On Episode 841 of The Core Report, financial journalist Govindraj Ethiraj talks to Aditi Nayar, Chief Economist & Head - Research & Outreach at ICRA as well as Dr. Ranjeet Mehta, CEO & Secretary General at PHDCCI (PHD Chamber of Commerce and Industry).

SHOW NOTES

(00:00) Stories of the Day

(00:50) Markets celebrate ceasefire but will it last?

(05:07) RBI holds interest rates as expected, lowers GDP forecasts

(15:43) India needs more than 50 widebodied aircraft and why jet fuel supplies will take time to return to normal

(17:26) An Indian delegation went to China after more than 5 years, first impressions

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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 9th of April and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

The stock markets are celebrating a ceasefire in West Asia but will it last?

The Reserve Bank of India holds interest rates as expected and lowers GDP forecasts.

What is early data telling us on the war impact and outlook in India?

India needs more than 50 wide-bodied aircraft and why jet fuel supplies will take time to return to normal

And an Indian delegation went to China after more than five years. What were the takeaways?

Markets and a Ceasefire on Tenterhooks

There is a two-week ceasefire in place between the United States and Israel on one side and Iran on the other. The ceasefire includes negotiations which will begin this Friday and the success of those negotiations will decide whether the ceasefire will hold beyond 14 days.

Whether or not one of the sides breaks this evidently fragile ceasefire and starts bombing the other will also determine the success of this effort. Also, Israel has stepped up bombing Lebanon's civilian areas and has argued that Lebanon is outside the purview of this ceasefire. So, the war is not over by any stretch and we should calibrate ourselves accordingly even as we welcome the breather as clearly global markets and Indian ones have.

As far as two-week ceasefire, Iran has pledged to reopen the state of Hormuz in what evidently was a last-ditch deal that saw President Donald Trump back off from threats to escalate the war. The threats of course were quite graphic and Trump had said that a whole civilisation would die tonight. That was on Tuesday which also led to considerable criticism within the United States including from his fairly loyal supporters within the right-wing ecosystem.

The six-week conflict has killed more than 5,300 people apart from of course triggering a global energy crisis according to a Bloomberg report. Oil and gas prices fell on this news which paves the way for the resumption of energy supplies through the state of Hormuz. Now, as we've been telling you, 20% of oil and liquid natural gas supplies flow through the state of Hormuz which has been mostly closed in the last six weeks except for safe passage for some countries and their ships including India.

Brent crude futures were down almost 14% to $94.29 and US crude futures were down 16% to about $94.93 but still above pre-war levels. Europe stocks were up about 4% following equally strong gains across Asian markets on Wednesday morning and Wall Street futures were also looking all set to drive the markets at open into higher levels and we'll come to that in a second. The dollar also fell having risen quite sharply during the last few weeks and the index is now at 98.84. Now the question of course is will oil prices go down further? It seems unlikely and uncertain of course because there is no further clarity at this point on how the ceasefire is going to evolve and what could be a more permanent outcome.

Back home the Nifty 50 and the Sensex were up on the fifth day now at a stretch as the ceasefire kicked in and the Reserve Bank of India of course maintained interest rates. The Nifty 50 was up 873 points to 23,997 and the Sensex was up 2,946 points to 77,562. The Sensex unlike most other days or the indices unlike most other days were holding fairly steady on the higher plane unlike the usual bouts of volatility that we are used to seeing.

In the broader markets both the Nifty mid cap and small cap indices were up 4% and 4.4%. The Reserve Bank of India's Monetary Policy Committee expectedly kept the benchmark policy report rate unchanged at 5.25% and retained its current policy neutral stance. The rupee gained for the fourth consecutive session on Wednesday while forward premiums declined as a plunge in oil prices after the U.S. Iran ceasefire supported global risk appetite according to Reuters which added that the rupee ended at Rs 92.58 per dollar up 0.5%. The rupee has gained about 2.4% so far in this month. Meanwhile global investors are keen to and therefore moving on or trying to move on.

