Markets Stage A Rebound
The Reserve Bank unleashed a series of moves on Wednesday aimed at providing more boost to corporate and individual borrowing including for IPOs
On Episode 693 of The Core Report, financial journalist Govindraj Ethiraj talks to Chakri Lokapriya, Chief Investment Officer at LGT Wealth Management as well as Dr. Nikhil Varma, Technical Lead, India at Algorand..
SHOW NOTES
(00:00) Stories of the Day
(00:50) Markets stage a rebound
(15:48) The Reserve Bank brings the banking system closer to the capital markets
(16:57) The role of decentralised finance in supply chains
Algorand Summit: https://algobharat.in/road2impact2025/
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 3rd of October and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital as we return from a holiday.
Our top stories and themes,
The stock market staged a rebound, will it last?
The Reserve Bank brings the banking system closer to the capital markets even as it maintains interest rates.
Oil prices drop even as the rupee gains
And the role of decentralised finance in supply chains
A Rebound
The Reserve Bank unleashed a series of moves on Wednesday aimed at providing more boost to corporate and individual borrowing including for initial public offers or IPOs. The changes will now allow banks to lend for acquisitions by Indian companies, a segment so far dominated by foreign lenders and credit funds and evidently in response to banks themselves seeking greener lending postures, so to speak in contrast to traditional ones which have slowed down a fair bit. The Reserve Bank of India also allowed as Reuters said unfettered bank lending against listed debt securities and also raised the limit for lending against equity shares from about 20 lakh rupees to 2 crore rupees.
The cap on financing for that bank financing for IPOs will also be raised to 25 lakh rupees from 10 lakh rupees per individual. Now all of this obviously means the banking system is inched closer to capital markets which is somewhat new or and represents a return to a past and either way deserves some deeper analysis which I will come back to next week. Now the Reserve Bank also said it would withdraw a 2016 framework that limited bank lending to large corporations in a bid to reduce the risk of concentrated loan exposure.
This was then so this change will now allow banks to raise lending to big companies. All of this marks a shift in stance mode and a general overview of how India Inc and its creditworthiness is viewed by the banking regulator and thus by extension the banking system. Meanwhile on Wednesday the indices snapped their longest losing streak in seven months thanks to gains and banking stocks following obviously everything that we just spoke about and yes the Reserve Bank did not change interest rates for the second straight meeting keeping the repo rate at 5.5 percent and maintaining its stance at neutral.
It also kept the GDP or the Gross Domestic Production projection for 2025-26 unchanged at 6.5 percent. It continued to lower its 2025-26 consumer price inflation forecast to 3.1 percent against its earlier forecast in the June policy at 3.7 percent. With all this good news at least for Wednesday the Sensex was up 715 points to 80,983 and the Nifty 50 was up 225 points to 24,836.
In the broader markets the Nifty Small Cap 100 index rose 1.1 percent while the Nifty Mid Cap 100 index rose 0.89 percent. Some of the sectors which did well were Nifty Bank, Auto Realty and Nifty Financial Services, Energy, FMCG, IT among others according to business standards. Now international markets are doing better.
The MSCI's broadest index of global stocks was up about 0.25 percent on Thursday after European stocks hit another record high up about 0.6 percent according to Reuters. Wall Street futures were also up Thursday morning. Tech stocks in Asia are still going strong lifting the region's indices and gold has hit another high while we were away for a Thursday holiday hitting about $3,895 overnight while also supporting U.S. Treasury sending yields sharply lower according to Reuters.
Oil prices are down now almost quietly which translates into I did not pay much attention in the last couple of Brent crude is now quoting below $65 a barrel. Speaking of oil, Reuters is reporting that India's diesel exposed to Europe has probably hit an all-time high in September as traders cashed in on profits in the west during a refinery maintenance season. So India's refiners which source about a third of their crude from Russia are boosting runs and redirecting surplus products abroad with gasoline and diesel shipments hitting multi-year highs, says Reuters.
Now all of this is precisely the United States' stated problem with India importing cheaper Russian crude and exporting finished products to Europe and thus of course allegedly funding Russia's invasion or rather war with Ukraine. Meanwhile the rupee went higher on Wednesday which made its best in two weeks even as the dollar slipped broadly as the U.S. government shut down and that's where it currently stands the rupee closed at 88.69 against the U.S. dollar up 0.1 percent on the day the most since September 17th according to Reuters. The dollar has now slipped to a one-week low against its major peers.
