Markets Set To Edge Up On Ceasefire Moves
Last week was a tough one for the stock markets though it could have been much worse
On Episode 578 of The Core Report, financial journalist Govindraj Ethiraj talks to Dharmakirti Joshi, Chief Economist, Crisil Limited.
SHOW NOTES
(00:00) The Take
(04:21) Markets set to edge up on ceasefire moves
(10:54) Oil prices are holding steady in the lower 60s
(13:52) Decoding India’s positive macroeconomic data that starts with the monsoons and analysing its potential impact
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 Monday the 12th of May and this is Govindraj Ethiraj, headquartered in Broadcasting as well as Streaming from Mumbai, India's financial capital.
The Take: Decision Making In A Time Of Information Asymmetry
Someone forwarded a Twitter link on Friday which I clicked through and found an unknown person with a high follower count announcing confidently that former Pakistan Prime Minister and well-known cricketer Imran Khan was no more.
The question that was appended to this forward was whether this was true. I responded to the question with a question. Why or how would some random person on social media sitting in some corner of the country know what was happening to Imran Khan or how and speak with such confidence?
There was no answer because there is not one, not from the person who forwarded this message and not from the person who posted this claim either. I'm sure if I were to challenge him. The point is actually larger.
We've entered a new dimension in misinformation flows and psyops which are now part of any war now like in the case of Israel and Hamas or Russia and Ukraine but we're seeing it here. Which means that almost nothing of seeming import can be trusted and since mainstream media notably on television has shown considerable alacrity in reproducing the same social media posts that cannot be trusted either. So the gap between social media and news media has reduced with very low to non-existent filtration processes in mainstream media.
This is of course bad news for all of us in the media but this is not so much about the media. The person who forwarded the post runs a business of reasonable size. I wanted to pose a question to this person.
As an entrepreneur or business leader would you take decisions that impact your organisation and its future direction based on random posts or even more scatterbrained claims that increasingly infest social media? Obviously not. You would not go invest in a new plant or explore a new line of business or shut one down because someone you have never met or will meet made a claim on social media backed of course with zero proof or evidence.
If you are the kind of person that has gone by the gut then it's your gut you would trust and not someone else's. I'm pretty sure of that. And yet we are in a situation where we appear to be trusting and almost believing random statements on non-trivial issues.
The argument which I've heard often is that this does not affect me directly so I don't really bother so much but I will definitely research it and authenticate it if it were to be impacting me. Like the government announcing a new policy that affects my business. Turns out it does not necessarily work like this.
As more falsehoods permeate the information ecosystems or spheres of influence we operate and live in we face the threat of losing our collective ability to think rationally about what is true or not. When hit with an avalanche of falsehoods it becomes tougher to distinguish fact from fiction and we get tired even doing so and default to the easy and lazy interpretations. We increasingly start believing anything that flies on social media, for example a campaign that highlights a defect with a competitor's product or service which was more likely engineered rather than real.
Now there is a larger context to all of this. The conflict with Pakistan with China floating somewhere above all of this with whom we have inextricable trade relations at this point will be a long one. While some threats will also recede as time passes and sense prevails there is no guarantee that something kinetic will not flare up again.
And even while firing of missiles might stop for now the cyber attacks and psyops are likely to continue or even escalate. In a situation like this, decision making must lean evermore on hard data and evidence. It's not that a random social media post will cause companies to change business direction but the time wasted in trying to analyse the outcome of something that is false to start with is unfortunate if not criminal.
A long war can inflict pain on the economy but India's economy is resilient and deep and will continue to grow but it also depends on our minds which must also be strong and stay focused. We must be far more discerning about what we consume and who we believe.
And that brings us to the top stories and themes.
The stock markets are set to edge up on ceasefire moves.
The monsoons are coming early as more macro positives line up.
Oil prices are holding steady in the lower 60s
And decoding India's positive macroeconomic data that starts with the monsoons and analysing the potential impact
The Market's Set To Rise
Last week was a tough one for the stock markets though it could have been much worse which it was not and is all set to get better next week at least somewhat and going by how things are right now. The larger question from a business and markets point of view is what is the meaning that we would revert to? Is it before April 22nd or April 2nd?
