Markets Stay Volatile As Global Cues Weigh In
Indian markets continued to stay volatile and in some ways reflecting more the uncertainty that is there in global markets
On Episode 593 of The Core Report, financial journalist Govindraj Ethiraj talks to Gulam Zia, Senior Executive Director - Research, Advisory, Infrastructure, and Valuation, Executive Director Knight Frank.
SHOW NOTES
(00:00) The Take
(07:53) Markets stay volatile as global cues weigh in
(11:45) More foreign brokerages are upgrading their view on emerging markets including India
(15:39) Indian students are not quite welcome in the USA
(17:55) Young Indians want to buy houses now, in contrast to earlier approach of renting, many closer to health facilities
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 Thursday, the 29th of May and this is Govindraj Ethiraj, headquartered usually in Mumbai, India's financial capital, but in transit right now.
The Take: India Inc. Is Once Again Investing Everywhere But India
We were sitting in a suite at the Taj Mahal Hotel on Mumbai's southern waterfront, looking out into an expansive bay dotted with bobbing boats and passing ships. It was a warm summer afternoon in the city, but my interviewee, Ratan N. Tata, seemed thoughtful and miles away.
Now, this was the early 2000s and the Tata Group was embarking on what would become a sweeping global acquisition spree. In 2000, it acquired the iconic London-based Tetley Tea. In 2004, it bought the truck manufacturing operations of South Korean automaker Daewoo Motors.
And later, after our interview, Tata, who passed away just last October, would go on to buy the Anglo-Dutch steelmaker Corus Group for over $11 billion. And in 2008 came the crown jewel, Jaguar Land Rover, acquired from Ford Motors. If it wasn't the Tata's, it was the Birla's.
In 2007, Hindalco bought U.S.-Canadian aluminium major Novelis for $6 billion, one of several big-ticket acquisitions from Indian conglomerates at the time. At the Taj that afternoon, Tata was thinking about acquiring technology, scale, brands, and presumably global respect. Kumar Mangalam Birla, two of the Aditya Group, seemed to be on a similar path, reportedly justifying the steep premium paid for Novelis, then touted as the world's largest producer of rolled aluminium.
But the one thing that most of these acquired foreign companies had in common, they were all in some kind of trouble, or at least many of them were. If the outbound wave that began in 2000 lasted through the end of that decade, a fresh one is well underway now. A Bloomberg report from December 2024 noted that outbound deals in the last quarter of 2024 hit a 10-year high in volume, 35 mergers and acquisition transactions worth about $5.3 billion, according to Grant Thornton's deal tracker. So far in 2024, Indian companies have executed over 100 overseas M&A transactions, mostly targeting the U.S. and Europe, the report said. India's overseas Greenfield investment was also on track to hit a record this year, according to FDI Intelligence. More than 400 local companies have invested in international projects in 2024, double the number seen before the pandemic.
But the contrast with the Tata and Birla deals of the 2000s is stark. Whether Jaguar, Land Rover, Tetley or Novelis, these were globally known brands. In contrast, the deals of recent years are marked more by high volume and low value, with a growing tilt towards business services.
The UAE, according to Bloomberg, has now emerged as the top destination for Indian investment. And all of this is beginning to show somewhat worryingly in the FDI or foreign direct investment numbers. An insightful article by A.K. Bhattacharya in Business Standard on May 28th examines the sharp decline in net foreign direct investment which fell or more accurately crashed 96% last financial year to just $0.3 billion or $350 million. This wasn't just a record single year drop but also the lowest level of net FDI inflow into India in the last two decades, He identified two key drivers behind the collapse. One is a 16% increase in repatriation and disinvestment by foreign investors in existing companies totalling about $51 billion and a 75% surge in outward FDI by Indian companies which touched about $29 billion. To be fair, gross FDI inflows during 24-25 did rise by about 14%, touching about $81 billion.
But if you account for the sharp increase in repatriation and outbound FDI, both of which effectively nullified the gains from gross inflows. Now, repatriation was always expected given the deluge of venture and private equity dollars that have flowed in over the past decade. Capital that has been waiting, almost like passengers on a Mumbai local to jump off before the train comes to a complete stop.
This has created its own distortions in the capital markets. We've seen a flood of offers for sale where a significant portion of the capital raised in recent years has gone straight into the hands of investors, including promoters and founders, rather than being deployed as productive capital within the companies. Now, there is nothing wrong with that, but it's not a particularly healthy sign when it happens en masse.
