Markets Fall Towards End Of Trading Day
India's major indices started falling in the last hour of trade on Thursday after tensions between India and Pakistan escalated
On Episode 576 of The Core Report, financial journalist Govindraj Ethiraj talks to Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan as well as Rakesh Bhatnagar, Director General at Voice of Indian Communication Technology Enterprises (VoICE).
SHOW NOTES
(00:00) Stories of the Day
(00:50) Markets fall towards end of trading day on heightened border tensions
(02:50) Rupee falls as currency markets reflect more fears than equities
(07:41) Good news, inflation is still coming down
(10:48) Are India’s cyber defenses strong and prepared for attacks?
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 [email protected].
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Good morning, it's Friday, the 9th of May, and this is Govindraj Ethiraj, headquartered in Broadcasting and Streaming from Mumbai, India's financial capital, through yet another very clear day.
Our top stories and themes,
the stock markets fall towards the end of trading day on heightened border tensions.
The rupee falls as currency markets reflect more fears than equities.
Is India's cyber defence strong enough and prepared for attacks?
And good news, inflation is still coming down.
The Market Slide
India's major indices started falling in the last hour of trade on Thursday after tensions between India and Pakistan escalated after India's Ministry of Defence said that as a part of Operation Sindhur, Indian forces had neutralised air defence radars and related systems at several locations in Pakistan. The CENZX was down 411 points to 80,334, and the NSE Nifty 50 fell 140 points to 24,273. There continues to be some resilience in the markets, but Friday could be in some ways a bigger test given that hostilities have escalated in the last 24 hours after the initial surgical strikes by India on Wednesday morning in response to that terrorist attack in Kashmir, which killed 26 innocent civilians.
The broader markets also saw declines with the Nifty mid-cap index falling about 2% and the Nifty small-cap 100 falling about 1.5%. In terms of other cues, the Bank of England cut interest rates on Thursday in a move which is likely to bring relief to businesses and individuals alike. The central bank reduced its key interest rate from 4.5 to 4.25% in its latest monetary policy meeting against a backdrop of not-so-good economic growth and uncertainty around tariffs. The cut had been widely expected, especially after a slowdown in price rises with inflation cooling to 2.6% in the 12 months to March from 2.8% the previous month, according to a report in the CNBC. Meanwhile, Trump has committed to a US-UK trade deal and Wall Street was gearing up for it as well, going by cues in early morning trade on Thursday. The details of the US-UK trade deal are of course not out as yet, but will be. Expectations are also high that a deal with India will follow soon, and that is something that has been hinted at for the last few days.
Meanwhile, there are travel disruptions across India. Some 27 airports now have been closed in northern, western, and central India for commercial flights until Saturday, May 10th, according to a report in the Times of India.
Rupee Jitters
Like elsewhere, currency markets are reflecting higher levels of apprehension in response to developments around the world than, let's say, equity markets, where India, for example, is still seeing considerable resilience. The rupee fell the most in more than three years against the dollar. Amidst escalating tensions with Pakistan, the rupee declined 1.1%, which is the biggest decline since February 22, to Rs. 85.79 per dollar, according to a report in Reuters. The rupee closed down finally 1% at Rs. 85.71, its worst day since February 23, after hitting that low. The yield on India's benchmark bond rose about seven basis points to 6.39%. So why are currency markets of the rupee reacting in this form, or reacting more, at least seemingly, than maybe equity markets? I reached out to Anuj Choudhary, research analyst, commodity and currency at Mirae Asset Sharekhan, and I began by asking him this, as to why we were seeing this form of reaction.
INTERVIEW TRANSCRIPT
Anuj Choudhary: Today, what happened, because of the surprise cross-border action which had taken place, so it was probably just a knee-jerk reaction by the markets. So I don't think that it's anything to worry about. It was just a knee-jerk reaction.
Govindraj Ethiraj: Right, but the level that we are seeing, I mean, even the knee-jerk reaction seems to be quite high. So what would you attribute that to?
Anuj Choudhary: Probably, it could be the importers who are unhedged. They are trying to hedge the positions in the market. Also, there may be some fear that if there are any escalations, that could lead to FII selling or something.
If that happens, it's probably an anticipated decline, like what you saw today.
Govindraj Ethiraj: Right, and if you were to look at the rupee in the last month or so, how would you characterise its movements?
