On Episode 999 of The Core Report, financial journalist Govindraj Ethiraj talks to Radhika Rao, Senior Economist and Executive Director at DBS Bank as well as Dharmakirti Joshi, Chief Economist at CRISIL.

SHOW NOTES

(00:00) Stories of the Day

(00:50) Markets Turn Around As Oil Prices Rise

(03:40) What Does The RBI Rate Hike Really Mean?

(15:52) The Silent Shift In India’s Exports And Guess Which Country Is The Biggest Recipient Of This Product

(23:11) Google Says They Have Fallen Short Of Their Own High Standards As Finland Suspends Data Centre Projects

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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 Thursday, the 8th of October and this is Govindraj Ethiraj Broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

The markets turn around again as oil prices rise

What the Reserve Bank rate hike really means

The silent shift in India's exports and guess which country is the biggest recipient of this product.

Google says they've fallen short of their own high standards as data centre projects are suspended in Europe.

Markets, Repo Rate, Oil and Forex

The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.5% on Wednesday, marking the first rise in nearly four years.

It also signalled more rate hikes by changing its stance from neutral to calibrated tightening, which was a surprise to the markets. The governor of the Reserve Bank, Sanjay Malhotra, said the extent and timing of any more increases would be contingent on actual inflation and growth data and that further rate cuts are off the table in the near term. He said that the duration and extent of the rate hike cycle therefore would be contingent on actual growth inflation development and outlook, especially that of underlying inflation, extent of broadening of price pressure and speed round effects on the supply shock.

India has joined major central banks around the world in raising rates as higher oil prices triggered by the Iran war fuel inflation has put pressure on consumption and on the rupee. And more on all of that shortly, India is also reckoning with a below average monsoon thanks to El Nino. The Reserve Bank's six-member Monetary Policy Committee voted unanimously for and earlier, 60 percent of economists in a Reuters poll had expected a 25 basis points increase in the repo rate, though there were a few economists who were hoping or saying that the interest rates would be left alone because raising them would or likely put pressure ahead of the festival season.

Oil prices were up again on Wednesday with Brent futures now back above the $100 mark at $101.80 a barrel on Wednesday morning. Not surprisingly, the markets reversed course on Wednesday with the benchmark indices reversing their two-day gaining streak after the Reserve Bank of India raised repo rates. The Sensex fell 429 points to 72,638 and the Nifty 50 was down 173 points to 22,603.

In the broader markets, the Nifty mid-cap 100 was down 0.6 and the small cap was up 0.3 percent. The Reserve Bank governor also said on Wednesday that financial markets could be irrational in the short term and several measures suggested the rupee was undervalued and he was speaking in the context of the rupee in a media interaction after the policy where he was responding to a question on why currency forecasts and hedging behaviour continue to point to further rupee weakness despite India's ability to attract foreign flows. He said that only in the long run are they able to find the right value, adding that by a number of estimates including the Real Effective Exchange Rate or REER, the rupee may be undervalued.

He later said the Reserve Bank would ensure the rupee stabilised, found its correct value, and moved in an orderly manner. Well, the rupee fell to about Rs. 96.84 on Wednesday nearing its record low of Rs.

96.96 hit in May. India's foreign exchange reserves have fallen for a fourth consecutive week now to $734 billion and they have fallen from their peak of $785 billion on September 4th, so a decline of around $50 billion in less than a month.

What Does The RBI Rate Hike Really Mean?

Economists have broadly read the Reserve Bank's four-year reversal and 25 basis repo rate rise to 5.5 percent and the shift to calibrated tightening as the start of a higher for longer phase with inflation risks outweighing growth Notes from rating agencies and brokerages like Crisil, MK and Carriage point to expensive oil, weak monsoons, El Nino, and broader price pressures while stronger growth gives the Reserve Bank of India room to tighten.

Several economists have said that they expect a 25-basis point hike in December itself and some have even suggested 25-50 basis points in this calendar year. Between December and February next year. Other houses who have put out notes include Baroda BNP Paribas Mutual Fund which has warned of pressure on bond prices and Modular Capital which sees some rupee support but higher borrowing costs and valuation pressure in rate-sensitive sectors.