Some of the world's largest investment firms are buying bonds and AI stocks while selling the dollar betting that war-driven uncertainty has passed its peak following the ceasefire according to Bloomberg. Stock futures were also up on Wednesday morning with Dow Jones industrial average futures rising 1,248 points or about 2.7%. That's roughly the percentage rise that we've seen across the world or broadly across the world and S&P futures were also up 2.7 and Nasdaq 100 futures were up 3.5% according to CNBC. Back in India there are enough coal stocks available at all the mines and power plants with stocks sufficient to generate power for 24 days.

Government officials told Reuters and overall coal stocks were at about 220 million tonnes right now.

The Repo Rate

The Reserve Bank of India's Monetary Policy Committee kept the repo rate unchanged at 5.25% at its scheduled policy review meeting on Wednesday as we just said and that of course was in line with expectations. The fiscal year 27 forecast for GDP growth and consumer price inflation was at 6.9% that's the GDP growth figure 6.9 from 7.6% last year that's 25-26 and inflation 4.6% from 2.1% again 25-26 that's last year.

The Reserve Bank has assigned downside risk to its growth forecast while attaching an upside risk to its inflation forecast. Economists at Quantico Research said they stuck to their view of a prolonged pause with repo rates being maintained at 5.25% through 26-27. The central bank would continue to focus on preserving financial stability by curbing adverse global spillover risks via the forex channel they said adding the Reserve Bank of India will continue to remain proactive and preemptive to maintain ample liquidity.

This is the Quantico Research report. Meanwhile India's foreign exchange reserves are sufficient and not a matter of concern the Reserve Bank of India Governor Sanjay Malhotra said on Wednesday amidst concerns that large capital market outflows could hit the dollar holdings. Forex reserves actually rose to about $697 billion as of April 3rd from $688 billion.

In the previous week the reserves have declined from a record high of $728 billion in late February thanks to central bank forex intervention to shield the rupee from pressure stemming from the war in west asia and lower gold prices have also brought down the value of reserves according to Reuters. I reached out to Aditi Nayar chief economist at ICRA ratings and I began by asking her what she was seeing in the early data following the start of the war on February 28th and her outlook ahead following the latest credit policy.

INTERVIEW TRANSCRIPT

Aditi Nayar: So I think, you know, it's a little early for hard data, but I'll give you some anecdotes that I picked up and some of the trends that we're seeing as a rating agency when we're talking to our clients, etc. There are a few sectors whose outputs we've changed to negative after the West Asia crisis has started because of the impact on the inputs that they use, both in terms of price and availability. Also, I think a general issue in some sectors is that because the inputs are not available in optimal quantities, capacity utilisation is actually on the lower side, and that is something that is going to hit margins as well because it's just suboptimal to not be running at the full capacity.

So I think this is a couple of, on the growth side, a couple of things that will have an impact in the Q4 numbers and more than that in the Q1 numbers, even if the crisis has indeed ended and the ceasefire holds and, you know, we're done with this conflict, prices will take some time to come back to normal because of the damage to the infrastructure, which has happened. Although availability may improve. So I think it's still a bit of a puzzle that we're trying to work through.

What will be the impact, the lasting impact of the West Asia crisis on Indian growth and macros in general.

Govindraj Ethiraj: Right, and what did you take away from Reserve Bank Governor's statements today, both in terms of what he actually said and maybe what he did not say?

Aditi Nayar: See, in terms of what he said, I think policy decision, unanimous pause on the rates and continuation of the neutral stance is very much what we were expecting, given the fact that there is so much uncertainty that cropped up out of nowhere after the last policy meeting. And, you know, as I was saying earlier, the impact of that in our data is still ahead because we'll be getting the March numbers, et cetera, in the next few weeks. So the policy decision is very appropriate given the kind of uncertainty that we had.

We were waiting to see what the new GDP and CPI inflation forecast would be on the new series from the MPC. And here, our forecasts are a little different. So I'll just elaborate on the sort of differences between what the MPC has said and what we projected.

So firstly, they work with an average crude oil price of $85 per barrel for FY27, which is the same as our assumption. As of now, while they've spoken of an un-linear risk, they haven't built it in. You know, they built in a normal monsoon into their forecast for now, while highlighting that it is a risk and could lead to an upside as far as the CPI inflation projection is concerned.