Anuj Choudhary: We had seen the rupee strengthening to the best levels in about two years, mainly because of strong FII inflows which were coming in in the market some of the last couple of days. So we had strong FII inflows coming in probably in the second half of April. In May also, in the last four sessions, we have seen FIIs continuously buying.
Also, there was a weakness in the US dollar index. The dollar slipped below the 100 mark. So that also led to the appreciation of the rupee.
So it's a dual reason why the rupee appreciated.
Govindraj Ethiraj: And how are you seeing right now the dollar index and its ability to influence currencies like the rupee or our Asian peers?
Anuj Choudhary: The dollar currently is plagued because of the trade war concerns which are happening, the trade tariff concerns. That is impacting the dollar negatively because of the expectations that it may lead to inflationary concerns in the US. The growth in the US is expected to slow down.
That will lead to a stagnation situation in the US. So that has negatively impacted the US dollar index. In the bond markets, if you see, the 10-year yields are down.
That is why we are seeing broad weakness in the US dollar index. Over the last few days, we have seen appreciation in the Taiwanese dollar, the Hong Kong dollar, and all the Asian currencies which have positively impacted because of the same. Even the rupee, if you see, for that matter.
Last Thursday, if you see, we saw a sharp appreciation in the rupee. That was also supported by the strength in the Asian currencies.
Govindraj Ethiraj: Right, and you mentioned Taiwan, which saw a dramatic jump, almost 20%, just last week. So what is changing in the currency markets, or is there anything changing that people should know about?
Anuj Choudhary: The markets are trying to adjust to the trade tariff issue. So there is a lot of uncertainty right now about what's going to happen. Probably when the US president announced the trade tariffs on most of the nations, there was a knee-jerk reaction.
But gradually, as things are trying to normalise, the US is also trying to cool down and they are trying to reduce the trade tariffs and all these things.
Govindraj Ethiraj: Okay, and if you were to come back to rupee now, I know that you said we are in a period of uncertainty because of the conflict at the border and tensions may take some time to subside. But what else is going in favour of and maybe not working for the rupee?
Anuj Choudhary: See, right now, the inflation is in the RBI's comfort zone. So the CPI is in the RBI's comfort zone. So there are expectations that in June, there could probably be one more rate cut of 25 basis points.
Hopefully, if the cross-border commercials which are happening over the last few days, if they subside, if they cool down, probably we may see a rate cut in June.
Govindraj Ethiraj: And therefore, the direction of the rupee, you feel, I mean, assuming things calm down on the border?
Anuj Choudhary: Yes, overall, we expect the rupee to strengthen. One thing is that the dollar index is weak. FII inflows are good right now.
The inflation is in RBI's control. So all these factors are good. Even the expectations of a normal monsoon.
So all these factors are supporting the rupee.
Govindraj Ethiraj: Anuj, thank you so much for joining me.
Inflation Could Fall
So here's the bright spot in macroeconomic data, apart from the fact that we are set now for better rains or a good monsoon. Indian consumer inflation has mostly come down to a six-year low in April after a further moderation of food price rises, keeping it below the Reserve Bank's 4% medium-term target for a third straight month, according to a poll of economists conducted by Reuters. Food prices account for nearly half of the consumer price basket.
The May 5th to 8th Reuters poll, which spanned about 43 economists, suggested that inflation as measured by the annual change in the CPI or Consumer Price Index fell to 3.27% in April from 3.34% in March. The fall is minor or not much, but it's significant given the fact that it's still downwards. Food inflation continues to come down, which in turn is driving overall inflation levels down.
This includes household consumption items like vegetables, pulses, and cereals.
Taiwanese Exports Jump
Taiwan's exports climbed to a record through April, driven by a rush to ship goods ahead of U.S. tariffs and continued strong demand for tech products. Taiwan data is interesting and useful to note from here in the context of the wild currency movements, mostly upwards, which has shocked currency markets world over. Taiwan's overseas shipments rose about 30% in April from a year earlier to about $49 billion, the Ministry of Finance in Taiwan said in a statement quoted and reported by Bloomberg. Economists surveyed by Bloomberg also said that that compares with a 16% increase forecast by them, pushing total exports for the first four months of the year to $178 billion, and that's the highest ever for this period.