The Business Standard report, like Bloomberg's analysis in December, points out the striking overlap between the sources of India's inward foreign direct investment and the destinations of its outward foreign direct investments. Singapore, Mauritius, the UAE, the Netherlands, the US or the United States accounted for about 60% of total inbound FDI. Coincidentally, or perhaps not, the same five countries also made up more than 50% of India's total outward FDI in 24-25.
So this is curious and interesting at the same time. While inbound FDI flowed into fairly visible sectors, industries that you and I can see and experience, more than 90% of outbound FDI went into financial services, including banking and insurance, manufacturing, wholesale and retail trade, and even restaurants and hotels. So no data on the sectoral or destination-wise breakdown of repatriation was immediately available, says Business Standard.
Now, once again, there's nothing inherently wrong in this, but it's still not a particularly reassuring trend. So the bigger issue is this, Indian companies are not investing enough in India, certainly not at levels policymakers or the economy would like to see. Overall private sector capital expenditure is expected to fall sharply by a fourth in 25-26 to about 490,000 crore rupees from about 660,000 crore rupees projected for 24-25, according to a money control report analysing government data.
So domestic consumption isn't growing the way it did just a few years ago. Manufacturing capacity remains well below peak utilisation, offering little incentive for companies to expand or create new capacity. And then there's the added chill from the tariff uncertainty of the last two months, a trend that will quite likely persist, putting further freeze on investment intentions.
So there are two different issues here. First, the outward investments and where they're going, which is mostly in financial services. Second, the sharp slowdown in domestic investment.
You have to remember that companies have funds on their balance sheets and could borrow as well if they wanted to. One major difference between the 2000s and now is that back then the Tatas and Billas weren't entirely convinced about the Indian market. Today they likely are, but remain constrained for various reasons from investing for expansion, at least at scale.
Keep in mind the CAPEX figures we refer to include major projects from groups like Reliance and Adani, particularly in areas like renewable energy and ports, or for that matter even Tatas and areas like semiconductors. Incidentally, the one big iconic global acquisition last year was Sunil Bharti Mittal's $4 billion purchase of a 24.5% stake in BT, or British Telecom. The rest, as the Business Standard article also noted, have been small and scattered.
It also strikes me as I look back at my interview with Ratan Tata on the theme of Indian businesses going global, maybe we have fewer gutsy business leaders like him nowadays. Leaders with the confidence and guts to place big audacious bets. Remember, his farewell big bet was Air India, a proposition no one in their right minds would have touched.
Maybe we don't need those bets today as India has opened up further and markets have matured, or maybe we do and just don't know where or what they are.
And that brings us to the top stories and themes.
The stock markets stay volatile as global queues weigh in.
More foreign brokerages are upgrading their view on emerging markets, including India.
Indian students are not quite welcome in the United States right now.
Young Indians want to buy houses now in contrast to the earlier approach of renting, and many want homes closer to health facilities.
The Markets Stay Volatile
Indian markets continue to stay volatile and in some ways reflecting more the uncertainty that there is in global markets than Wall Street, which is well on its own trip. And of course, the strong showing on Wall Street on Tuesday had no impact on Wall Street on Wednesday. The Nifty was down 63 points to close at 24,752, while the Sensex was down 240 points to close at 81,312 on Wednesday.
The broader markets did better. The Nifty small cap 100 was up about 0.3 percent, while the Nifty mid-cap 100 was mostly flat. One stock that attracted attention was ITC after British multinational BAT PLC trimmed its stake in the company by selling about 2.3 percent in a block deal worth about 11,000 crores or more than a billion dollars, and the share price was down 3.2 percent. On the macro front, India's industrial activity showed moderate growth on April 25, with the index of industrial production rising about 2.7 percent year on year, according to data released by the Ministry of Statistics and Programme Implementation. But the performance has been driven by the manufacturing sector, which saw a growth of 3.4 percent against 4.2 percent last year. Bank of Baroda Research said that industrial growth at 2.7 percent in April is a positive indicator to start the year, considering that the core sector performance during this period was suboptimal. And they also said that on the forefront was a smart increase in capital goods supported by both electrical and non-electrical machinery, while there was a base effect growth of over 20 percent, which is impressive. It needs to be seen if this is maintained in the coming months as one is looking at investments to pick up. In other markets, the Indian rupee was almost flat on Wednesday and closed at Rs.