The property sector comments differ more on the damage to demand. Anuj Puri of Anirak has warned that costlier home loans on top of high prices could delay festive season purchases especially in affordable housing and make new mall projects less attractive though Knight Frank sees affordability pressure but expects resilient growth and housing demand to prevent major disruption. The Asucham Warehousing Task Force has argued that industrial and warehousing demand stays strong and much of the repricing has already happened though prolonged high rates demand stricter underwriting.

I reached out to Radhika Rao, Senior Economist and Executive Director at DBS Bank in Singapore and I began by asking her how she was seeing the rate hike in the context of other economies and markets who've raised rates recently before coming to the Reserve Bank.

INTERVIEW TRANSCRIPT

Radhika Rao: So you have seen, so let's split that into DM and EM countries. Developed countries have had, thanks to the oil shock, they have started to hike rates. So when I say DM, let me classify.

So you know, you've got the European Central Bank, for example, who's already undertaken rate hikes. Then you've got to the likes of even Australian RBA and the BOE, who have also tightened policy. And more recently, you've got the Fed also joining the peers in hiking rates.

They've undertaken one, and there's likelihood of at least 50 basis point more, according to our baseline assumption. Similarly, in Asia as well, what we've seen is that the central banks have actually not waited for the Fed to act. You know, if they've had compulsions because of the currency, or they've had compulsions because of inflation, they've gone ahead to hike rates as well.

A couple of such examples would be Indonesia undertook about 100 basis point of hikes in just two months, back in May, June, because of what the currency was doing. And then you've got Philippines, which heightened policy and continues to because of how inflation has been playing out there. Other than into the spectrum, countries like China, for instance, you know, which is still looking to support growth currency that has actually been appreciated, you know, providing them and helping to keep rates generally more accommodative.

So I would say quite a diverse mix, but certainly more in the hawkish camp than I would say, you know, easing policy. This is the kind of backdrop that RBI has also been operating.

Govindraj Ethiraj: Right, which brings us to RBI. So RBI has seemed to have jumped in and gone directly for a hike without signalling a stance earlier. Are you seeing it like that?

And any other takeaways?

Radhika Rao: Coming out of the August policy meeting, I think the interpretation of the markets was that, you know, the committee was dovish. Subsequently, we saw minutes and when you see the fine print, you did get an idea that they were worried about inflation. And they were a bit more positive on to mean that, you know, downside to growth was expected to be less.

Then, you know, when first quarter GDP numbers came out, that kind of backed their expectations as well. Subsequently, we had some public comments from the governor as well. And looking at where growth is, where inflation is, I think in the run up to October, it had become quite clear.

And I would say after a long time, there is a near consensus that emerged from the analyst community that a rate hike was likely. And I guess two other things that really changed between August and October was what went to happen to oil prices, stubbornly staying above 100. And you've got the Fed also, which had began to tighten policy.

Now, Fed's move certainly is, I would say, a part in the central bank's, you know, dashboard. But that's another, you know, significant development to keep note of. So all these things falling into place together with the fact that domestic inflation is heading the 5% handle very soon, and perhaps even closer to the 6% handle, provided the sufficient justification for the central bank to go ahead and kickstart its hiking cycle.

Govindraj Ethiraj: And if you look at the past or recent history, what's your sense? We've obviously embarked now on a rate hike cycle, as have other countries, as you just pointed out. But does it look like this could continue for some time, even if let's say oil prices were to moderate?

Or is this one of those things where once the train has left the station, it's gone for a long time?

Radhika Rao: If you want to draw parallels, I would say the closest, of course, would be 2022, when we had the other rate hiking cycle. So between, I guess, in the last five years, we've really gone through these four phases of hikes and changes, right? And it is as it should be subject to changing condition, inflation as well as growth.

So 2022, inflation was much higher, and hence a very aggressive rate hiking cycle was undertaken. Then you've got 2025. Then there was a pause, 2023-2024.

Now we were at 2025, where rates were cut by 1.25. So I would say, you know, being here and now, 75 or 100 basis point still is a normalisation in rates. I wouldn't call it ultra aggressive, because in effect, you are reversing what the move was in year 25. As going back to a question, just the most recent example, I would say inflation is really not that high as yet.