Even if events after April 22nd or the killing of innocent Indian tourists in Pahalgam in Kashmir can be put aside from a purely market movement point of view, April 2nd the day the tariffs were announced is still hanging over us. Remember we are on a temporary reprieve from the 26 percent tariff that was promised and then reduced along with everyone else to 10 percent for goods exported from here or imported into the United States. So where do we stand now is a macroeconomic question as well which I will come to shortly.
Last week saw a fair degree of pressure on the markets with the census falling about 1047 points. Sectors like tourism took bigger hits given the perception that travel would be hit domestically as we did see early signs of that over the weekend as well in terms of lower footfalls at airports among other places. But with the ceasefire announced and assuming there is no violation of it, activity and travel could pick up in a few weeks.
Remember over 30 airports are shut right now particularly all the airports which would typically receive summer domestic tourist traffic. There will be a business impact of all of this which will emerge in some time. But the good news is that the last quarter is looking good and even if the current one for some companies and sectors is weak, the next one could turn around.
Nilesh Shah, Managing Director of Kotak AMC told Business Standard that quarterly results from 108 companies have exceeded expectations. He says that one can argue that good results come early and bad ones later but the fact remains that actual numbers have beaten estimates. Second, foreign portfolio investors who weren't expected to buy have turned buyers and are buying in significant volumes openly and not quietly.
The other important point he makes is that there is no major initial public offer or IPO or QIP, that's Qualified Institutional Purchase Activity. It's all primarily retail and high net worth individuals booking profits. Domestic institutional investors are still net buyers.
So flows and fundamentals, the two things that drive markets have turned favourable. Now the IPO point is interesting because they do tend to drain out investor demand and more so at market peaks and usually the not so good ones come towards the end though of course they come in the middle of a bull run too. And back to Friday, markets fell sharply after that sudden escalation in tensions between India and Pakistan.
The Sensex fell about 880 points to close at 79,454. The NSE Nifty 50 was down 265 points at 24,008. The Nifty Mid Cap 100 in the broader market settled flat or mostly flat and the Nifty Small Cap 100 was down about 0.6%. Like we've argued in the past, the Indian markets have demonstrated remarkable resilience in the last three weeks even as foreign flows have remained high. Next week should be better than the last one and more on that macroeconomic data which could drive it is coming up. Meanwhile, foreign exchange reserves in the country declined about $2 billion to $686 billion as of May 2nd after an eight-week gaining streak that took reserves to a near six-month high according to data from the Reserve Bank of India reported by Reuters on Friday. Reserves had risen by nearly $50 billion in the nine weeks preceding the that's last week and we are even now just $19 billion short of the all-time high of $704.8 or close to $705 billion hit in late September 2024, a period which also saw the markets hitting their peaks. For the week to which the reserve data pertains, the rupee has risen about 1% thanks to inflows into Indian equities and optimism about a trade deal between India and the US. Remember there's a trade deal between India and the UK now. On Friday the rupee closed at 85 rupees 37 paise and it was down about 0.9% thanks to depreciation pressure sparked by the escalation in conflict according to Reuters. Currency markets in general as we discussed last week as well are reacting more adversely to developments in geopolitics including tariff wars. More on currencies coming up in a moment.
Emerging markets or no emerging markets?
There's an interesting debate that seems to be developing and while this has been around for some time there are some new nuances. The question of course is are emerging markets including India a sound safe haven at times like this? A report in Bloomberg says global funds are piling back into Asian stocks as the attraction of soaring currencies and resilient earnings offset concerns that higher US tariffs will hit the region's economic growth.
Global funds have bought about 9.6 billion dollars net of shares in emerging Asia outside China over the last three weeks which apparently is the longest run of inflow since March 2024 according to that Bloomberg data. Emerging market corporate earnings are also forecast to be more resilient than the US peers to the impact of Trump's higher tariffs and we've already just talked about those 108 Indian companies which have announced results and beaten expectations. The current trade levies may reduce emerging market earnings in aggregate by 7% versus 10 to 15% for the US according to calculations from HSBC holdings.