So first of all, they've said that there is an upside risk to CPI inflation and a downside risk to the GDP growth forecast, which is different from what they normally do. Typically, they will give you, say that risks are evenly balanced. Now, 4.6% is their projection. Ours is 4.3%, so it's a little bit lower. We are assuming that after the excise duty changes, the prices of petrol and diesel do not need to be changed in a hurry. So that's one difference.

Second, the price of gold had come down in the last couple of weeks when the prices had started unfolding. That's a little bit, again, of a palliative, very minor, but just want to point out that that is something that we did consider. And the third, that even though El Nino is a risk that we are also watching out for, the reservoir levels are quite ample right now, and that gives us some amount of insurance if the onset of the monsoon isn't very timely.

So we are a little lower on the CPI inflation number. On the growth number, on the other hand, also we are lower. So our forecast for an $85 per barrel crude for India's GDP growth in FY27 is 6.5% versus a 6.9% for the downside that the MPC has indicated today. And I think here, you know, these are the couple of things that I would point out. The suboptimal capacity utilisation is something that will affect margins. And overall, you know, the wealth effect is there as well.

Various transmission channels for the growth side to be lower. So for instance, on the inflation side, if you don't increase the pump prices of petrol and diesel, it stops the transmission. But I think on the growth side, some of the transmission mechanisms are also pretty rapid, including things like if remittances fall, et cetera.

So we are a little more circumspect on the growth number and a little more optimistic in a sense on the CPI number.

Govindraj Ethiraj: Right, and how are you seeing the Reserve Bank's moves? Of course, Reserve Bank is one of the early central banks to respond after the war started. But as you look around the world, how do you think central banks would react or are beginning to react versus how Reserve Bank is reacting, considering at least one part of the problem is common?

Aditi Nayar: See, the transmission pace would be different in different economies. So in the US, for instance, the gasoline prices change on a daily basis. And there, the pain gets felt by the consumer very, very fast.

Whereas in India, we felt the pain in terms of LPG availability. And in India, in any case, I think the bigger problem has been the LPG availability issue than the crude oil availability issue, because crude oil you can get from other sources, maybe more expensive, but you can get it. But our contracts are very tight to West Asia as far as gas is concerned.

So that's where the pain was felt more quickly in India. So it is different in terms of what gets hit. Other than that, I think in the Indian context, possibly for some time at least, the MPC would choose to see this as an exogenous supply shock and an exogenous price shock, and not necessarily one that warrants very quick monetary policy reaction.

And I would imagine that the MPC will want to stay growth supportive for as long as possible. So it would take quite a lot of negative news on the inflation side for, I imagine that they would go in for a rate hike.

Govindraj Ethiraj: Right, so I started by asking you about what other data signals that you were seeing, early data signals. So as you look ahead, so we've talked about the monetary policy response. What else do you think one should be expecting or looking out for at a time like this, which is maybe non-monetary, to respond to this situation?

Aditi Nayar: So first of all, in terms of data, obviously we'll be looking at all the high frequency indicators. And then the next thing that we'll be looking out for is the tax figures that the government releases from time to time. So that's where we would be looking at whether there is a margin impact.

Having said that, the first few months of the fiscal year, the tax base tends to be very small, and any small changes seem to be very magnified in terms of a ROI change. So maybe, while you shouldn't typically look too deeply into it, there could be refund related issues as well, but it is an input that we will be still considering over the next few months, really looking at the direct and the indirect tax data. Then of course, what we're hearing from our own clients in terms of the pain or the lack thereof.

Also, when we look at the response, so monetary policy response, also response from Government of India in terms of the liquidity that will be provided or any guarantees, any other relief measures that could be provided. So it'll be a combination. Now, if the ceasefire holds, then perhaps you may not need too much of additional policy support coming in from Government of India and the RBI.

But if this is going to be something that doesn't hold and we are again back in a stressful situation over the next few weeks, then maybe the government will have to think about what is the duration of the crisis that we should be preparing for, and accordingly, what are the relief measures that may need to be forthcoming. Now, just to segue, I mean, my view, this crisis is not the same as COVID in terms of the growth impact. I'll sort of give you a funny example.