It is still, you know, just gone past the midpoint. I think it's that you're looking at base effects will also kind of push in headline inflation even higher. And then, of course, you've got oil, which is in the background.

To your question, is it a train that has left the station? I would say that it is going to take stops. It is going to take stock and stop.

If, say, conditions reverse, the US yields become much more. We really wonder what would do that. But yields cool off.

There's a big credit event that happens globally. Oil prices have shown earlier, June, July, you know, suddenly from 100, it can be a 70. That kind of swing happens.

Inflation worries subside. I would say the central bank would prefer to go slow. But I think typically in the past, we haven't seen them do one and done.

I think you can at least get the next reporters in view and kind of confirm that inflation is going to be in the 5% to 6% handle, if not more. So I think expecting another 50 to 75 basis points of hikes, I would say is not out of question. Again, whether we call it recalibration, whether we call it normalisation, I wouldn't want to term it as being very aggressive, because in effect, again, you're reversing out the easing that happened in 2025.

And one final point, we do compare where rates will end up versus where inflation will, you know, typically rates maintain a buffer, positive buffer. And even with a 7500, you're looking at a very marginal buffer, you're looking at a very significant buffer.

Govindraj Ethiraj: Right. And how are you reading consumption overall in the economy? And do you think that or do you feel that this interest rate change could have any impact?

Radhika Rao: So consumption has held up, I would say relatively, I mean, if you look at the high frequency indicators, it's held up pretty well. Going into the several tailwinds, right, you can talk about financial conditions and need been being easier, indirect tax cuts, tax relief, so on and so forth. Now, coming to the second half of fiscal 27, some of these things are already reversing out.

You've got indirect tax, which in the high frequency numbers also will go into base effects. Whatever propelled the numbers earlier could soften it. Then you're looking at tighter financial conditions.

We haven't really in all discussions always has been centred around El Nino and the effect on monsoon. So we do have significant amount of population as well as growth, you know, dependent on the farm, rural sector is dependent on output there. Summer output seems to be OK, winter output, we'll have agriculture that have to keep eye on.

So these are conditions that, again, you know, which tell you that household consumption could soften at the margin. A couple of other things I can think of, wealth effects, which really helped in 23-24, are kind of weaning off as well. Still significant amount of money going into the capital markets, but the kind of gains which we had seen in the past have not rectified.

So putting all these things together tells you that there are reasons if we were to that consumption would probably be more moderate in the second half of the year compared to what we had seen at least in the year, year and a half in the run up to at present, for example.

Govindraj Ethiraj: So one is on the corporate side and one is on the macro side. So on the corporate side, what's your sense, particularly consumer facing businesses, consumer products and so on, and how things could evolve in the next quarter or so, because a lot of people are obviously betting on that. The second is, do you see more macroeconomic tightening either preemptively or otherwise, as you look ahead?

Radhika Rao: Coming to your question, I mean, I was just hearing some of the guidance that FMCG companies or QSR companies were giving off late. I think I would say at the margin, they also sound a bit cautious, because again, they've had a good run, they do see some risks on the horizon. And almost everybody has been facing higher raw material costs, you're not in a position to pass it on entirely.

So you know, somebody got to pay. So it is certainly impacting their margins. So hence, I think the central bank's belief also perhaps that there would be a general tendency for some of these firm level costs to get passed on to the final consumer in the coming six, eight months.

And I think FMCG would also be a part of that cohort, from what we understand from listening to the guidance in general. On the second part of the question on macroeconomic tightening, monetary policy is certainly front and centre at this point. I think financial stability, we just spoke about this, India, as its EM is operating in an environment where risk free rates are closing in on EM rates.

In the past, EM rates used to be 400, 500 basis points above where the DM rates are, US rates in particular. But now you're looking at a compressed and quite compressed spread. But I think beyond the point that compression, I think initially, it does reflect improved fundamentals for the emerging market countries.

But I think taking it below 200 basis points, for example, you can see the impact on flows. Because this period is also where currency volatility is quite strong for rupee as well. As we are looking at it now, dollar rupee is back in the 96 handle.

It's been meeting a stronger intervention response. But nonetheless, it's been under pressure. So putting adjusted for inflation, adjusted for that lack of buffer, you would see that investors generally being a lot more cautious.