Stronger currencies pull investors as they mean higher total returns for dollar-based investors. The MSCI gauge of regional stocks outside Japan has risen almost 16% over the past month while an index of global shares has risen only about half that amount. Whenever Asian currencies trend then normally you tend to see capital inflows into this part of the world, a strategist at UBS global wealth management in Singapore told Bloomberg.
Asian financial markets have generally rebounded after the downturn in the US dollar as traders bet the tariffs would be negative for American growth and undermine overseas demand for the nation's assets and that's something that we've been seeing. The Taiwanese dollar has led the regional currency rally and risen more than 9% since the 2nd of April while the South Korean won Singapore dollar and Malaysian ringgit have all appreciated more than 3% says Bloomberg. The other view is that emerging markets don't do well in recessions. According to strategists at JP Morgan shares and company, they said that for now investors should not chase the current emerging market rally until there is more visibility on the magnitude and geographical breadth of the macro slowdown.
Other strategists say Asian shares remain attractive as the region will be one of the biggest beneficiaries should fears of a global trade war keep diminishing. According to them the region has been under-owned in investor portfolios for a long time and undervalued for just as long and there is plenty of potential upside should growth concerns global and regional fade. More now on emerging market currencies but in a moment.
Oil Prices Edge Up
Oil prices were roughly 2% higher on Friday and clocked their first weekly gains since mid-April as a U.S. trade deal with the United Kingdom turned investors optimistic even as they waited for an outcome of trade talks between the U.S. and China. Brent crude futures rose a little more than a dollar to settle about $63.90 so just under $64 a barrel while the U.S. West Texas intermediate crude futures were at about $61 a barrel according to Reuters. Over the week both the West Texas intermediate crude and Brent gained about 4%. On Friday the U.S. President Donald Trump said China should open its market to the U.S. and that an 80% on Chinese goods seems right just a day after he announced the deal lowering tariffs on British car and steel exports among other agreements with the United Kingdom.
Changing Tack On Currencies
So back to currencies we've been speaking of how currencies are reflecting more vividly the fears and apprehensions and perhaps hopes of investors worldwide rather than equity markets that includes India as well with the rupee being hit harder in a manner of speaking than the equity markets last week even as the border conflict escalated. The lessons here are not to do with currencies alone, it's about how second order effects are difficult to predict or maybe the right people are not being consulted when making these decisions on areas like global trade or tariffs. Also that such decisions in this case international but could be domestic tomorrow might have cascading effects of the kind we may not be able to predict or should be working harder to try and predict.
So on the day Trump unveiled the steepest tariff hikes for U.S. trading partners in a century, JPMorgan Chase, according to Bloomberg, had this trade idea for clients. They said to go bearish on emerging market currencies. About a month later the Wall Street Bank is changing tack.
Our underweight has not worked strategist wrote in a Friday note referring to their liberation day advice for investors to underweight currencies from developing nations in their portfolios. We see sufficient arguments that emerging market forex will not weaken versus the U.S. dollar in the coming period they said in that note quoted by Bloomberg. So it's not just JPMorgan.
Morgan Stanley in early April told clients to add to their bearish positions on emerging market currencies. What both did not see coming was how investors would move away from the U.S. assets or how a pause in Trump's levies would allay some fears. So since April 2nd an MSCI gauge of emerging currencies is up three percent led of course by that Taiwanese dollar and the South Korean won.
And then speculation about potential trade deals and Taiwan's currency soaring the most since the late 1980s which caused sort of shock waves in the currency markets and that pushed JPMorgan strategists to double upgrade their stance on Asian currencies going from overweight to underweight. And now they're bullish on currencies including the Malaysian ringgit and anticipate China's onshore won to remain stable according to that comprehensive Bloomberg report.
