On Episode 951 of The Core Report, financial journalist Govindraj Ethiraj talks to Puneet Gupta, Director–India & ASEAN Automotive Market at S&P Global Mobility as well as Anindya Banerjee, Head of Research for FX and Interest Rates at Kotak Securities.

SHOW NOTES

(00:00) Stories of the Day

(01:18) Markets Stay Down As Oil Prices Wait For War Developments

(04:11) The Rupee Fell To Its Weakest Level In Two Weeks On Monday

(06:32) Why Did The RBI Close The FCNR Deposit Window So Suddenly?

(17:16) A Top Govt Official Makes An Open Case For Bringing In E10 Fuel, As Opposed To E20 Which Consumers Are Upset About.

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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Good morning, it's Tuesday, the 18th of August, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

The stock market stayed down as oil prices wait for war developments.

Why did the Reserve Bank close the foreign currency non-resident deposit or FCNR deposit windows so suddenly?

A top government official makes an open case for bringing in E10 fuel as opposed to E20, which consumers don't like.

The rupee fell to its weakest level in two weeks on Monday.

Markets, West Asia, Oil and The Rupee

Oil prices rose on Monday on a lack of progress in diplomatic efforts to resolve the Middle East conflict, though the fact that there was no supply disruptions did hold back further increases.

Brent crude futures were at about $88.86 or just under $89 on Monday afternoon after coming close to about $90, that's $89.60 in the afternoon once again. Reuters quoted analysts saying prices were unlikely to move substantially higher unless there was a halt in the current flow of crude out through the state of Hormuz at night and or a closure of the Bab-el-Mandeb Strait. For now, prices were trading close to $90 as traders were still hoping for a resolution where the strait reopened and oil prices fell.

Either way, shipping traffic through the strait has slowed to a halt over the weekend ahead of the expiry date of the 60-day ceasefire between the US and Iran that was yesterday with no official negotiations or deal in sight. Over the weekend, only five cargo ships passed through the critical oil passage on Saturday according to Kepler data cited by Reuters and quoted by CNBC and this is compared to 31 vessels the previous weekend. Overall, shipping is down 90% since the war started on the 28th of February and the state of Hormuz carries roughly 20% of the world's oil averaging about 130 vessel transits per day CNBC reported and as we've been saying here on the core report we are now very close to if not already in the middle of a forever war.

President Donald Trump on Monday said the US would bomb Oman if the Gulf nation gets in the way as the ceasefire expires or expired with no official negotiations or deal. Oman has been locked in talks with Iran over the strait to reopen the waterway to commercial transit even as the US maintains its blockade of Iranian ports. Iran has continued to deny any direct negotiations with the US and Trump said on Monday that informal talks were taking place with Iran's revolutionary guard but that the US was in no rush to make a deal.

Now higher oil prices are obviously weighing on domestic stock prices and the markets and the lack of resolution there would mean that gains if any here would be limited or pushed back quickly. On the brighter side, most analysts on the last sheet have said the first quarter 26-27 corporate earnings season has concluded on a strong note with companies across sectors doing better. We will get you more deeper analysis as we get them.

And the markets are of course down on Monday as expected the Nifty 50 saw its fifth straight session of losses while the Sensex has fallen in four of the last five trading days. On Monday the Sensex was down 281 points to 77,728 and the Nifty was down 78 points to 24,287. The Nifty mid cap and Nifty small cap were down two at 0.05 and 0.36 percent.

In the broader markets the Nifty mid cap and the small cap were however up very marginally that's 0.05 and 0.36 percent higher. The rupee fell to its weakest level in two weeks on Monday as oil prices drifted higher and sentiment was weighed down after the reserve bank brought forward the end date for its discounted forex swap facility for overseas deposits by a month according to Reuters which added that the rupee declined 0.2 percent to close at 95 rupees 60 paise per dollar and avoided steeper losses most likely because of intervention by the reserve bank of India according to that report. Meanwhile India's unemployment rate for people aged 15 years and above fell to a 5.1 percent in July its lowest in four months according to data released on Monday a Reuters poll had projected the July unemployment rate at 5.4 percent compared to 5.5 percent in June in March too the rate was at 5.1 rural employment rate fell to 4.5 percent from five in June while the urban rate went up to 6.7 percent from 6.6 according to the national statistics office data quoted by Reuters.