The Taiwanese government also said they expect the front-loading to continue, boosting Taiwan's exports in May, which could see a growth of 15 to 20% compared to the same period last year. And all of this is being led by, you guessed it, a global boom in artificial intelligence, which is fuelling demand for high-end tech products, including chips that make up a large share of Taiwan's exports. And coming back to currency, these rising exports have also contributed to a surge in foreign exchange holdings amongst exporters, one of the key drivers behind Taiwan's sharp rally that we saw a few days ago, and apparently its sharpest since the 1980s.
The Fed Won't Be Rushed
Federal Reserve Chair Jerome Powell has made it clear that he will not be rushed into lowering borrowing costs until there's more certainty on the direction of trade policy, which will have to come from the White House. The Federal Reserve held interest rates steady on Wednesday, and in their first meeting since President Donald Trump's sweeping tariff announcements last month, said the risks of seeing higher inflation and employment had risen in the United States.
The scenario would force a tough choice, he said, between lowering borrowing costs to support the job market or keeping them elevated to contain price pressures. He also suggested that uncertainty over the scope and scale of the tariffs and the outcome of the trade talks will keep policymakers on hold now. Meanwhile, the war of words, or rather the one-way attack by President Donald Trump against Jerome Powell continues.
India's Cyber Challenges
A high risk of cyber attacks on India's digital infrastructure is emerging, and even as India engages Pakistan in response to the terrorist attacks last month. Stock exchanges on Thursday urged market participants to implement immediate precautionary measures to safeguard their systems and ensure a secure marketplace. This followed an advisory issued by the Indian Computer Emergency Response Team, or CERT-IN, on Wednesday.
The Bombay Stock Exchange said that market participants were advised to take precautionary measures on potential cyber risks, including high-impact cyber attacks such as ransomware, supply chain intrusions, and DDoS, or distributed denial-of-service attacks, and web defacement and malware. The Ministry of Electronics and Information Technology has also issued a critical advisory warning of a sophisticated cyber threat campaign targeting organisations in banking, financial services, and insurance. The BSE also asked all brokers to take steps to check if necessary security controls align with the Securities and Exchange Board of India Cybersecurity and Cyber Resilience Framework issued on August 20th last year.
But while we're talking about attacks on the digital infrastructure, in the case of stock exchanges or the banking system, there are other threats as well that we have to take note of. And I reached out to Rakesh Bhatnagar, Director General of the Voice of Indian Communication Technology Enterprises, and I began by asking Rakesh Bhatnagar, who represents both telecom companies as well as voice providers, where exactly India was vulnerable, how, and what we should be doing about it.
INTERVIEW TRANSCRIPT
Rakesh Bhatnagar: You see, telecom systems provide remote maintenance facilities also. That type of facility is there. So very recently, as far as the drones are concerned, I tried to alarm the Defence Ministry and others that the drones which are being procured, were trying to source it from the GEM portal, and there were Chinese traders who were trying to pass on the drones as the domestic bake.
So you see, during the time of war, whether it is China or Pakistan, if the drones are coming and the software in the drones is from an unfriendly country, it can create a disaster type of scenario. Whatever procurement we are doing, definitely as for the sensitive areas are concerned, telecom happens to be a very, very sensitive segment. So there we have to ensure if we are having our own solutions within the country, so the best thing is that we should be using the domestic solutions only.
The scenario is that no two countries can be friendly for a very, very long time. Today, someone may be friendly with us, but the situation develops in such a way that we are no longer friendly after some time. Whatever software is concerned, whatever operating systems are concerned, we need to safeguard the best possible solution if we are having our own software, we are having our own operating systems, if we are having our own hardware.
So that provides the best type of scenario to us.
Govindraj Ethiraj: Right, so a potential attack on, let's say a bank or a stock exchange in India, which is a purely digital effort. But what you're saying is, let's say attacks taking place because of software, which is already embedded in hardware. You talked about drones, it could be routers, it could be so many telecom equipment pieces which come into the country.
How would we respond in that kind of a situation? Because so much of it is already here.
Rakesh Bhatnagar: Just last week, I had a meeting with the National Cyber Security Coordinator's team. I had indicated to them that many of the SIM cards which we are having at the operating system in the mobile SIM cards, whether it is a Vodafone or it is Airtel, many of the SIMs which are supplied prior to 2023, have not passed through the trusted sourcing. So the ones which are procured prior to 2023, they are vulnerable.
So a question was put to me, then what can be done? So I had suggested that in India, our players are there who have the capability of developing it. And just last week, as for the Indian operating system, which can work for the BSNL network, which can work for Vodafone.
