On Episode 996 of The Core Report, financial journalist Govindraj Ethiraj talks to Umesh Revankar, Executive Vice Chairman at Shriram Finance Limited (in an excerpt from our Special Edition) as well as Shankkar Aiyar, economic journalist, columnist and author.

SHOW NOTES

(00:00) The Take

(04:34) Oil Prices And Bond Yields Will Determine If Weak Markets Can Recover

(06:13) India’s Foreign Exchange Reserves Fall The Highest On Record Last Week

(07:14) Why Non Banks Continue To Show Credit Growth, Particularly In The MSME Sector

(16:09) Consumption Will Drive India’s Growth But What Do We Know Of Its Trajectory?

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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 Monday, the 5th of October and this is Govind Rajathiraj broadcasting and streaming weekdays from Mumbai, India's financial capital and welcome back after a long holiday shortened market week and weekend

The Take: When will foreign portfolio investors return to Indian markets?

An Indian origin emerging markets fund manager once told me how in the early 1990s, inflation in Brazil had topped 2000% and yet residents of Rio de Janeiro were still dancing the samba on the beaches. Despite flailing macroeconomic indicators, the country's stock markets were powering ahead, crowning Brazil as Latin America's best performing market in 1993.

When I asked him about India's prospects in the late 1990s, his explanation was simple, markets always look ahead. And that axiom has stayed with me, particularly now, as I recounted, as India experiences the exact reverse. On paper, the country's macroeconomic data remains stable and yet Indian equities are taking a pounding as foreign portfolio investors rush for the exits.

So the question, of course, is what will bring them back. But before that, in September, investors dumped about $2 billion in local equities after halting two months of net buying though at small levels. And the flight is now extending to debt.

A Bloomberg report notes that outflows from index eligible sovereign bonds have hit $1.1 billion in September. Now, that tracks as the worst bleed since March and marks a stark reversal from June's record inflows, that report says. A relentless flood of initial public offerings or IPO is exacerbating this liquidity drain.

Prime database says Indian companies raised something like 243,000 crore rupees or about $25 billion in the first half of fiscal 2027, which ended last week. Equity fundraising has jumped 75% year over year between April and September, thanks to average listing gains that have gone up from 7% to 19%. Hanging over this domestic liquidity squeeze is the single determining factor swaying stocks on a daily basis, and that's oil.

The outlook is hazy. Even though flows through the state of Hormuz have reportedly rebounded to near pre-war levels, the commodity is hovering stubbornly at around $102 a barrel. Indian policymakers are now openly acknowledging the severe downstream reality of the war against Iran.

Last week, External Affairs Minister S JaiShankkar warned of a looming major food crisis compounding the fertiliser shortages already stemming from the conflicts in Ukraine and Iran. He rightly noted the situation is highly stressful for the global south as a whole. Economic havoc, the US administration appears to have neither anticipated nor particularly cared about when hostilities commenced, and not much has changed even today.

Domestic economic policymakers are currently retreating to the comfort of financial system safety and strong corporate balance sheets. Whether those defences hold will become clearer when second and third quarter earnings arrive, and second quarter earnings are starting literally this week. But the broader question remains, what will coax foreign capital back, which in turn will obviously help lift markets up? A recent report from the brokerage Bernstein offers a fascinating thesis on how foreign institutional investors actually think, asking whether they follow the broader economy or simply earnings.

So Bernstein says that historically, up till about 2007, FII flows and India's GDP growth moved in tight tandem. Over time, that relationship has fractured, and today the correlation between India's macroeconomy and foreign flows appears to be outright negative. So we are left with a profoundly counterintuitive reality.

If markets are truly looking ahead and foreign capital now views peak macroeconomic performance as a signal to sell, a sustained market recovery in India might well depend on the arrival of weaker economic data.

And that brings us to our top stories and themes.

Oil prices and bond yields will determine if weak markets can recover.

India's forex reserves fall the highest on record last week.

Why non-banks continue to show credit growth, particularly in the MSME sector?

Consumption will drive India's growth, but what do we know of its trajectory?

Markets, War, Oil and Forex

Crude futures were down after European governments agreed to US President Donald Trump's request to release diesel reserves to lower prices and reduce fuel imports from the Brent.

Brent was down to about $102.25 a barrel over the weekend. But last week was noteworthy in as much as the Nifty falling for the 8th consecutive week or close to 9%, its longest losing streak since the 9 weeks to April 2001, as global investors continue to sell. The Sensex 2 has fallen for 8 straight weeks, losing about 8.5% over this period.

Last week, which was a holiday-shortened one, also saw the Nifty 50 logging its worst weekly performance since March, with markets shut on Friday for Gandhi Jayanti. Last week, the Nifty 50 lost about 3%, the steepest since the week ended March 13, when it fell about 5.3%. The Sensex was down to 71,909, losing about 2.7% over the week. Oil is of course one reason for the falls, but so are high bond yields in the US, which make it attractive for capital to stay rather than go out.

The Reserve Bank of India's monetary policy meeting is expected to provide some direction on how policy makers are viewing the economic environment, particularly if they're seeing it as inflationary like some other central banks including the Federal Reserve have. And of course, earnings season for the second quarter kicks off this week, with companies like TCS set to announce their results. Elsewhere, gold prices fell thanks to stronger US dollar and higher US treasury yields, which put pressure on the metal.

