Markets Rise After Gaining Confidence
Indian markets were up again after much back and forth during the trading day
On Episode 587 of The Core Report, financial journalist Govindraj Ethiraj talks to Rajnikant Behera, Executive Director, Finance at RSB Group as well as Advocate Shrish Deshpande, consumer court expert.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Markets rise after gaining confidence
(01:34) Morgan Stanley quotes India’s new terror doctrine as part of the bull case for 89,000 Sensex
(07:19) India’s auto components industry is holding steady
(17:16) Another bank shuts down, will depositors be in the lurch?
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].
—
Good morning, it's Thursday, the 22nd of May and this is Govindraj Ethiraj headquartered and Broadcasting and Streaming from Mumbai, India's financial capital.
Our top stories and themes.
The stock markets rise on Wednesday after gaining some confidence after the three-day fall.
Morgan Stanley quotes India's new terror doctrine as part of a bull case for 89,000 cents next year.
India's auto-component industry is holding steady against tariff threats, banking on domestic growth.
Another bank shuts down in India. Will depositors be in the lurch once again?
The Markets Stabilised
Indian markets were up again after much back and forth during the trading day on Wednesday, that's 21st May. The Sensex closed 410 points higher at 81,596, having of course shot up even more during the day but then of course retreated. The NSE Nifty 50 was higher by 129 points to 24,813.
Amongst the broader markets, the Nifty Mid Cap 100 and the Nifty Small Cap 100 were up 0.8% and 0.4% respectively. Meanwhile, the projections are back after a short break. Morgan Stanley has its base case Sensex target of 89,000 by June.
Well, it's June 2026 in case you were feeling more bullish than normal today. There is a bull case scenario too, in which Morgan Stanley is saying that the Sensex could touch 100,000 as early as June 2026 as well. So either way, whether it's 89,000 or 100,000, that's June 2026, that's a whole year away.
Morgan Stanley Equity Strategist said that their new Sensex June 2026 target of 89%, which is an 8% upside, bakes in their new earnings estimates and also rolled forward from their December 25 target of 82,000. Now, the reasons for all of this are not really new but perhaps worth recalling or revisiting. So Morgan Stanley says strong macroeconomic stability with improving terms of trade, declining primary deficit and low inflation volatility.
It also talks about mid to high teens earnings growth annually over the next three to five years, led by an emerging private capex cycle, re-leveraging of corporate balance and a structural rise in discretionary consumption. An interesting aspect Morgan Stanley brings in is India's new doctrine on terror, which makes future terror attacks an act of war, a strong deterrent to future terror strikes, also making it easy for future governments to act decisively against terror. And like the past, says Morgan Stanley, and therefore there's an upside surprise in military performance, underscoring strong progress made in strategy, air combat and navigation.
Oil Prices Jump
Oil prices rose after CNN reported that new intelligence from the United States suggests Israel is preparing for a potential strike on Iranian nuclear facilities. Brent crude went above 66 dollars a barrel. It was quoted below that for the last few days.
Now, it's not clear whether Israeli leaders have made a final decision on whether to carry out the strike, CNN said, citing unidentified officials. This would also suggest, at least in my inference, that the U.S. intelligence sources are leaking information so as to preempt the possibility of precisely such an attack. The U.S. has been attempting to engage Iran on nuclear talks, as we've been seeing in recent weeks, which could pave the way for more oil to return to the market, which could of course lead to some degree of oversupply. An attack by Israel would obviously hinder progress in those negotiations and contribute to more unrest in the Middle East, which supplies about a third of the world's crude, according to Reuters compilations. Meanwhile, gold prices rose again, this time to their highest in more than a week on Wednesday, supported by a weaker dollar and safe haven demand, as President Donald Trump failed to convince Republican holdouts to back his tax bill. Spot gold was up less than a percent at $3,314 an ounce, according to Reuters.
