time also I was in the Krishi Bhavan.

And after that, the drought manual has been revised. Now, the guidelines for the state governments to declare droughts are very clear. The system for help from the centre under National Disaster Relief Fund, etc., is very clear. National Disaster Management Authority is better organised. So, we cannot say that it will follow the same pattern as earlier. For example, rains are already delayed.

But even now, if we get rainfall in the next one week or ten days, things will still improve.

Govindraj Ethiraj: Right, Mr. Hussain. Thank you so much for joining me.

Siraj Hussain: Thank you.

What are the State of Oil Refiner’s Borrowings?

Indian refiners' borrowings are hitting limits as they incur losses from selling petrol and diesel as well as LPG, or liquefied petroleum gas, at below market rates, according to India's oil secretary who spoke on Thursday and quoted by Reuters. State fuel retailers' revenue losses in the first quarter have crossed Rs 100,000 crore or about $10.6 billion, he said at an industry event, and that's the figure that Trissel Ratings had also put out, which we touched upon yesterday. He said that borrowings by Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum has risen as these companies absorb these losses.

While many countries have raised retail prices of petrol and diesel by about 40 to 50 percent after the war drove up crude prices, India has done so only by less than 10 percent.

Why will iPhone Prices could rise?

Apple will raise prices on its products to offset the surging costs of memory and storage chips, according to CEO Tim Cook, who spoke in an exclusive interview with The Wall Street Journal. He said that price increases were unavoidable while they were doing their best to mitigate the huge increases that were being passed on to them and protect their customers.

Apple's next major product launch is likely to be in September when it releases the iPhone 18 lineup, expected to include a new foldable iPhone. Research firm Tech Insights has estimated that passing the higher cost on to consumers while maintaining its profit margin would add about $270 to the price of the next iPhone Pro model. All of this is because AI demand has created an unprecedented run on two types of memory chips, that's DRAM, or Dynamic Random Access Memory, and NAND, Flash Storage.

Only companies like Samsung Electronics and Micron Technologies supply the market. As Neil Shah of Counterpoint Research told us last week as well, data centres are paying a premium for these chips, so manufacturers are shifting production towards enterprise-scale components and away from the consumer business.