85.36 against the US dollar from Rs. 85.33 in the previous session. The dollar index was last at 99.5, little changed on the day, while the Korean won and Thai Baht led gains in Asian currencies with a 0.4 percent rise, according to Reuters, who also gave us the rupee prices earlier. Back to Wall Street, a Wall Street Journal report from Tuesday says that now Wall Street is betting that the worst of President Trump's trade war is in the rearview mirror. The latest example came on Tuesday when news of easing trade tensions between the US and EU led to a 2 percent increase in the S&P 500, which was the largest single-day gain since May 12th, when a rollback of tariffs between the US and China spurred an even larger market rally. While corporate earnings and bond market jitters have prompted stock swings in recent weeks, the Wall Street Journal trade policy remains the key driver of day-to-day market action, and investors have eagerly greeted signs of easing tensions by driving markets higher, hopeful that the US will eventually be able to strike deals with little lasting damage to the economy or corporate profits.
Well, the question therefore seems to be not whether its trade tensions have dissipated, but whether the worst fears have dissipated, which of course does not add up, given that the 30 percent duties on China and 50 percent on EU products are on pause amidst another pause till July 9th with the rest of the world, including India. So none of those issues are resolved, nor do they look like many of them would be resolved in the coming days. The Chief Investment Officer at Apollon Wealth Management told the Wall Street Journal, the market was relieved for now and that they could ignore the latest tariff threat.
We just need to get past this uncertainty so companies and consumers can plan ahead. Well, how companies can plan ahead is once again not clear to me, whether in the US or anywhere in the world, but presumably Wall Street knows something that we all don't. Meanwhile, US stock futures were flat on Wednesday morning, a day after the Dow Jones rallied more than 700 points and the S&P 500 rose 2 percent, all of which rose after a four-day losing streak.
Just to remind everyone, President Donald Trump on Sunday said he would delay a 50 percent tariff on the European Union to July 9th, after initially saying on Friday that he was not looking for a deal.
UBS Joins Global Banks In Upgrades
Meanwhile, in a report that's emerged now, UBS securities has upgraded its India stance to neutral from underweight as part of an overall shift in strategy for emerging markets to domestic and defensive-orientated sectors against the global trade tensions that we're all seeing today. Several FIIs, by the way, including Morgan Stanley and JP Morgan, have upgraded their emerging markets view in recent weeks. UBS, however, cautions that given the corporate earnings growth in India has been stable, the exorbitant risk premium, extra returns that investors expect from riskier assets linked to Indian equities, is unreasonable.
India traditionally carried a 20 to 25 percent risk premium versus other emerging markets. However, recently that premium has soared to 60 percent, a level unjustified by the current pace of corporate earnings growth, according to the head of emerging markets and Asia equity strategy at UBS Securities. Indian equities often carry a high risk premium driven by their long-term growth story and the appeal of a young consumption-led economy.
But alongside this optimism comes challenges like policy uncertainty, market volatility, and currency risks that make investors demand extra returns. The premium reflects both optimism about India's future and the risks tied to it. UBS does say, like everyone else, that a stronger case to invest in India will only or likely emerge when corporate earnings growth picks up, manufacturing gains traction, and of course, India-U.S. trade negotiations reach a breakthrough. So in 2025 so far, the MSCI or the Morgan Stanley Capital International Emerging Market Index has gained about nine percent, while MSCI India is up 3.4 percent. UBS Securities says it continues to favour China for now, citing its attractive valuations and comparatively stronger fundamentals.
It's An Above Normal Rainfall
The Indian meteorological department on Tuesday said India is likely to receive above normal rainfall in June. The forecast released as part of IMD's second stage long-range outlook indicates that rainfall on June 25 is likely to exceed 108 percent of the long-period average or LPA. The government secretary in the Ministry of Earth Sciences said that during June most of the country is expected to receive normal to above normal rainfall.
However, some southern parts, that is, of peninsular India and parts of northwest and northeast India, may receive below normal rain. Trading agency Crystal said in a note that last year's above-normal rainfall meant that the reservoir storage position at the end of the monsoon season was much better than the long-term average at 87 percent of life capacity, compared with the last 10-year average of 77 percent. Currently, reservoir storage levels are at about 29 percent of life capacity at an all-India level, which is higher than last year's level for the corresponding period.
At that time it was 24 percent. So, the forecasts of above normal rains in 2025 augur well for reservoir storage at the end of this monsoon season. Crystal also says that abundant rainfall should ensure good soil moisture for the Rabi season and also gives us some statistics.