The New Global Flow
The new global capital flows continue to move in directions that are different from what they were before the tariff tantrum started. The question we don't have an answer to is how much will be long-term and how much will not. Japan saw record foreign inflows into its equities and long-term bonds in April as investors left U.S. markets following President Trump's trade attack against friends and foes alike, according to a report in the CNBC. The net inflows were the largest for a calendar month since Japan's finance ministry started collecting data in 1996, according to Morningstar. A Nomura head of forex strategy in Japan said that Trump's tariff shocks likely changed global investors' outlook on the U.S. economy and asset performance, which likely led to diversification away from the U.S. to other major markets, including Japan. Of course, things have shifted in the last few weeks, with the United States and China striking deals and other deals between the U.S. and U.K. and the U.K. and the U.U. and the U.K. in India, of course. Now, what does this mean? Well, before we come to capital flows, we quoted an Alliance survey report from China yesterday, which said that 95% of Chinese exporters are trying to build alternative Asian markets, regardless of which way the tariff situation goes. Now, for capital flows, while historic monthly inflows may not continue, market watchers feel that, or rather, they still have a positive outlook on Japanese assets and continue to see strong inflows.
The head of OCBC's investment strategy team said that Trump's unprecedented actions and policy flip-flops have dented U.S. credibility and confidence in its assets, and this could still result in global fund managers investing less in U.S. markets in favour of others. Given such a backdrop, demand for Japanese assets may remain healthy, even if it's not as strong as April, he said, or rather, he told CNBC. There is a corporate governance angle as well, rather than improving it as far as Japanese companies go.
Morningstar's equity research analyst says that he saw more net inflows into Japanese equities than in the past decade amidst that improved corporate governance.
Indigo Posts Good Results
Indigo on Wednesday reported a 62% rise in consolidated net profits for the fourth quarter of FY24-25, at about Rs3,067 crore from about Rs1,890 crore in the same period last year. All of this was attributed to strong domestic demand.
It's quite likely that the current quarter results, which will be out in July, will see a dip because of the stoppage of several flights in the north and west of India and spreading over 30 airports, which were shut for over a week earlier this month for security reasons. Meanwhile, consolidated revenue from operations for Indigo grew about 24% year-on-year to about Rs22,000 crore from about Rs17,800 crore last year, sequentially, though the revenue was almost the same.
An Outlook for Auto Components
India's auto component sector is expected to grow about 7-9% this year, which was similar to last year thanks to sustained demand momentum from two-wheelers and passenger vehicles, particularly utility vehicles, which account for nearly half of overall revenue, according to a new report from Crisil Ratings.
The ratings analysis looked at auto component makers accounting for nearly 35% of sector revenue of about Rs8,00,000 crore last year, or Rs800,000 crore. An interesting shift underway in the component space is that the share of high-margin, technology-intensive components now accounts for 27% of revenue, up from about 18% before Covid, thanks to premiumisation and strict emission norms. The report also says there is a moderate uptick in commercial vehicles and tractors, which have about 17% share, and that will help the industry.
The aftermarket segment, which is about 15% of revenue, this is for components, remember, is also seen growing at about 5-7%. However, weak demand for new vehicles in the United States and Europe, that's about 60% of India's exports, could provide headwinds. Interestingly, Crisil says that there is a decline in input costs, particularly of steel, which is about 40-50% share of input costs, aluminium 15-20%, and plastics 10-12%.
These are the share of input costs and not how much it's fallen. And all of these represent structural rigidity, reduce vehicle weight, and for interiors, and obviously, the reduction in input costs will help profitability, though pressure from new tariffs could dent the margins of companies exporting largely to the US. The US contributed just 5% of total revenue, but commands a 28% share of export earnings, and is the fastest-growing auto component market, says Crisil.
I spoke with Rajnikanth Behera, director and part of the founding family of RSB Group, a leading auto component manufacturer with units across India, as well as in Mexico and the United States, and primarily focused on areas like transmission systems, and I began by asking him how he was seeing the tariff challenge right now.
INTERVIEW TRANSCRIPT
Rajnikant Behera: If you say, in the beginning when he put that, but fortunately, taking feedback from the industry and globally, he definitely came back to pausing it first, the 90-day pause, which is also important for everybody to reflect on. And post that, he had made a few of the tariffs mandatory for some countries. For example, like China also from 145-50%, now around 30%, they are negotiating.
So, I think he set a ground that how things are moving is not going to move like that, and we all need to correct and not correct incrementally, but transformationally for everybody to get aligned. So, that the message he was giving, good or bad, I think we are not going to judge. That's how the geopolitical scenario takes place.
But from an auto component perspective, very quickly, of course, we need to realign. We need to get up, realign ourselves, and understand how the tariff law is there. We are present in India, we are present in the US and Mexico as geographies.