So Wednesday's rally notwithstanding what are the broad trends in the market given that earnings have been slow for some time and overall valuations are still seen as stretched. I spoke with Chakri Lokapriya CIO or chief investment officer of equities for LGT wealth based out of Chennai and I began by asking him what was going on in the market and where it was going right now before asking him also what he was liking in terms of sectors in these markets right now.
INTERVIEW TRANSCRIPT
Chakri Lokapriya: You know, currently, India has one of the highest tariffs in the world at 50%, with a base rate of 25% plus a punitive rate of another 25%. So, against the backdrop, you know, earnings for Indian corporations have slowed down, and they're preserved to probably about 6 to 8%. And therefore, you know, the market returns would more likely be around the same number, around 6 to 8% over the next few months.
On the other hand, if this punitive 25% is removed, and if it comes down from 50 to 25%, then you're very likely to see a significant earnings upgrade. And therefore, the market returns would be significantly higher, not of 12, 14% for the next 12 months. So, I guess it's all come down to now the tariffs are the primary worry and the rate of tariffs at 50%.
If it comes down, then I think India will be in a far better shape.
Govindraj Ethiraj: Right. But before the H-1B visa fee was announced, the markets had recovered whatever they had lost to that punitive 25%, or for that matter, the cumulative 50%, isn't it?
Chakri Lokapriya: Yeah, absolutely right. You know, I think what the H-1B $100,000 fee kind of showed to the market is basically it's not just tariffs. The US can devise other methods of making it more difficult for Indian companies to operate in the US.
And so, with the H-1B tariff of $100,000, clearly, the profitability of Indian IT companies comes down. Well, the numbers are only about 2% to 4% on the earnings and the profits growth. But what it does is that overall model, which has been built over the years in Europe, using cost advantage to India's benefit.
So, that goes away and it has kind of taken away some kind of confidence from the system. And that is largely the reason for the current markets having a very cautious outlook.
Govindraj Ethiraj: Right. And if you were to look ahead now, what would you say are the significant or not so significant triggers that could drive prices or performance?
Chakri Lokapriya: Yes. You know, today, India is naturally in an interest rate cutting cycle. You know, fortunately, that is very good for the equities markets, because the lower the cost of borrowing for companies, then the higher the profit margins and therefore, higher the So, India still has a good interest rate differential between India and the world and therefore, has the ability to cut rates far more.
And also, with the recent GST cuts, inflation is also coming down well under control. So, these will act as cushions to the market with an inflation under control, GDP at about 6.2%. I think the markets have the downside intact and therefore, there's not much downside at Fed levels.
Govindraj Ethiraj: And you know, we've been waiting for an earnings upgrade for several quarters now or a shift in earnings outlook, which has not happened in the way we thought it would happen or at least at the pace at which we were hoping it would happen. But what's your sense as we are now entering the next quarter of the current financial year or rather having started the next quarter of the current financial year? Are things looking any different?
Are you able to see anything around the horizon or over the horizon?
Chakri Lokapriya: You know, that's a good question, because basically, companies are waiting for the dust to settle down in terms of where the final tariff number that's likely to be. And until then, the capital expenditure plans of the private sector of the companies are largely on hold. They're doing the incremental bids where it is necessary, but beyond that, no.
So, the heavy lifting is actually being done by the government-owned companies, the PSU banks as well as the PSU companies are doing the heavy lifting. And that will continue to support the market. This earnings upgrade is likely to come.
One, with the GST cuts, there has been some amount of earnings upgrade that will come about in the next quarter. Second, clearly the tariffs. And third, the interest rate cycle further going down will provide us the third catalyst.
Govindraj Ethiraj: And you feel that interest rates going down is a sufficient catalyst to change earnings profile of companies and therefore market response to that?
Chakri Lokapriya: You know, fortunately, the Indian equity valuations are at very reasonable levels. They're probably at 19, 20 times. To put this into context, they're very close to those numbers that we saw during the COVID lows.
So, which means clearly that was a far more significant event than today's tariff situation. So, the downside is very limiting. On the other hand, it has come down to the removal of uncertainty.
It is like a switch. If that comes about to a change where the punitive tariffs go away by, let's say, November or December, then you would see a lot of companies stepping up to the plate and therefore leading to an earnings uptick.