So I think in response to that as well, RBI and policymakers in general would prefer to maintain a sufficient buffer. Because FCNR was a very timely move. I think it has garnered more than 140 billion inflows.

But come FY28 or 2027 calendar year, you're going to come back to the organic drivers. And that's where these differentials and maintaining favourable valuations versus US markets, for example, will become quite important.

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

Radhika Rao: Thanks, Govindraj.

France’s Finance Chaos

The head of the International Monetary Fund told the French government in a CNBC interview on Wednesday that they have to bring their finances under control. France is in the throes of another political crisis with violent student protests now stretching into their third week.

Young people across France are protesting long study days, teacher shortages and run-down schools which has put pressure on the country's government bonds known as OATs. Investors are now asking for a higher yield than they do for bonds issued by the Italian government with French 10-year bond yields rising by more than 100 basis points since the start of the year according to that CNBC report. IMF's Managing Director Kristalina Georgieva told CNBC in Singapore that what we see in France is a complication of on one side the consequence of borrowing shock after shock after shock, climbing on the staircase that does not lead to heaven and on the other side a political dynamic seen in France that creates more difficulties for to put a clear path for tightening.

She said there is a very clear recognition in France that deficit needs to be brought under 5%.

The silent shift in India’s exports

India's rising petroleum exports have helped moderate the deterioration in India's oil trade balance and contained the oil trade deficit. Moreover, India's merchandise export growth of 18.8% or close to 19%.

So far this fiscal has been driven to a large extent by a surge in petroleum exports which grew 46% year-on-year. Merchandise exports as a whole now are gaining faster right now as opposed to service exports which were ruling the roost in recent years. Now all of this was not expected and is a pleasant surprise to everyone including of course the exporters.

Non-oil exports, by the way, are only expanding at about 14.4% which like we said marks a reversal from the consecutive declines in petroleum exports over the previous three fiscals. Interestingly, India is exporting to newer markets with Singapore leading the way. Also a reflection on the sheer supply disruptions faced by key exporters like West Asia and Russia amidst geopolitical tensions and reduced refining capacity because of attacks.

Exports to Russia for example have more than doubled from a low base reflecting disruptions in Russia's refining capacity amidst the Russia-Ukraine war. So the top 5 destinations for oil exports from India are Singapore at 18.4%, Tanzania at 9.6%, Netherlands at 8.6%, South Africa 7.4% and Australia 6.3%. There are some similarities for the same period that's April to June with last year except that Tanzania did not figure in this and Netherlands, UAE and USA were leading the list last year. I reached out to DK Joshi, Chief Economist at Crisil and I began by asking him how he was seeing this latest trend and the report that they had recently put out.

INTERVIEW TRANSCRIPT

Dharmakirti Joshi: Well, yeah, I think, see, if you look at the last three fiscals, 23, 24, 24, 25 and 25, 26, the average export growth for petroleum products was minus 17% per year. So we were shrinking. Now, this year, I think in this fiscal year, we've seen opposite of that we've seen 46% growth in petroleum exports.

So the total export growth itself was around 19%. And if you take petroleum out, it is only 14%. So I think petroleum is contributing is punching more than its weight.

A couple of things are happening. Globally, I think we've seen hit to the downstream facilities and India has good refineries, I think, and that allows us to import oil and sell it out. So other thing which is influencing our exports is that you're getting a better price for your exports now, because diesel etc.

I think there is a shortage. So the final products or the petroleum refined products, their prices have risen much faster than the price of crude oil import. So that what we call terms of trade that has become favourable in petroleum sector.

Consequently, I think the share of petroleum exports, which was around 30% of the total petroleum imports, that has become 40%. So I think this is a quantum shift that has taken place. And this is due to several factors.

As I said, I think there are price differentials between exports and imports. And on top of that, I think the refining facilities have been hit. And so we are getting an opportunistic benefit out of this and we also managing to diversify to different locations.

So that is a good thing at this juncture, because it reduces the pressure on the trade deficit that comes from high crude oil prices. So overall, it's good for balance. We'll still run a current account deficit, which is higher than last year, but this is capping the upside to that.