So, in all these three places, we are seeing how we realign our business wherever possible. It's not easy to realign your auto business overnight. But of course, for the next few years, how do we realign our investments and our current order book also, how do we realign and see how budgets are moving?
So, this is some work we are currently doing from our auto component and industry perspective.
Govindraj Ethiraj: Right. And you have a large India presence as well. So, roughly between domestic and international, what is your current split across your group?
Rajnikant Behera: So, as a consolidated sales, I would say around 10% will be a global exposure. So, we are not that much globally exposed, 10 to 15%, I would say, including exports. So, one is my businesses that I'm doing there and my exports from here.
So, fortunately, our exports are not that high, so that we get hit from a revenue perspective immediately.
Govindraj Ethiraj: But many of the companies you supply to including Tata Motors and Ashok Leyland and M&M are also exporters. So, is there a secondary hit in that sense?
Rajnikant Behera: They are exported, but I don't know how large they're exported to the US. They're exporters to major Asian countries. So, the impact is not that high from that perspective.
Unless India has an import on raw materials and stuff like that, which we produce here, as of now, we have not got hit to that extent.
Govindraj Ethiraj: Okay. I'll come back to the domestic market in a second. But you were clearly prescient in some ways in setting up in the US and in Mexico.
I'm also sure to take advantage of the trade deals there and the growth in the market. But what made you think of setting up in 2011, which was obviously before Donald Trump's first presidency as well?
Rajnikant Behera: Yeah. So, I mean, typically, if you see the US market over the last three to four decades, if you see the US and see China, to begin with, the US started importing more and more, and China started exporting more and more, as an example I'm seeing. Similarly, Canada and Mexico are just besides the US.
Of course, there are going to be opportunities there as well. And that is how the opportunity of Mexico came in. So, we supply to the tier ones there, and the auto components and the tier one supply to the global OEMs there.
And tier one started moving to Mexico to take advantage of the free trade agreements that currently also exist between the US, Mexico and Canada. So, on the basis that since our OEMs were moving, you know, component business, you understand whether it is in India and abroad, we follow our OEMs. Typically, if you have to secure orders, and if you have to secure more products, penetrate more, this is how mostly the component manufacturers follow. So, that was the strategy that whatever we are doing from the US, if you have to grow, then we go there and work with our tier one OEMs to get more business.
So, that's the idea. That was the idea when we set it up.
Govindraj Ethiraj: Right. So, you said about 85-90% of your market and business is really in India. How have things been in the last year or so?
We've seen passenger vehicles, for example, slow down to some extent, the growth of it at least. This year seems to be similar to last year, give or take. Are you seeing any other shifts within the space in terms of the nature of vehicles, electrification, hybrids, what kind of vehicles people are consuming?
Rajnikant Behera: So, cars, of course, there is a slight growth, but not to the extent that we thought of. The first two wheelers also are protected. We don't supply to two wheelers, we do supply to cars, but our predominant supply is to commercial vehicles.
And commercial vehicles definitely went through a tip in terms of your overall market growth. So, 3-4% it went down. And so, from that perspective, because it was an election year as well, and capital expenditures from the government side are important to accentuate the commercial vehicle sales.
So, that's where we had a little bit of a slowdown this year compared to last year. And this year, of course, is looking better than at least last year. So, yes, moving forward for further growth as the capital expenditure starts increasing now.
Govindraj Ethiraj: I'm going to ask you for an outlook for the next three to six months, but between commercial vehicles and passenger vehicles, what's your rough split?
Rajnikant Behera: So, it's a commercial vehicle, I would say 80% will be a commercial vehicle. In our auto business, because we have two businesses, one is auto and one is construction equipment aggregate. I'm talking on auto.
So, almost 80-85% will be commercial vehicles.
Govindraj Ethiraj: So, you supply to JCP, for example, that is treated as a domestic business or export? Domestic. Okay.
So, JCP India. Okay. So, what's your outlook then for both the heavy commercial as well as the construction business or the construction equipment manufacturing business?
Rajnikant Behera: Well, the construction equipment business is doing fairly well. It's doing much better than the auto business. And that shows that government spending has increased.
Of course, once the construction equipment increases, the lag effect comes in. And we are now seeing commercial vehicles also taking place. But for the next three to six months, I would say it will be more of a coming back to last year, probably numbers.
And then the second half will be much better. That's what we understand as of now, quote unquote, any other war coming in. So, we can't predict that.