Meanwhile, a quick look at Wall Street and a reminder that the S&P 500 had hit a fresh all-time high last week following what CNBC called a blockbuster earning season that's buoyed investor sentiment, adding that the stock markets have continued to climb in the face of ongoing hostilities in the Middle East and concerns around the AI trade. Disappointing retail sales data and a relatively mild inflation print have reduced market expectations of a Federal Reserve rate hike in the coming month, and U.S. President Donald Trump told Americans over the weekend to prepare for continued high fuel prices as a result of the war. The point being, of course, that none of this is affecting the markets, which continue to rise on their own steam.

FCNR Deposits Shuttered by August

Shorter tenor India bond yields rose after the Reserve Bank said it would close the FCNR deposit window for NRIs a month earlier than scheduled. This was announced late Friday, and it also surprised traders because the Reserve Bank of India Governor Sanjay Malhotra had ruled out an early end as recently as the 5th of August in his policy meeting and interaction with media. Bonds fell, led by the shorter tenor papers, as the premature closure means less rupee liquidity to support demand, a Bloomberg report said, adding that the five-year yield rose as much as nine basis points to 6.44 percent and the 10-year climbed five basis points to close at 6.81 percent.

The move could also limit further increases in foreign exchange reserves and cap gains in the rupee, according to economists. The FCNR drive has pulled in more than 50 billion dollars and will close now at the end of August. Two other facilities for state-run companies and banks will remain open until December, Bloomberg added, saying that dollar inflows have now bolstered the Reserve Bank's forex reserves, adding about 30 billion dollars in three weeks, and now the reserves stand at about 707 billion dollars.

Economists at Nomura Holdings, led by Sonal Varma, said in a note quoted by Bloomberg, the Reserve Bank's decision was likely driven by cost-benefit analysis. "These are borrowing funds with three- to five-year maturities, creating future liability, with the RBI also bearing forward premium costs; the burden is likely seen as high," the note from Nomura said.

Now, while all of this helped the rupee, which was clearly one objective, Citigroup expects the currency's recent gains to be capped at 95 per dollar, and its chief India economist wrote in a note that it seems that using the scheme to engineer any sharp appreciation of the rupee to reduce the undervaluation wasn't one of the main objectives. Earlier, Citigroup was expecting the rupee to strengthen to as much as 94 per dollar.

On the other hand, banks are preparing to intensify mobilisation of the FCNR (or Foreign Currency Non-Resident) bank deposits for the next two weeks, urging non-resident Indian customers to make the most of the available time, according to bankers who spoke to Business Standard newspaper. They said the lenders will advance the staggered mobilisation they originally planned over six weeks by proactively engaging with NRI customers to speed up the process. The expectation was the total mobilisation under the Reserve Bank's concessional swap window could still reach 60 to 70 billion dollars in the next few weeks.

So what does the Reserve Bank's abrupt pullback signify, and how do the overall numbers and costs look like today of pulling in all those dollars? I reached out to Anindya Banerjee, Head of Research for Foreign Exchange and Interest Rates at Kotak Securities, and I began by asking him how he was seeing the sudden move.

INTERVIEW TRANSCRIPT

Anindya Banerjee: See, the RBI actually prematurely they closed the window. It basically is a reflection that the scheme has been a complete success because if we compare the amount of flows that has come in close to 60 odd billion and we have to understand that they have not closed the window for ECB, that is still on, it's just the FCRB. 60 billion has come in and with almost I would say half of August still left, I think that number could inch towards 75 to 80 billion because the last stretch we tend to see an increase in the pace of flows.

So that is a substantial amount if we compare it with the currently the FX assets which RBI has that's roughly around I think around 650 billion or something like that. So that's more than what is around 15% of the total of the RBI which has come in. So that's comfortable that it has more than expectation of what the RBI had envisaged at this time.

Govindraj Ethiraj: You're saying there was no sort of late realisation that this is going to cost more than what we thought it would?

Anindya Banerjee: Actually, as far as the cost is concerned, it's still an open question. There are so many variables. Effectively, this scheme where RBI is short on the dollar, banks gets the hedge free of cost at zero.