Monsoons, Another Step In Economic Revival
Monsoon rains are expected to hit India's southern coast on May 27th which is not far from now. Five days earlier than usual making the earliest arrival in at least five years according to the Indian meteorological department which also obviously raises hopes of bumper harvests of crops like rice, soya bean and corn according to a Reuters report. Last year the monsoon reached the Kerala coast on May 30th and overall summer rains were the highest since 2020 which also helped India recover from a drought in 2023.
The monsoon provides about 70 percent of the rain that India needs to water farms and recharge aquifers and reservoirs. Reuters points out nearly half of India's farmland without any irrigation cover depends on the annual June rains to grow a number of crops. Summer rains usually arrive in the southernmost coast of Kerala state around June 1st and then spread across the country or move up the country by mid-July and that process usually triggers the planting of crops like rice, corn, cotton, soya beans and sugarcane, says Reuters.
The IMD or the Indian meteorological department last month said that India would see above average monsoon rains and this would be for the second straight year that's 2025. Of course there are some questions about whether the rainfall would be consistent and we'll come to that in a moment. The IMD defines average or normal rainfall as ranging between 96 percent and 104 or 104 percent or a 50-year average of 87 centimetres or 35 inches for the four-month season.
So with the monsoons being among the major macroeconomic data points that are looking good and favourable, what are the other major macro data points looking like and how is India poised as we examine our internal and external economic positions now that some things have settled down. I reached out to Dharmakirti Joshi, Chief Economist, Crisil Limited and I began by asking him how India's macroeconomic data was stacking up from here on.
INTERVIEW TRANSCRIPT
DK Joshi: As far as I think the monsoons are concerned, coming early or a little bit late doesn't matter too much for agriculture at least as we've seen in the past. What is really important is that both the private agency SKYMET as well as the IMD are predicting normal monsoons this year and this is the first set of good news for agriculture output because food inflation depends on agriculture production being about 18 percent of the GDP. So clearly from an agri-growth and food perspective I think it's a very important first set of signals and it comes on top of the production of wheat which is expected to be healthier this year and also I think pulses production is also expected to be good.
So these are the ruby indicators from the second advance estimates. On the agriculture front we have good news. Having said that, I think I also want to point out that this is specifically important this year because the external environment is not that great.
So the domestic factors assume greater significance in this context but I think having said that we need to watch out a bit carefully on how the rains play out because you've seen that the monsoon patterns have changed there are heat waves etc so all those things will always remain monitorable and they'll be watching and I think apart from that early rains can bring some respite from the hot weather that is currently playing out. So that's on the agri front.
Govindraj Ethiraj: If I were to ask you about food inflation in the past food inflation has been driven by factors like vegetable prices including onion, potato, tomato which have fluctuated quite widely and part of this or a good part of this I imagine is driven by rains but is that something that we are in more control of compared to previous years?
DK Joshi: See I think weather is unpredictable and the food production responds to that I think and it's very sensitive to that. So I think we have become more resilient in some of the crops like rice, wheat etc because you've introduced new varieties. I think this is an ongoing process and what has also happened is that the frequency of these weather shocks has also increased while we become more resilient.
So it's an interplay of both these that determines but for this year I think the tidings are happy I mean so far.
Govindraj Ethiraj: When I talk to analysts for example on the equity side a lot of people are hoping or maybe placing their hopes on how companies will perform. I'm talking about consumer facing product consumer product companies on the back of an agriculture upswing. Is that something that you're also seeing?
DK Joshi: The rural part is better than the urban part right now and the durable goods are doing much better than the non-durable goods, that's what we get from the industrial production data. So I think now the issue is the revival of urban consumption demand and here I think so far whatever stimuli is being given I think has not played out because the interest rate cuts just began and I think they will take time to influence the urban consumption and on top of that I think the income tax cut have just started kicking in from April. So I think in the coming months there is hope that these two factors will support consumption demand and on top of that I think the low food inflation is specifically good because since it has a very large weight in the consumption basket it eats into your discretionary spending ability.
So I think if you have low inflation also then I think that comes into support your consumption. So I'm not talking about a very strong revival in consumption but what I'm saying is that it will maintain its momentum I think and the hopes are now pinned more on what happens to urban consumption because rural signals are reasonably good as of now.