But if I were to take that out and if I were to see how the GDP has been slightly corrected by two, three basis points, still, we see that compared to what we did on March 25, March 26 should be at least better by three to four percent at least.
Govindraj Ethiraj: And this is what you're saying now is the aggregate which includes higher contributions from commercial vehicles as well as construction equipment?
Rajnikant Behera: Yes. So, construction definitely is better. And commercial vehicles may not be as good as construction, but they will catch up compared to what was slowed down last year.
Govindraj Ethiraj: And you're saying that you're seeing the early signs of that happening, at least on the orders that you're getting, which is feeding them.
Rajnikant Behera: Correct. You're right.
Govindraj Ethiraj: Got it. Rajnikant, it's been a pleasure speaking with you. Thank you so much for joining me.
Rajnikant Behera: Thank you. Thank you so much. Bye-bye.
What happens to depositors when banks shut?
The Reserve Bank of India on Monday said it cancelled the licence of a Lucknow-based bank called HCBL Cooperative Bank as the lender does not have adequate capital and earnings prospects. Consequently, the bank ceases to carry on banking business with effect to the closing of business on May 19, the Reserve Bank said.
The Commissioner and Registrar of Cooperatives for Uttar Pradesh has also been requested to issue an order for winding up the bank and appoint a On liquidation, every depositor would be entitled to receive a deposit insurance claim amount of his or her deposits up to Rs 5 lakh from the Deposit Insurance and Credit Guarantee Corporation DICGC and that's where the problem begins. In February this year, the Reserve Bank also imposed strict curbs and effectively shut Mumbai-based New Era Cooperative Bank barring it from issuing loans, accepting new deposits or permitting withdrawals for a six-month period. According to the Reserve Bank, these measures were taken due to concerns over that bank's financial stability and liquidity.
An issue that crops up in the case of New Era or other banks that have been shut down is the smooth recovery of depositor funds which is actually never smooth. I reached out to Advocate Shirish Deshpande, Chairman of the Mumbai Grahak Panchayat, considered one of Asia's largest voluntary consumer bodies and who has been campaigning on behalf of New Era's depositors in general and about how the DICGC should be doing more to give back depositors' savings because they have the money.
INTERVIEW TRANSCRIPT
Adv Shirish Deshpande: Well, depositors do not know exactly where do they stand because earlier as per the first communication of Reserve Bank, they were supposed to pay this Rs 5 lakhs, up to Rs 5 lakhs to the depositors by 15th of May. Now, they have again extended that date by another three months. By giving another three months, that is up to I think 15th of August or something it would be.
Now, while extending the date or even while announcing the first restrictions on 13th February, Reserve Bank has not cared to take the depositors into confidence. It is just a mere circular that there are some irregularities and in the depositors' interest, the following restrictions are being imposed that from tomorrow onwards you cannot withdraw your deposits, blah blah and all that. Even in the second extension also now, the one which has come just a couple of days back, that is on 15th of May, Reserve Bank has not taken the depositors into confidence by saying as to what are the steps that are so far taken by Reserve Bank for revival of this bank or any merger plans or the proposals and all.
And straight away now, they are actually deferring this payment under the DICGC Act, which is supposed to be in 90 days, three months. Now, they have deferred it. Again, Reserve Bank does not think it fit that they owe an explanation as to why this extension is being given.
You see, the people are put at tremendous hardships. These are their hard-earned money. There are n number of senior citizens whose livelihood is depending on every month income that is getting from their fixed deposits and other schemes and the saving bank account and all.
Where do they go? Now, all that they have so far allowed is only 25,000, not even 5 lakhs. 5 lakhs is the limit that is up to which they will give it eventually by August end now, I suppose.
So, this is not the way the regulator has to act. The regulator must realise that the entire banking system operates on the deposits of the depositors. And if you don't care for them, it shows a very bad picture, you see.
Govindraj Ethiraj: Right. So, in terms of the modus operandi of the regulator, isn't this standard procedure for most such cases where banks, for various reasons including fraud within the bank, have been asked to stop business or cease business?
Adv Shirish Deshpande: Yes. In fact, if this is supposed to be the standard procedure of Reserve Bank, then what is required is revisit the standard procedure because it is painful. You see, I believe that High Court and also the National Consumer Commission has passed several strictures against the Reserve Bank and made suggestions.