So in COVID, we were all stuck at home and a lot of services that you consume out of home were completely cut off from you. And the thing with services like that is that if you don't avail of it one month or one week, you may not avail of it later. So for instance, a haircut.

If you don't get a haircut this month, you're probably not gonna get two haircuts next month. So it can be a dead loss. Similarly, if you were at home and you weren't using your car and your petrol consumption went down, you probably weren't going to consume twice as much petrol later, right?

But the savings from that, you may actually deploy towards something else. So services were badly hit during COVID. Manufacturing was hit, but then it picked up again later.

This crisis right now, other than a few things like restaurants, et cetera, where the cooking was a constraint, right now services are not being hit. To the extent that manufacturing is running under capacity because the inputs are not available, they can actually make that up later if the availability situation eases. So what was a dead loss during COVID?

You may not have a similar sort of dead loss situation in the current crisis. So you could have a almost proportionate recovery, but all of this will presume that the crisis ends pretty quickly.

Govindraj Ethiraj: That's an interesting note to end on. Thank you so much for joining me, Aditi.

Aditi Nayar: Thank you.

Wide Bodies and Jet Fuel

Willie Walsh head of the International Air Transport Association and incoming Indigo CEO warned on Wednesday it would take months for jet fuel supply to recover even if Iran opened or reopened the state of Hormuz fully given disruptions to Middle East refining capacity according to a Reuters report.

Fuel is the second largest expense for air carriers after labour typically accounting for about 27 percent of operating expenses according to IATA or the International Air Transport Association. Walsh told reporters in Singapore he expected crude oil prices to fall but jet fuel costs would likely remain slightly elevated due to the impact on refineries. He also said it would take months to get back to where supply needs to be given the disruption in refining capacity in west asia.

He also dismissed comparisons to the COVID-19 pandemic which had crippled global travel. He said that this was not similar to COVID and nowhere close because during COVID capacity was reduced by 95 percent whereas the current crisis is more comparable to shocks like the 2008-2009 global financial crisis or the aftermath of the September 11th attacks. Post 9-11 that's 2001 the recovery took about four months he said and in 2008-9 it took about 10 to 12 months.

Elsewhere BBC quoted him saying that India could handle more wide-bodied aircraft. He said that India's aviation market is poised for significant expansion but remains constrained by the limited number of wide-bodied aircraft. He described India's fleet of 50 wide-bodied aircraft as a scandal given its size and growth potential.

Wide-bodied aircraft are larger and twin aisles so there are two aisles and obviously meant for longer hauls.

China and Indian Commerce

For the first time in over five years a delegation of Indian businesses visited China according to the trade body PHD Chamber of Commerce and Industry. The delegation that was led by the PHDCCI was in China between the 29th of March and 4th of April even as the war raged in West Asia and comprised eight Indian companies which met Chinese companies from Shanghai, Zhejiang and Fuxi.

Six of the eight companies were startups operating in electric vehicle charging, electric trucks, battery storage and energy trading according to the industry body. Last month the Government of India eased rules to allow Chinese investments into India which had been tightened since 2020 following a deadly border clash at the Galwan Valley. I reached out to Dr. Ranjit Mehta, Secretary General and CEO of PHDCCI and I began by asking him how this delegation was different from previous ones he has been part of.

INTERVIEW TRANSCRIPT

Dr. Ranjeet Mehta: See, China has always been a country of innovation and especially they have done excellent things in manufacturing and that too especially on renewable energy. So this particular delegation was focussing on only on renewable energy and EV charging, basically solar and EV charging. That's what the focus of the delegation was.

Since you know we had been having some rough patches in our relations with China for last 4-5 years and this was the delegation which PSDCCI has mounted after a long time. So I must say that Chinese companies were very very enthusiastic about doing business with India and they have got a lot of capacity, a lot of extra capacity. They have already produced a lot and they feel that India is the biggest market and India is the market where they can really sell their products.

However, I think from our side the idea was to see that we can get some technology, we can see what is the latest innovation in this field and where the world is going, how China is doing. So our delegation members they had seen their facilities, they had seen the kind of innovation that China is doing in this. I think overall we found that the mood was very very upbeat and people were highly enthusiastic.