Govindraj Ethiraj: So if I were to visualise you know the classic ducks lining up in a row at least as far as good macroeconomic data is concerned. So we've touched upon monsoons which as you've pointed out in the past as well is a luck factor in some ways or a lucky strike but there is also inflation and there is interest rate and you've touched upon inflation already. Interest rates is the third aspect or the third duck.
How are you seeing that and what are the other ducks that you feel are lining up right now?
DK Joshi: First of all I think if you put it in the global context let me just spend a minute doing that. We are a domestically driven economy so what happens to consumption and investment is very important. Also keep in mind that that global factors currently are not that favourable and we have direct impact and indirect impact of what happens in the tariff regime that is playing out and direct impact is of course linkages with US but indirect is the collateral damage because even if you tariffs did not hit you I think the collateral damage from what happens to the other economies whether China starts dumping which I think there is some indication so all those things start playing out. So in this context what happens in the domestic economy in terms of both buffers as well as the growth levers or growth drivers that we have becomes very very important and people usually don't talk about buffers when you have those in place.
We have a low current account deficit, a low external debt, forex reserves are reasonably healthy and these are a cushion I think in the current environment where there is a lot of volatility. Rising share of services and exports also is a cushion for us because interestingly I think the cycle of services exports or services trade is not so much synchronised with the global trade cycle. Here I think the services exports have done reasonably well compared to the goods exports whenever there is a global trade downturn and again if you look at the latest forecast from the WTO they are also predicting that goods trade will be down by something like 0.2% in 2025 but the services trade will still grow at 4% so that I think having about 48% so that's another buffer and finally I think the healthy corporate balance sheets I think they provide the financial flexibility as well as resilience to the corporate sector. The upgrades continue to be more than downgrades, interest cover, gearing, all those parameters are very healthy.
I think in this environment policy levers are not too many. I think one is what you just referred to as interest rates and here I think we see two rate cuts happening in the rest of the fiscal year and that's because your inflation is nudging down and I think the data is likely to come on 12th and we expect headline inflation somewhere around 3% so that's pretty soft. The government I think on its fiscal lever is not that strong but they have budgeted 10% growth in capex.
I think if they carry that out that also becomes a stimulus compared to last year because last year the government capex performance was not that good. Oil price is also another luck factor because we don't control it so that is good for growth inflation and also current account deficit. So we actually expect about 6.5% growth in 2025-26 with risks tilted downwards. Now the biggest or the top macro risk for us is higher tariffs and uncertainty and financial market turbulence which can create a downside to both global growth as well as I think to our growth. We need to continuously watch out for weather disturbances because right now we know about quantum of rainfall but its distribution the shocks from the weather need continuous monitoring and I think the experience of last few years tells us that food inflation which is anyway most volatile component of overall inflation I think that is most sensitive to weather changes and fruits and vegetables particularly.
And I think finally policy making is becoming more data driven across the world. It is now very difficult to forecast in this environment of heightened uncertainty so you'll have to keep monitoring it on a regular basis. So I think that's how I would look at the outlook play out and the risks I think which are there in the system and I think which need continuous monitoring.
Govindraj Ethiraj: So when you look at the buffers that you've talked about the low current account deficit external debt high forex reserves very close to record actually which was hit in September I think last year and the other factors that we've talked about lower oil prices in the 60s we've talked about inflation obviously being lower and interest rates heading further down. Do you recall a period that you've seen that's similar to this in the past and what happened after that?