So that testing of that, I've already sent across an official communication on that. If the approval comes, within two months, the Indian operating system can be there. As far as the chips are concerned, if they're replaced and because a SIM card completes the cost of a SIM, it is not more than about 20 rupees, 50 to 20 rupees.
That is the normal cost. So the government can say that all the SIMs which are the older one prior to 2023, the government can say that, okay, now the SIMs supporting the 5G network are going to be available. And if the Indian SIMs are there, maybe we can try to replace them as per the requirement.
Govindraj Ethiraj: And you feel that the SIM, and because the SIMs do not come or we don't know where they originally came from, you would have some kind of Trojan horse to trigger communications.
Rakesh Bhatnagar: It could happen. Another input I would like to share with you, when the prime minister had gone to the USA one and a half years back, when Biden was the president. So at that time, there was talk of rip and replacement of the entire 4G and 5G supplied by the Chinese companies, ZTE and Huawei.
So from India side, Reliance, Seattle, Voice Consortium and Tejas, TCS combined. So we had presented four alternate options who could participate in the rip and replacement programme. And when the G20 event was there, again, there were talks, but that exercise could not be completed because the issue came on the standardisation related and the certification related issues.
Because in India, the Airtel, BSNL, you see all of them, they're not following a common national standard and the common national specification, certification, so that also is not there. So as a result of that, it could not take off. But very recently, we have written to the government saying that there's an urgent need if we want to get the advantage of rip and replace, not only in the USA, but in the European Union because the European Union also, they're also trying to replace the Chinese equipment.
And even in India, we have sent across a proposal from our side that all the 4G deployment which has been done through ZTE and Huawei, can be replaced by the Indian solutions. In India, as of today, we are having about 10 players who can support 4G and who can support 5G as well. So when the capabilities are concerned, we definitely have the players who can do it.
So you are referred to the banking network. So you see, as far as the use cases are concerned, data is concerned, you see, all of them, they also make use of the 4G and 5G networks. So the network is very stable.
So whether it is the banking application or any other use case applications, you see the security will be available or there as well.
Govindraj Ethiraj: Right, last question. So if you were to look at the areas that are most exposed or most vulnerable today, between let's say, we started off by talking about banks and stock exchanges, and you've talked about SIMs and therefore obviously the entire mobile telephony network. What are the other areas that are vulnerable potentially, both in the private and public sector or government sector?
Rakesh Bhatnagar: You see, cyber attacks, the secure networks, so you see these are other requirements. We can have secure networks also. So we have the many domestic players who can make the various types of fireballs there, who can make the network secure and any cyber attack, they can control that part of.
Govindraj Ethiraj: Right, and this is something that everyone is doing already. So I mean, all banks over time, even whether there is a specific threat of the kind we're seeing, they've always had high levels of defence and stock exchanges as well, because of the nature of what they're dealing with, data to do with money. And I mean, we're talking about obviously billions of dollars being traded.
So that is sensitive and therefore they're geared. I mean, do you feel that there could be more or that's not enough?
Rakesh Bhatnagar: You see what they are doing, because everything is residing on the telecom networks. Say the telecom network itself is vulnerable. So the problems can be going to their side as well.
So like for example, you see right now, we are facing the problem with the armed forces action taking place at the borders. Now that the normal communication system, which is there of Airtel, Jio will be available at the borders, but we need a secure solution. So that type of network in a box, 4G, 5G network in a box, configured as per the requirements, specific requirements of the armed forces.
So that also can be configured. Right in the beginning I've said, domestic design led equipment. You see that it can give the best results, whether it is a stock exchange or a banking system, because then the complete software control is with us.
If a bank is needing any special secure environment for them, that also can be tailor-made because the system designers are in India. So they can always do it. But if you are sourcing software, you're getting some solution in which the foreign players are there.
So the control of the software is not with the Indian system. The control is outside. If you want to get some changes done, you'll say, okay, we'll try to get it done.
But the timeframe for the implementation, that may be three months, it may be six months. But in a dynamic situation, you want to change something very fast. You find that something is going wrong and you need some immediate corrective actions to be taken.
So with the domestic solutions, with the designer being available in India, software having been developed by them, they can do it very fast. Right.
Govindraj Ethiraj: Mr. Bhatnagar, thank you so much for joining me.
Rakesh Bhatnagar: Okay, thank you.