So now if the USDNR were to fall over the next three years, four years, that's a long enough window. The RBI can go into the open market and buy dollars. Like they exactly did that in 2014 and 15.

They had around $30 or $35 billion coming into the FCNR at that time. RBI was short effectively. And when the USDNR dropped below $60, they went and started to buy dollars.

And they actually made money on that. At this point, it's tough to say how things will pan out because it totally depends on the dollar trajectory. And we know in currency market, things are settling.

So if RBI gets a favourable cycle over this long period, they can easily cover those dollars. But as of now, RBI has got enough. They've got enough cushion because this was primarily done to kind of create a shock absorber for the rupee.

And we have seen also the flows for FDI are turned positive in the debt and equity. So there is no need to continue with this emergency measure.

Govindraj Ethiraj: Got it. So one of the objectives was surely to appreciate the rupee from where it was, or for that matter, where it is. And that does not seem to have happened despite these $60 billion plus dollars that have come in.

So why is that happening or not happening?

Anindya Banerjee: Right. There is a confusion in the market. That's the natural question that if you have a $60 billion or $70 billion inflow in such a short span, that's like four months or five months of oil imports coming in at one go.

The US dollar is flat end to end. The reason being, this is not hitting the market. This is where the bankers are selling directly to RBI, getting the commitment for the hedge to reverse the transaction at three or four years or five years at the same currency rate with no forward premia or hedge cost.

So it is going directly to the RBI's coffers. So what is going to increase is basically the commensurate Indian rupee liquidity and RBI's FX reserve. And we have seen quite a solid uptick in the RBI's FX reserves since the announcement of this scheme.

So it's now up to RBI to use those dollars and sell in the open market. Then only the impact will be seen. Because RBI ensured that it doesn't hit the open market because it would have created insane volatility.

Govindraj Ethiraj: And what's your sense? Will the Reserve Bank then use these dollars now to shore up the rupee?

Anindya Banerjee: Not as of now. Because if you see the RBI or the government is still not inclined to basically go hammer and thorns and break the market. Possibly the reason could be that we are creating buffers in case the oil prices again spiral because the West Asian war is not over.

And it all started because of that. So I think we are keeping that buffer. And so if the time again, the RBI needs to intervene aggressively, then they can use those dollars and intervene.

Govindraj Ethiraj: So retrospectively, would you say that the strategy has been to raise FCNR deposits and dollars and keep them more like a safe deposit to act upon later? Or was the strategy something else?

Anindya Banerjee: Absolutely. Because that is the main objective of the strategy to create a buffer. Because all these measures followed after Prime Minister Modi made the announcement that the next one year is going to be tough because of the West Asian war.

And after that, we saw several measures being implemented with these measures from the RBI, including the FDI, the opening of the gates for the FDI. The buffer needs to be there. As I said, the West Asian war is not over and the oil price dynamics, things can again spiral any moment.

Govindraj Ethiraj: Then it could be needed. So you touched on rupee liquidity, and that's clearly one of the beneficiaries of these inflows, which is not going to happen in the same way if the window closes. What's your overall sense on liquidity and where it's going?

Or where it could have gone?

Anindya Banerjee: See, as long as the inflation is not a problem. Now, inflation is well anchored. Yes, it is higher than where it was starting of the year.

But that's okay. That's a normal, I would say cyclicality of things. But so rupee liquidity is going to be quite positive because these are substantial flows.

Unless the RBI decides to sterilise that through the debt market, of course, they won't be doing it through the USDNR market because it will be counterproductive. So it will be done through the money market. But the rupee liquidity won't be comfortable because 60 billion or finally, let's say it becomes 80 billion.

So those are substantial. It's like RBI actually intervening in the market, buying dollars and selling rupees. This kind of infusion we saw in 2020 during the COVID.

So I think the substantial liquidity will be there. But again, the RBI will sterilise it, which definitely is not required.

Govindraj Ethiraj: So what's your sense on where the dollar is right now? And in that context, where the rupee could be, or how could it move potentially from what we know or see right now in coming months?

Anindya Banerjee: See, at this point in time, USDNR is a highly managed currency. And I think the invisible hand of the central bank is playing a big role. So they are not wanting it to strengthen significantly now.

They are sort of allowing a very measured deposition because the global economic situation is still fragile. So you need a weaker currency when your inflation is manageable. I think that's what they are doing.