They want to come to India, they want to do business with India, they want to work with Indian businesses. I think this kind of you know one-on-one interactions between the two companies, between industry to industry is very very essential for taking it forward.

Govindraj Ethiraj: Right and I'll come to the specific sector since you talked about this being an EV focused delegation. What were the concerns if any that expressed on the Chinese side? I mean in terms of investing in India, I mean there were restrictions now we've lifted some of those restrictions.

Dr. Ranjeet Mehta: Well they are not willing to invest in India as such. They find India to be a very big market. They are willing to come to India, they are willing to enter into JVs, they are willing to do business with India.

However, I think that India at the same time is you know not an easy market in the sense the business ultimately is going to happen in states. Depends on states what kind of demand is there. At the same time I think that it'll take some time and since this was a first delegation after a long long time, I feel that once the companies they know each other, they meet and initially you just can't say that whether they had any concern.

We can't say that. We can only say that there was a lot of excitement, they were excited and they know that India is the fastest growing economy right now and a lot of action is happening in India and China has already passed that phase. However, India is at the stage of takeoff.

I think that they are willing to do business with India, with Indian industry. The only thing is it is between ultimately two companies. When two companies they meet, they enter into some kind of MOU, some kind of agreement, joint venture and they set the business terms.

Then I think this goes forward. But with this delegation one thing is very sure that they find India to be very exciting market and market with a lot of opportunities. At the same time we also have to you know get the technology which China has and we need to you know get those technologies in India so that we can also move forward in this journey.

Govindraj Ethiraj: And more specifically, so what are the kind of technology transfer opportunities that you saw or the technology partnership opportunities that you saw within electric vehicles and the electric vehicle ecosystem?

Dr. Ranjeet Mehta: See India is having a huge plan. We have a plan of achieving 500 gigawatt of renewable energy by 2030 and we want to achieve around 250 gigawatt of solar energy. So therefore and India has a big plan to come out with the electric vehicles.

Already it has taken off and we also need a lot of charging stations. So there are opportunities in India where Chinese companies can play a very important role. If the things go on I think that we also have another plan where we will mount another delegation maybe in the next upcoming quantum fair.

So I think that our companies from our members, I think our members they are very keen to go to China again. And as far as you know the market of course India in the charging stations or for that matter electric vehicles, I think Chinese have done wonders and we should definitely do some kind of collaboration with them.

Govindraj Ethiraj: Right and did you feel or see any opportunities in the other direction as in Indian companies either expanding presence which they've done in the past of course but expanding presence making investments or flow from here to there?

Dr. Ranjeet Mehta: No this we did not see. However India buys so machinery from China earlier on for example in ceramic industry. Earlier on we were getting machines from Italy but today all the machines are coming from China.

Same way in solar I mean we are getting a lot of machines from China. Even in other manufacturing sectors many machines are coming from China that people are already doing and they are getting. I think that is already going on and with the relations now being smooth so that will further enhance.

Govindraj Ethiraj: Right a slightly lateral question. We've had a war in West Asia for the last six weeks and we now have a ceasefire for two weeks. Now there is obviously a lot of shifts around because of this.

I know your delegation was actually there when the war was going on. Do you see any impact of all of that in the renewed relations that India and China have?

Dr. Ranjeet Mehta: We can't really say that there is any renewed interest because of the West Asia crisis. However the West Asia crisis has definitely disrupted the supply chains all over the world especially a country like India who imports around 85% crude oil from abroad. We had to suffer especially the commercial gas which was not available for some time.

I mean it was in short supply. It's not available but it was in short supply. So however today I think Government of India has already sent a circular ministry of petroleum and natural gas that 70% of what was in March the gas LPG will be supplied to the commercial sector also.

This is a very good news because the moment this 15 days ceasefire agreement between US and Iran took place I think this was a good move from Government and now the industries who are not able to operate in full capacity at least they'll have 70% of that fuel which they need.

Govindraj Ethiraj: Right Dr. Ranjeet. Thank you so much for joining me.

Dr. Ranjeet Mehta: Thank you very much.