Food grain stocks of the Food Corporation of India are currently at about 95 million tonnes as compared to last year's 77 million tonnes and therefore there's enough buffer against shocks. Stocks of rice and wheat, if you wanted to know, are well above the required norms as on date at 38 million tonnes for rice, 35 million tonnes for wheat. The required norm is about 13 million tonnes for rice and 7.5 million tonnes for wheat. So, to conclude, the ratings agency says that if the IMD's forecast comes true, it would lead to a second year of an above normal monsoon, boosting agricultural value add, strengthening rural demand and keeping food inflation in check. However, its distribution over time and regions needs to be closely tracked. Adverse climate events such as rainfall and temperature anomalies could disrupt agriculture production and exert pressure on food prices.
Student Suspensions
Foreign students, including a healthy chunk from India, might contribute some 44 billion dollars to America's economy annually, but they're not welcome for now. The U.S. State Department on Tuesday suspended foreign students' visa appointments as it weighs expanded guidelines for screening applicants' social media accounts according to an internal cable obtained by the Washington Post. Some 1 million international students go to the U.S. every year, 23-24, that's last year. A record number of 331,000 Indian students went to the U.S. to study, making India the top country of origin for international students to the U.S. And this figure was a 23 percent increase compared to the previous year when about 268,000 Indian students were studying in the U.S. While the latest strike down is not specifically linked to Indian students, given that Indians represent almost a third of all foreign students, it's tough to separate the two.
It also means that students and their parents will spend the next few months with sleepless nights, particularly the tens or hundreds of thousands who've got admissions. According to that note, the Washington Post reported the note as saying, effective immediately in preparation for an expansion of required social media screening and vetting, consular sections should not add any additional student or exchange visitor, that's EM&J visa appointment capacity, until further guidance is issued. And that will happen in the coming days.
Unclaimed visa appointment time should be immediately removed from availability. The Washington Post also quoted Homeland Security saying, last month, citing White House executive orders aimed at addressing anti-Semitism, it will begin screening non-citizen social media accounts for anti-Semitic content as reason to deny visa and green card applications, including visa applications from foreign students. The State Department and its cable on Tuesday said this is in line with White House directives and the next step is for posts to evaluate operations and processes in preparation for this expanded social media vetting of all student and exchange visitors, that's FM&J visa applicants.
So new guidelines are going to come, but it's unclear what they will entail. A State Department spokesperson told reporters during a press briefing on Tuesday that that's something that's not been discussed publicly and that they use every tool in their tool chest to vet anyone coming in who wants to come into the United States.
A Pulse Real Estate
A recent study conducted by Knight Frank Real Estate Consultancy has found that more than half, 58% actually, preferred their new homes to be closer to health facilities, while a slightly lesser number, 53%, indicated a preference for shopping outlets. There is also an attitudinal shift which appears to overshadow the aspect of consideration, which is that younger people who were earlier not so keen to own assets, like homes in this case, appear to be changing their mind now and shifting to buying houses. Moreover, an overwhelming majority of Indians prefer ownership of homes over any other format.
The report aimed at understanding home buyer sentiments and called Beyond Bricks the pulse of home, found that 80% of some 1,629 respondents across eight cities have positive purchase sentiments. The intent was the strongest amongst high earners, with annual incomes of above Rs 50 lakh, that's 91%, and millennials, about 82%. A significant portion of respondents across the country, for instance, were looking to purchase a home to upgrade to a better living space, while nearly a third wanted to buy a house for the first time for end use.
Apartments remained the most preferred residential choice, though higher income buyers showed a stronger preference for independent houses and villas, indicating a desire for space, privacy and premium living, says Knight Frank. More than half, as we said, 58% preferred their new homes to be closer to health facilities, while a similar number, that's 53%, indicated a preference for shopping outlets. Public transport access was also a prominent factor in the decision-making process of most buyers, with 40% of respondents indicating it to be something they sought while selecting a home.
I reached out to Gulam Zia, Senior Executive Director at Knight Frank, and asked him how he was reading some of these shifts between earlier years to now.
INTERVIEW TRANSCRIPT
Gulam Zia: But that has started shifting again. Like, while you're talking about overall weighted average, but when I pick up homes with more than Rs 50 lakh budgets, that is where the shift is even more pronounced. It's more than 91%.
So the biggest difference is that purchasing has become a key factor. Of course, the lower end is slightly different because of unavailability of home loans and now with the change in repo rates, etc, the home loan interest rate is shifting. I'm sure even there it will start changing, but because the lower end is more prone to any changes in home loan interest rates, it was different.
But Rs 50 lakh and above, 91% of the home buyers actually are keen to actually buy instead of renting. That's the key difference between what it was earlier and what it is now.
Govindraj Ethiraj: Right, so you're saying the same people would have preferred to rent earlier and are buying now. Therefore, it's an attitudinal change, not driven by affordability or higher incomes and so on.