Govindraj Ethiraj: Right. And the oil that we are exporting or the refined product that we are exporting, is that eating into what could have otherwise gone into domestic consumption?

Dharmakirti Joshi: No, there's no shortage domestically. So I think the refining capacity is being fully used. Otherwise, it would have been visible as lines outside the petrol pump, etc.

There's no shortage there. So I would presume out of that proxy indicator that it's not eating into the domestic demand for these products.

Govindraj Ethiraj: Right. And we're also seeing a shift in the countries who are importing from us. So Singapore is leading the list now.

So what does that tell us?

Dharmakirti Joshi: Well, it's not that Singapore's domestic consumption has risen and they want more refined petroleum products. I think Singapore is also a hub for re-exporting and transshipments, etc. I think it's a rerouting that has happened because of Middle East war and some routes not being that favourable.

I think it's a result of that. Singapore per se, I think it's become the top importer from India. This also came to as a surprise.

And when we started digging and we figured out that it is more of rerouting that is playing out rather than Singapore being the destination for our exports of petroleum products for internal use in Singapore.

Govindraj Ethiraj: Right. Tanzania comes next, which was not there in the top five last year.

Dharmakirti Joshi: Because the routes have been moved around. So I think it's a result of that. This doesn't mean that this situation is going to continue forever.

As and when I think the prices normalise, I think we'll see new configurations appear.

Govindraj Ethiraj: And how are you seeing this overall equation of import and export balance because of this? I mean, this is something that we were not expecting and not ready for in a sense, but are now benefiting from it. As you look ahead, how is this panning out?

Dharmakirti Joshi: I would say that since the refining facility has been damaged and we have enough refining capacity, I think we can make use of the situation to our advantage right now by exporting petroleum products. And this will continue as long as this current scenario continues to play out, which is, I think you know how the prices of diesel have gone up globally, I think because of the refining capacity that has been hit in Russia, also I think in the Middle East. So I think it's a function of how this plays out.

See, India is an importer of petroleum products after all. I think it has some advantage on the downstream and it is using that advantage to push its petroleum exports and very good thing at the current juncture where current account deficit is going to rise. The capital inflows are at least I think from into the equity and debt markets are that great.

The FCNRB deposits also help. But overall, I think in this kind of a situation, this is a significant advantage, I would say.

Govindraj Ethiraj: Right. How are you seeing the overall export outlook for the country, at least on merchandise? I mean, given that this in itself is doing well.

Dharmakirti Joshi: Yeah, merchandise is actually doing quite well overall. And I think there are a number of factors for that. One is that the global economy itself is doing quite well.

That I think so far, it has not surprised on the downside. And second, I think is that there's some advantage that is playing out right now, but some advantage which is going to play out as and when the European foreign trade agreement comes into play. Right now, we are benefiting somewhat from the already implemented foreign trade agreements.

But I think that's going to accelerate to some extent, at least I think when the European FTA gets signed. And I think here the beneficiaries, first round beneficiaries will be the labour intensive sectors because that's where we got the advantage in the European foreign trade agreement, vis-a-vis our competitors. At least the tariff rate is now at a common platform for us and for them.

So that helps these exports. But over time, I think it's eventually a function of how competitive we become in the other categories where we want to export. Here, I think the segments like defence, etc., I think they are gaining traction. So gradually, over a period of time, provided we manage to improve our competitiveness, I think we'll have some strength in our export market, which was not previously there.

Govindraj Ethiraj: Hey, DK, thank you so much for joining me.

Dharmakirti Joshi: Thank you, Govind.

Google Halts Data Centre Work in France

Google has been ordered to halt work on two data centres it's developing in Finland a month after Google committed to investing $15 billion in AI infrastructure in the country CNBC is reporting. The Finnish Licencing and Supervision Agency on Tuesday issued a notice to Google Subsidiary in Finland asking it to suspend building work for data centre projects planned for two places until the environmental impact assessments have been completed. The suspension request applies among other things to the removal of trees, topsoil excavation, quarrying, crushing, transfer of soil masses, ditching and the construction of roads and storage areas according to a Google translation of an LVV press release put out by CNBC.

A Google spokesperson told CNBC that they understand the concerns and have fallen short of their own high standards in this instance and that they would follow LVV's guidance.