Govindraj Ethiraj: And you're saying that private CAPEX could be a trigger for this?
Chakri Lokapriya: There are two things. One is that a government CAPEX is fortunately intact. The government has continued to spend.
So, all the government companies, you would see some earnings upgrades. On the other hand, the private companies, they would wait for the global cues to come about and the interest rate cycle also to probably next month will be another rate cut. So, when that happens, I think we will begin to see the private sector also joining in making their plans and therefore having earnings upgrades.
Govindraj Ethiraj: Right. Let me take a step back now. I mean, geographically, that is.
You are a global fund as well. So, a lot of funds are actually pulling out of India right now. I'm talking about global funds or emerging market funds.
And China is looking very hot for various reasons, including tech. And this is a sustained phenomenon, as we are now seeing foreign portfolio investors selling continuously. And even though Indian investors are buying, they're only able to barely provide a cushion to that selling that's happening.
So, my question really, I guess, is how are you seeing it if you take a step back and look at the region now and where India stands?
Chakri Lokapriya: You know, India has, because of the tariffs, has actually been one of the poor performing markets, if you compare it to other emerging markets. And that has also led, because of this uncertainty that we spoke about, has led to corporations holding back. And that has led to earnings slowing down.
And when earnings slow down, then, you know, foreign investors usually look for markets where there is an acceleration of earnings. China has been in a not so good place for the last few years. They're seeing some signs of an uptick and therefore they're moving towards China.
But as far as India is concerned, FII selling is likely to abate only when we see some kind of a resolution to the Trump tariff at about 50%.
Govindraj Ethiraj: Right. And I noticed that in various other conversations, you've talked about sectors that look good or promising despite all of this. You've talked about, for example, metals and auto ancillaries and banking.
So, tell us, I mean, first thematically, what looks good or how do you spot opportunity in this kind of environment? And therefore, what's driving those thesis? And secondly, what specifically or specific sectors that are you looking at?
Chakri Lokapriya: India, fortunately, is a domestic economy. 85% of all the demand is domestic in nature. And only exports form only less than 12-14% of the overall pie.
So from that perspective, despite the tariffs, you will have the domestic facing companies, which are financial services, consumer discretionary and industrials. These three segments are actually continuing to do what they do. And as far as financial services and consumer discretionary is concerned, they will benefit from an interest rate cut because whether you want to buy a bike or you want to buy a car or a home, lower interest rates make lower EMIs and therefore make it more affordable to go out and buy.
And second, now the GST rate cuts have a significant boost. As we've seen, two-wheeler, four-wheeler sales have actually picked up post the GST rate cuts. And third is industrials.
You know, infrastructure development is very key to India's growth. And the Indian government has done a very good job. But through the Indian PSU, government-owned companies doing infrastructure spends, I think that as a theme will continue.
So these are the domestic facing sectors that we would like to look at.
Govindraj Ethiraj: Right. And is there any specific view on metals and auto insularities? Because I heard you talk about them earlier.
Chakri Lokapriya: So indeed, you know, metals actually fortunately are in a good space. What has happened in the case of metals is, you know, the tariffs are universal and therefore the Indian companies are not at a disadvantage unlike other sectors. And globally, you know, once China has slowed down, they have put curbs.
And therefore, you know, on the other hand, Indian production is kind of picking up. And therefore, the demand for metals is picking up domestically. And second is the valuations of the metal companies are very reasonable at about five, six times EV with that.
Against that backdrop, any catalyst that is that you see any incremental spend by whether it is domestic or outside the country will act as a spur for traditional growth in the metal sector. And auto insularities is a function of what the auto companies do. Auto companies are benefiting from the GST rate cuts.
So whenever you buy an automobile, all the ads that the auto parks, which go into making a car or a bike, also those companies will benefit.
Govindraj Ethiraj: Right. Last question. So what's the one concern that you have at this point of time?
You know, the main concern at this point in time is the uncertainty.
Chakri Lokapriya: Markets don't like uncertainty. And the market is expecting probably a November, December resolution to the punitive 25 percent rate. Now, the longer that drags on, the longer the uncertainty continues.
And that will be the single biggest catalyst, auto catalyst, if and when.
Govindraj Ethiraj: Chakri, thank you so much for joining me.