Gulam Zia: Indeed, indeed. There's a big difference that earlier, like today, affordability is a concern because all of us are facing huge price rises, etc. But in spite of that, this is the finding that affordability is not the key, it's the purchasing which is more important, vis-a-vis what it used to be renting a few years back.
So there's a big shift that we are watching.
Govindraj Ethiraj: And any reasons that could be driving this, at least as evident from your own survey?
Gulam Zia: The big difference you're seeing is in spite of affordability etc. becoming a concern, it's actually the post-COVID environment which helped shift this entire positioning. The attitudinal change is happening because health is supposed to be the most important reason. And it is coming out very clearly.
Gone are the days where people were talking about the swimming pool as the key reason for decision making, etc. Today, health, health facilities, proximity to hospital, etc. is coming up as a key reason for purchasing a house.
The decision making criteria is more about health. And that shift is something which was induced by COVID may not be so pronounced. The COVID itself may not be a key reason, but it has remained.
The lasting impact of that is that people are talking about ownership, having their own house, proximity to health facilities, healthcare facilities are now driving the decisions.
Govindraj Ethiraj: So you're saying because there is proximity to healthcare, they are buying the house. That's interesting...
Gulam Zia: That's indeed the reason because another fact like a few more things that are coming about is gone are the days where people are talking about, you know, a gymnasium in the building or a health club or even a spa or something or swimming pool for that matter. Those are the things which are taken as hygiene. The importance of proximity for a healthcare facility is the most important key factor that is coming about.
So these are a few differences, what it used to be earlier and what it is today. And that's why ownership, you know, because if you're shifting houses every now and then, you cannot maintain a few of these minimal requirements. And that's where we want to believe that the shift has happened based on these requirements, which are post COVID induced kinds of requirements.
Govindraj Ethiraj: And you're saying this is cross age groups or are there variations between age groups in the people are deciding to or zeroing in on their home purchases?
Gulam Zia: Actually, it is still visible because millennials, we haven't really done in depth because the Gen Z's are not yet a huge component of home buyers. But millennials, the requirement of owning a home is still lesser than the rest of them. As I said, the overall average for those who have more than 50 lakh to buy a house, it's more about 91 odd percent are the people who want to buy a house rather than renting.
But when it comes to millennials, the same factor, it actually comes down to about 72 to 73 odd percent. So millennials are age wise, millennials are yet catching up on the requirement of owning a house and compared to the rest of them, where it is actually more than 90 percent.
Govindraj Ethiraj: Again, if you look across cities, for example, Mumbai metropolitan region or Bangalore, Chennai, Ahmedabad, are you seeing shifts that are driven by attitude or driven by incomes or income levels that is or both?
Gulam Zia: I would say there's one more factor that we must look into, which is transition. Like especially when you're talking about Bangalore and even in Delhi and most of these IT driven cities, most of the people who are coming in would immediately not buy a house. Those who are coming for jobs, etc.
are not buying a house. So this is the floating population, which is creating more of an impact on the decision to be shifting towards renting vis-a-vis buying, because it will take a couple of years before they arrive at the decision to buy that house. So this is where zonal changes are coming about and cities like especially Delhi and Bangalore, the percentage shifts, the decision to rent is still more pronounced compared to the rest of the country in these two cities.
Govindraj Ethiraj: Right. And how is this affecting the overall housing market? And also to some extent, I'm sure this is supply driven, including the advertising and push and so on.
So how do you, or rather, what would you tell potential home renters or owners at this point, how they should be taking their decisions based on some of these findings?
Gulam Zia: To me, the most important message that this whole survey is driving across is that while today affordability is not a key concern, buying a house is appropriate, going for it is the right time right now. However, if affordability is shifting, I think you also asked that very specific question on affordability. Right now, in spite of rising prices, the decision is still veering towards buying instead of renting.
But soon, if this kind of a price rise continues, then you may have to relook at your decision. So that's something which is, as far as I am looking at it, this is what is coming out very clearly, that right now, while things are looking rosy and shifting towards buying a house, but going forward, of course, unless the home loan interest rates are coming down drastically, then again, the situation will continue to be in favour of owning. But if the prices are going the way they are, and it's already showing in cities like at least down south in Bangalore, in Hyderabad, these decisions are actually impacted because of affordability.
But then going forward, for the rest of the cities as well, if the price rise continues unabashedly, then we will have to look at some other alternatives, as I said, unless the home loan interest rates come down.
Govindraj Ethiraj: Gulam, thank you so much for joining me.