So considering that the oil prices are, we could see levels of 97 or 97.5. But I think if it gets closer to that magic number, 100, we could see heavy intervention. RBI has things in its disposal to intervene aggressively.

Govindraj Ethiraj: Right. Good note to end on. Anindya, thank you so much for joining me.

Anindya Banerjee: Thank you so much.

Edible Oils

The key reason for raising dollar deposits was obviously to counter rising import bills thanks to a depreciating rupee. This applies to everything, including edible oil. The crude oil bill is huge—about 11 to 12 lakh crore rupees a year. The edible oil bill is much smaller: about 1.6 to 1.75 lakh crore rupees, or 175,000 crore rupees. At that level—that's 175,000 crore rupees—this is nine percent higher than the previous peak of 1.6 lakh crore, or 161,000 crore rupees, touched last year.

A column in Business Standard by writer Surinder Sood has pointed out the major reason for cost escalation is higher imports to bridge the ever-widening demand-supply gap, though factors like the spike in global prices due to the West Asia crisis, reduced availability of palm oil in Indonesia because of greater diversion to biofuels there, and the rupee depreciation has also contributed, says that column. More than half of India's requirement of edible oils is still met through purchases from abroad, and such heavy dependence on imports for a mass-consumed essential item like cooking oils is unwarranted, the columnist has argued. He also says that it is also dicey because the bulk of imports comprise palm oil and its derivatives sourced from just two countries, Indonesia and Malaysia. Any disruption in supplies from these countries, for whatever reason, can turn out to be a problem for India, which is also the world's largest importer of edible oils.

"Besides, vegetable oils are not something that cannot be produced locally in sufficient quantities," the column says, making a strong case for improving the economics of oilseed cultivation to let these crops be as remunerative as their potential competitors, failing which the dependence on edible oil imports is unlikely to diminish.

The Ethanol Debate’s Dirty Laundry

Sticking to oil, but switching to ethanol: the column by India's Chief Economic Advisor to the Government of India, V. Anantha Nageswaran, in The Indian Express newspaper has argued, quoting tests, that there is no impact on car engines rated for E20 blends (or 20 percent ethanol with 80 percent petrol). But he says that one exception is genuine—that is, India has roughly 75 to 80 million older two-wheelers built before BS4 (that's BS-IV standards), and they run on carburetors. A carburetor cannot sense the extra oxygen in the blend and adjust for it, so on E20, the engine draws in too little fuel for the air it draws in and runs hot. It also points out that older rubber seals that are not rated for ethanol are a separate problem, as they degrade on contact with the fuel, regardless of engine temperature. Retrofitting those seals with ethanol-compatible ones is cheap; still, it happens one vehicle at a time, and covering 75 to 80 million two-wheelers that way will take years, even if every workshop starts today, says that column.

Now, it also says that the original roadmap apparently anticipated this and requested that a lower-blend fuel remain on sale for these vehicles, but that fuel quietly vanished from the pumps, and now the column says it needs to return. Now, this is obviously interesting because it is one hand—or one arm—of the government arguing against another arm of the government in fairly public display.

Anyway, so the column says that restoring a lower blend at the pumps, say E10, alongside the option to buy E20, would calm most public concerns, lower total ethanol use instead of raising it, and protect the existing fleet while the retrofit programme catches up.

What the column does not say—and of course, something that we've been reporting here—is that thanks to the fear that's been now created in the eyes or minds of motorists, whether two- or four-wheeler, sales of petrol vehicles have come down, and sales of other fuels, including electric, have been rising. So much so that now there is a waitlist for two-wheeler vehicles running into months, and most manufacturers of electric two-wheelers are trying to ramp up.

So what is the feasibility of a return to E10, even if partly, and how could that be managed? I reached out to Puneet Gupta, Director - Mobility Global for S&P, and began by asking him how he was seeing the latest developments, including the Chief Economic Advisor's views on E10.

INTERVIEW TRANSCRIPT

Puneet Gupta: I think it's very clear that there is a lot of noise around E20 and use of gasoline fuels. So, today government continues to push E20 fuel through the gasoline pumps. Obviously, you know, from the consumer side, so they continue to hear something around, you know, degradation of the vehicle parts, you know, and which is obviously a big cause of worry today for the consumers.