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And what are FII selling? Foreign portfolio investors have dumped shares worth about 180,000 crore rupees or 1.8 trillion rupees in the last 12 months with oil and gas information technology and auto companies bearing the biggest brunt according to a business standard article.
Overseas investors have sold oil and gas stocks worth about 57,000 crores, IT worth about 53,000 crores and auto about 35,000 crores totalling about 1.45 trillion rupees or 80 percent of the net selling according to an analysis of data provided by prime database quoted by business standard.
The De-Dollarisation March
India's reserve bank has unveiled fresh steps to enhance international acceptance of the rupee joining efforts by regional peers to globalise their currencies amidst all the tariff related trade disruptions that we've been seeing according to a report in Bloomberg.
The reserve bank is to introduce reference rates for currencies of India's biggest trading partners, the reserve bank said in a statement on Wednesday. Currently those rates are provided for dollar, euro, pound and yen versus the rupee. The reserve bank is now looking at the Indonesian rupiah and the UAE's dirham as benchmark currencies for reference rates, Deputy Governor Rabi Sankar said in response to a Bloomberg question at a post-trade decision briefing in Mumbai that was on Wednesday.
China among other countries has made similar moves to globalise its currency amidst all the tariff related uncertainty that we've been seeing. US tariffs on Indian goods are the highest in Asia which obviously weigh on export earnings and are part of efforts to deepen the rupee's push in global trade and reduce the reliance on the dollar.
It's All About Decentralised Finance
Decentralised finance or DeFi is an emerging financial system using blockchain to enable direct transactions between individuals and businesses but it can play a specific role and a key role in areas like supply chains where the seller or buyer is able to transact with greater comfort and confidence. In countries like India of course there are ventures which ensure that there is a proper point of KYC connected with the financial world or what is known as the off ramp and on ramp platform. All of which becomes important in the context of India's new digital personal data protection act or DPDPA.
I spoke with Dr Nikhil Verma, associate professor of management at Ramapur college of New Jersey and a technical lead for India with blockchain company Algorand foundation in our building on blockchain series and I began by asking him how he was seeing the role of decentralised finance play out.
INTERVIEW TRANSCRIPT
Dr. Nikhil Varma: So, to start with, the whole idea of supply chain is the value chain around an organisation, how things move from one place to the other. And when things move, when there is an exchange of value, there has to be some kind of a financial interchange. And to start with, because blockchain was more or less against the state kind of a framework when it started out, the idea was that, okay, let's do the whole supply chain in the blockchain because blockchain does not need to wait in line for permits.
That's the kind of mindset we started out with. But the problem is that if we had continued on that rogue path, this would never be mainstream, right? And that's why most of those rogue elements were associated with blockchain.
Now, coming back to the real world, things that we can do in a supply chain are the kind of interchange of value that happens, suppose you buy assets, you trace assets, what we need with a blockchain-based solution is something like a GPS, which not only tracks but gives you direction, right? And what was required in this area of blockchain diffusion in the supply chain is to be able to make sure how we can have an infrastructure that is already compliant to the laws of the land, right? So, blockchain makes payments, trustless parties interact with one another, payments seamless.
And not only that, there is more to it by adding another layer of decentralised finance, which where you could have underwriters taking a risk, you could have micro-insurance coming into play, you could have better visibility of the asset, you could actually know which asset is in the manifest on real-time basis and it's immutable, it cannot be doctored. So, a lot of things will transform because of DeFi being embedded into the supply chain.
Govindraj Ethiraj: So, tell us about where it's more applicable than, you know, there must be some areas or some kinds of industries, for example, where it's more applicable right now and therefore it becomes a more or a better use case.
Dr. Nikhil Varma: So, one of the things in supply chain, the issue is, the biggest issue is that payment processing does not happen in real time, okay? Whenever we exchange goods, there is a net 30, there is a net 60, there is a net 90, there is a net never, all kinds of things happen. And what we need to bring into play is a mechanism to be able to get liquidity when I exchange goods because otherwise that's where the risk factor comes into place.
As a farmer, if I'm growing crops and if I am not able to get liquidity, I'm going to be stuck in that cycle of poverty because I want to go to the loan sharks and take money. Now, what happens is these farmers have to sell their crops. I'm just giving you an example, this might not be the only case.