In fact, even recently, while extending this date in New India case, Reserve Bank has said that in case of distress in the emergency and all, if you want the money, okay, you come out with this document, that document and all. Actually, this practise itself has been deprecated by the courts and still the Reserve Bank is, it seems, not in a position to learn anything from this.
Govindraj Ethiraj: Right. So, in the case of giving out funds from the DICGC, are the funds not there or is it there but not being dispersed for other technical reasons?
Adv Shirish Deshpande: I don't know. In fact, DICGC is plush with the money. If I can quote certain statistics to you, firstly, when the DICGC, Reserve Bank is a part of that also, as you know, when they're saying that they're going to give 5 lakhs, this is where we must first understand that DICGC collects from the banks, all banks, whether private, public sector, cooperative banks, any bank which is a registered bank as a banking company, they collect the premium on the entire deposits lying in the bank at the end of every six months. Now, if premium, if you're collecting on the full amount, where is the justification for giving only 5 lakhs and which was earlier, you know, it was only 1 lakh till about, I think, 2021.
So, when you're collecting the premium for the entire amount, it doesn't look nice. In fact, just imagine if the same practise is to be adopted by any private insurance company, what would you call it? It would amount to an unfair trade practise.
It would amount to unethical practise. Now, coming to the amounts that DICGC has, I can tell you the total amount of claims that they have settled so far since 1978. Mind you, since 1978 till 2024, the total amount that they have claimed and disbursed to the depositors is only 16,326 crores.
I repeat, 16,326 crores. As against that, I will match what is the collection of DICGC only in one financial year by way of a premium for year 23-24 is 23,879 crores. So, match these two figures.
Total claims settled so far, 16,326 crores and every year or last year that you have collected the premium alone for only one year is 23,879 crores. Now, the total deposits that DICGC has, the figure is astounding 1,98,763 crores. And do you know the simple interest that they are getting every year on this is in the range of about 11,908 crores.
And last year, 23-24, they have collected about 13,947 crores only by way of interest. So, there is no shortage of the funds. Only thing what is lacking is a willingness on part of the government, on part of the Ministry of Finance, on part of the Reserve Bank of India and the DICGC authority.
Govindraj Ethiraj: Okay. So, I don't have them on this discussion. I mean, just to sort of sum this up, I mean, but the money that the DICG is sitting on, it is part of a consolidated balance sheet somewhere, isn't it?
Adv Shirish Deshpande: Yes. In fact, I must clarify that all these figures that I have extracted and quoted now, they are from the DICGC annual report itself. So, they are uncontroverted figures.
Okay. So, these figures cannot be questioned or doubted about it. So, the source is only authentic source.
Govindraj Ethiraj: Okay. Coming back to the amount that is being dispersed or should be dispersed to depositors, assuming let's say all the other procedural issues are taken care of, for example, in the case of the bank, in question, there was fraud that in turn led to the problems. Now, what in your mind should be an ideal dispersal figure?
If you're saying it went from 1 to 5 lakhs, what should be the… No, no.
Adv Shirish Deshpande: You see, there is no question of ideal figure. The figure is my every rupee, your and my every rupee has to be insured and it should be fully secured. You see, I would have said that this is a matter of policy, had it not been the case that they were collecting the premium for the entire amount.
But today, they have been collecting the premium for the entire amount. So, they have no other option. Mind you, if they were to collect the thing from up to 5 lakhs, then it's a question that, okay, instead of 5 lakhs, why don't you make it 10 lakhs or 20 lakhs and all.
The fact that you are collecting the premium on the entire amount, you have no option but to secure the entire deposits and pay back the entire deposits. That's what it is.
Govindraj Ethiraj: And where do things stand today in terms of the DICGC or the Reserve Bank responding to these requests and how do you see the path forward?
Adv Shirish Deshpande: You know, we have made it quite public in the media and all that thing, but there is not a smallest denial from Reserve Bank or DICGC. Worse still, we wrote letters to the Reserve Bank of India and sought the appointment. Now, this is the consumer body, this is perhaps the largest consumer body in India, Mumbai Grahat Panchayat.
And Reserve Bank officials do not find time to give us, to meet us and explain what the whole issue is about. The same question that you are asking me, where does the matter stand now and all, we as a depositors representative are entitled to know that. Now, Reserve Bank doesn't care to give us the appointment.
What are they shying away for? I mean, we don't understand this.
Govindraj Ethiraj: Right. Mr. Deshpande, thank you so much for joining me.