And that's also one of the reasons why do we see consumers really looking for much greener options like electric vehicles or CNG vehicles, you know, because we have been seeing that the demand for both electric vehicles, for example, touch 8% and even for electric two-wheelers, you know, cross 12%, which is the highest ever in India. So, clearly we see, you know, consumers moving towards greener fuels, but I think it has to do something also with the E20 fuel, you know, which is a cause of big concerns, both for existing car drivers and also for the new car users.

Govindraj Ethiraj: Right. So, the chief economic advisor made a case in a newspaper column on Monday that maybe there should be a reintroduction of E10, which is 10% blending, particularly for older vehicles where the recorded impact is higher, particularly in terms of parts and, you know, in a carburetor-based internal combustion engine versus electronic engine, carburetor engine is not able to cope with the change in fuel mix.

So, how do you read that?

Puneet Gupta: To put an end, you know, to this whole story, because obviously it's a big concern for a million of users, you know, who are driving their vehicles today. So, this is one of the options, right? You provide E10 fuel or you provide E20.

So, basically, in a way, you know, what government is trying to do is to give choice to the consumers, you know, rather than force the fuel on consumer. But in a way, you know, it may be a win-win for all, but we really need to see, you know, how Ministry of Oil, how government really puts a price behind, you know, every fuel, because that is the only way to differentiate. But in a way, you know, it'll be good because then consumers can decide.

Some consumers are confident on the technology, on ethanol, then they can go with E20 or higher blends. And if some consumers, you know, are more worried about their vehicle, then they can obviously go with E10, which is, I think, fine, where we didn't find any problems, you know, with the vehicle. So, I think that is the thoughts right now.

But, yeah, there are multiple things which are going on right now. But this is one of the good options, you know, which government can do.

Govindraj Ethiraj: Right. And how do you see the supply chain managing this? You know, I mean, supply chains are managing multiple types of fuels already, but this would be another blend, hypothetically.

Puneet Gupta: Yeah. So, this is a very ideal case. So, that's right.

You know, that will be another blend which will be available to the consumers, which government has to. So, from a supply chain perspective, obviously, it will be more cost which will be involved. But otherwise, providing E10 is anyways fine.

On the otherwise, you know, meanwhile, I think it gives time to the government, you know, it gives time to the Ministry of Oil, you know, or other OMCs, oil marketing companies, you know, to plan E20, you know, in a better way so that even OMCs are more confident, you know, about what they are providing to consumers. So, I think at the end, it will make everybody happy, you know, in the ecosystem. But eventually, you know, and maybe on the new vehicles, I think, which are already tested for E20 and above blends.

So, I think there, it should not be an issue. But I think it's more about, you know, we are giving the choice to the consumers to select from.

Govindraj Ethiraj: Right. And broadly, how are you seeing consumption and demand trends for alternative fuels as well as traditional fuels and as you look ahead?

Puneet Gupta: So, I think as we know, you know, one of the biggest emission norms, which is cafe 3 norms, is coming from 1st April 2027. So, this is making, you know, OEMs bring up more cleaner vehicles. And one thing, it's very clear, you know, that today, the BEVs, you know, are the first choice of the consumers, you know, followed by CNGs and hybrids.

So, clearly, we are seeing a shift, you know, towards the greener fuels. But I think it has to do something, you know, because in India, we are always, you know, talk about, what's the fuel mileage of my car? And obviously, when it comes to BEVs or hybrids, you know, so these cars really score high in terms of mileage.

And basically, this E20 concern where a consumer feels that their mileage is coming down is a big cause of worry. So, clearly, I think BEVs is going up and as per the projections of Mobility Global, we are talking about close to 17 or 18% BEV penetration in cars by 2030. And today, we are roughly around 8% this year.

So, I think we are well on the track, you know, in terms of BEV penetration going up. And even in the other categories also, you know, we are seeing BEV penetration going up. And maybe, you know, it's the inflexion point for India.

On the other side, it's not just consumer, we are also seeing the choice of electric vehicles in any category has gone up. It may be passenger cars, it may be two wheelers, and more and more new brands are entering into these fuel types.

Govindraj Ethiraj: Right Puneet, thank you so much for joining me.

Puneet Gupta: Thank you very much.