The farmer selling their crops, now there is an integrator who has lots of money, so they are able to buy that crop at a lower price and then they are controlling power in that ecosystem. This usually happens in most of the supply chain constructs, if most of the supply chain of the current times that there is one party who has money is controlling power and lack of liquidity or lack of a fair model for people to have access to money when they need it is what is creating these power centres in supply chain, right? Now, how do we kind of democratise it?
What we will be able to bring in is with DeFi, you could get decentralised finance funding on a real-time basis, which means a farmer at the time of raising their crop can actually tokenise their future crop with the risk outlook of the market. There could be an underwriter who could give them a line of credit and they would not get stuck in the cycle of poverty. This is just one simple example, but now you can see anybody who's getting raw materials for a future contract can possibly have a future-looking contract.
Instead of going to a bank and putting in all those documents, you could have a much lighter process. Of course, it has to be regulated, it has to follow the laws of the land, but access to capital becomes easy and when access to capital becomes easy, then things become more fluid, becomes more democratic and you have less power players in the supply chain.
Govindraj Ethiraj: Right, and what's a good use case in India right now?
Dr. Nikhil Varma: So, one of the use cases that we have is very interesting is the company LW3. Now, this is a slightly different kind of a supply chain where they are looking at a battery return process. So, a battery return process, EV battery return process, we will be seeing a lot of EV batteries being returned in the next seven years because they have a shelf life of about seven years and we've just started getting into the EV space.
This whole return process would be very capital intensive as you can imagine because batteries at the end of their life, there is a salvage value to it. So, let's simply put here, now that salvage value has to be transported from the person who has the EV battery all the way up to the recycler. Now, if we have to actually look at the current systems in play, the current systems were set up for a forward logistics process, not for reverse logistics.
None of us actually went back to any store and gave our whatever part of our car and that would go back to a recycler. There was no process set. So, that capital expenditure would be way higher and the return of investment for the battery would take longer.
So, most big players will only be able to come into play. So, what LW3 has done in a very interesting manner is the uberization of this return process, which means the value of the battery is locked into a smart contract every time it switches hands. So, if the person gives it to a place that stores the battery, of course, the storage place has to be validated by the ecosystem.
The person will get money right away in their wallet. When the storage place gives it over to a logistics company, the logistics company owns the battery. Now, the storage place will get money and when the logistics company hands it over to the recycler, the logistics company will get paid in real time.
Now, I feel that this is a game changer. This kind of model can be built across multiple frameworks. Of course, there is an on ramping and off ramping because at the lower level, we have to kind of deal with tokens to be able to transfer the value.
But on the user level, it's all paid in rupees. So, the on ramping and off ramping has to have some kind of a regulatory oversight. That is why there is another company in our ecosystem, in Algorand's ecosystem called Carrot, who have built this on ramp, off ramp SDK software development toolkit, which can be integrated with all these applications, where each of these parties are KYC'd or KYB'd, whatever be the case.
And whenever they receive a payment, they follow the whole regulatory process to be able to report it to the government and so on and so forth. So, this is a beautiful use case, which does not require CAPEX and could transform the whole battery return process.
Govindraj Ethiraj: Last question, Nikhil. So, what's one area where you see DeFi playing a role, which is beyond, let's say, what we are seeing or are familiar with right now?
Dr. Nikhil Varma: I feel that DeFi is definitely going to have an impact on our daily lives in a multitude of ways. One of the things that I already outlined is the access to capital, but then there could be things like micro-insurance. I feel micro-insurance and micro-finance are two big areas where DeFi is going to transform people's lives.
And these people are being integrated into the supply chain, so a small weaver can now buy cotton by micro-finance through this whole infrastructure because they have a forward-looking contract to anything that is going to be serviced. That, I think, is going to transform lives. This whole idea of Atmanirvar Bharat, I think that would well be promoted by a DeFi-based rail that would come where people could put in money from a regulatory oversight perspective.
That's what we are building. We are trying to make sure that every single thing that is being done will be reported to the government because nothing comes out of the system without a regulatory oversight. But access to capital, I think, is the key thing and that's what DeFi would provide.
Govindraj Ethiraj: That was very interesting, Nikhil. Thank you so much for joining me.
Dr. Nikhil Varma: Thank you, Govind.
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And do look out for insights on blockchain and how it can transform businesses as we count down to the third Algorand India summit 2025 to be held on December 6th and 7th at the ITC Gardenia in Bangalore. You will find a link to that in our description.