DK Joshi: Well I think I'll have to jog my memory but I think we have seen I can tell you a period when things were opposite of this and what happened for instance the 2013 taper tantrum current account deficit four and a half percent of GDP inflation close to 10 percent growth not that strong so I think you were obviously fragile five and you got impacted very badly and now actually the macros are telling you you are far away from that and also I want to tell you that the way global developments impact us I think is a function of the nature of those developments during the global financial crisis where the advanced countries particularly the advanced countries that slowed down actually they were all in a recession very sharp slowdown in growth India still had a positive rate of growth because it was not a crisis that was within the economy I think consumption etc continue but if you take a crisis of covid I think our economy shrank more than the advanced countries so I think it's the nature of the crisis also so right now what we are seeing play out in some sense is closer to the global financial crisis where it's not a crisis within the economy but I think it's so the impact will not be that pronounced I think so the nature of what kind of shock comes also determines so this one seems to be as of now a relatively benign shock I think in comparison and our macro parameters are in good shape so you can at least you're somewhat resilient by the way I think this doesn't insulate us from the global economy because over the years we've got more integrated so the pain very quickly transmits from what happens in advanced countries to us so in that context we are not insulated but we are better cushioned I mean I would say at this juncture
Govindraj Ethiraj: You mentioned covid and the fact that our economy performed worse was more hit than many of developed countries who also were shutting down or locking down so is there a sort of one line reason why that happened to us
DK Joshi: I mean we were more affected everything came to a halt within the economy and those countries gave more stimulus than us I think that's also true and they also suffered the consequence of that in terms of higher inflation particularly us I think it became quite unpredictable so I think their ability to give stimulus was much more than our ability in retrospect
Govindraj Ethiraj: it's blessing at least a minor blessing
DK Joshi: well I think there is a if you look at the cost benefit analysis I think yes I think the policy package of focussing on investments and pulling back or giving stimulus to the extent we can afford I think that has helped
Govindraj Ethiraj: So speaking of investment so using now all of this which is clearly as you said you know a relatively favourable environment assuming there is no further escalation on border conflict the tariff numbers that we finally see are okay or manageable what's your sense on how this could drive overall investment and expenditure private and public as far as investment is concerned
DK Joshi: The best case would be that investment to GDP ratio in 25 26 remains what it was in 24 25 now government investment will do better than what it did last year because in 24 25 we had this prolonged elections and I think the that had an impact on public investment so public investments haven't done that well in 24 25 this year I think there'll be more focus on that so the capex from centre and state should do much better than last year now coming to private capex which is I think which we have been waiting for a long time well we all know that the private capex has not picked up in line with the healthy balance sheets and financial flexibility that that the corporates today enjoy and increased uncertainty has now made it even more difficult to take decision on investments for instance a fear of dumping means that you don't know how the different is going to play out how much competition will be there so I think private investment is likely to remain subdued and interestingly there was a private capex survey released by nso about I think a few days back and this is an experimental survey but it's very important for going ahead because we'll we'll have more handle on what has happening to private investments and I think that shows that investments even the private sector are lumpy in nature and also shows that 25 26 is investments are likely to remain subdued now I think I just want to point out that this survey was experimental and I think data needs to be interpreted with care but this is what it is it is showing and I that is our assessment also that in this highly volatile and uncertain environment I think private investment will not be that strong an engine of growth certainly but I think there is an interesting twist to this whole story on investment while the private investment may not be that enthusiastic but what we are seeing is that because of the supply chain shifts which are happening as a result of the trade there is some positive spillover to us one example is the the apple announcing that iPhones will be manufactured in India so I think that will have a demonstration effect on some other companies as well and I think so they will as a part of the supply chain shift we will benefit from that I think I heard in your show that I think the Vietnam's EV manufacturer is also going to start production this year itself but the supply chain reorientation which did not benefit us in the previous China plus one now seems to be somewhat more favourable I think so we need to latch on to this trend and quickly make a success out of it as much as we can I mean from a long-term perspective we'll need to do more better infrastructure etc but within the existing system also I think there seems to be an opportunity emerging from that so that's also an investment I think which is coming from although overall FDI is is not that strong
Govindraj Ethiraj: but you are saying that with someone like an apple who by the way has said that they want to move all their production meant for or rather consumption meant for the US to India from China is also triggering domestic CAPEX because they're feeding
DK Joshi: so what will happen now is that one is that we are in the assembly business I think we've done a very good job of that now I think one you need to move some backward linkages will start as a result of that because you will have to create an ecosystem for sustainability of this kind of investment
Govindraj Ethiraj: right right DK it's been a pleasure speaking with you thank you so much for joining me
DK Joshi: Thank you so much Govind for having me