Spot gold was at about $4,140 per ounce over the weekend. India's foreign exchange reserves have actually now dropped the most on record, thanks to the Reserve Bank's support for the rupee, which also weighed in. Reserves fell about $18 billion to $747.5 billion for the week of September 25, according to data released over the weekend.

This is the biggest fall in a week on record, according to Bloomberg data. The Reserve Bank has sold dollars to shore up the rupee while also conducting sell-buy swaps in the forex market, putting pressure on reserves. The rupee fell by the most in over two months to Rs.

96.32 a dollar on Thursday. And finally, both HDFC Bank and Kotak Bank have new CEOs and both originally hailed from ICICI, widely considered a fountain of talent for the financial services sector. The coming weeks and months will be interesting as the new joinees will surely trigger some shuffles or reshuffles in the case of HDFC Bank, where more exits are being predicted.

It would be interesting to see how the markets weigh the certainty of new leadership versus the weakening of its top deck.

The Future is NBFCs?

Non-bank finance company Shiram Finance late last year had announced that Japan-based MUFG Bank would invest about $4.4 billion or close to 40,000 crore rupees to acquire a 20% stake in the company. Now this was the largest foreign direct investment ever in India's financial services sector, which also saw several other large deals last year.

So with several months now behind us, how is that investment playing out? And strategically, how is the MUFG-Sriram alliance progressing? And what are the other areas that Sriram is focussing on, particularly in terms of lending? I spoke with Umesh Ravankar, Executive Vice Chairman of Sriram Finance, and I began by asking him how he was seeing credit trends of late.

INTERVIEW TRANSCRIPT

Umesh Revankar: There is a dynamism under the business model. If you look at all small businesses, there has been certain challenges, but I think Indian business people, entrepreneurs, and the players have done very well. When I say very well, if you look at the situation when the US tariff went up for the Indian exports, there are many companies which were dependent on the exports, especially in the MSME space, and there was uncertainty.

Then they had to move to new markets, but the Indian markets were able to absorb some of them. So, overall, I think the Indian manufacturers and the SME sector has come out very smartly. And also, at the same time, the government also reduced the GST for certain categories like vehicles.

That boosted the sale of a vehicle, and there was a lot of demand which was not fructified in the sale for the last two, three years. And finally, entry-level cars, commercial vehicles, 28% to 18% is a significant reduction in GST. And we see 15% to 25% increase year-on-year in all categories, two-wheeler, tractor, commercial vehicle, cars. Even, of course, the premium cars and luxury cars are also doing extremely well, in spite of not having any GST favour.

But overall, I think the response from the individuals, customers, business people have been very good. So, credit growth for the MPC sector per se is around 18-20% across for the last couple of years.

Govindraj Ethiraj: Okay. So, for those who may not know, could you tell us what the breakup for Sriram Finance's lending basket is, or how does it look like right now?

Umesh Revankar: See, broadly, a commercial vehicle is around 46% of the total book. And that's the mainstay? That's the mainstay.

And 21% is the passenger vehicle. So, we do both the personal mobility, and also we do the passenger, like taxi, buses, we do. We also have two-wheeler financing.

We are the largest two-wheeler financial, even though it looks, the number looks small. It's just 6% of the book, but we are the largest. We have 10% market share in two-wheeler financing, in new vehicle only.

And the construction equipment, we have around 8% of the book. SME, exclusive SME is around 15% of the book. Then gold loan is small, around 2.5-3%. And the personal loan is around 3%. So, if you look, more than 90% of the book is against the security. Slowly, we are trying to build a business model in SME, where the lending will be against cash flow, rather than on the security.

So, building it, I think, maybe next couple of years, we'll perfect the art of funding SME.

Govindraj Ethiraj: And you said commercial vehicle is almost 46% of the book, and that's what Sriram has been traditionally known for. Now, you also had a big investment come in, and I referred to it from MUFG, which is a Japanese banking giant, and that was a 39,000 crore investment. So, what were they looking at?

I mean, what is it about the India market, or what are the points of attraction for them, or has it been for them?

Umesh Revankar: See, MUFG is in India for a very long time as a wholesale bank. They don't even have any deposit, they don't take deposit, they can take deposit. So, they have been catering to large-ticket lending.

They have not had a play in the retail. One thing is the retailer, you need a lot of people, bank, network, you need to understand the local domestic market, and a lot of dynamism involved in the fluctuation, the economic activity. Therefore, they have not been there.

So, they were looking for a retail play. And then we approached them as looking for a capital, because we had to raise a capital, we were in the growth stage, and in the growth stage, we wanted a capital. We had an option of raising capital by adding 2-3% every 2-3 years, or taking a partner.

So, we believed that having a partner will help us in the long run. So, both our requirements met, and they also liked our business model, philosophy, the frugal nature of running the business. See, they also have a lot of good relationship in India for the Japanese corporates.

There are around 1490 Japanese corporates functioning in India. 1,490? 1,490.

And they have a wholesale relationship in Japan and to some extent in India. But for the retail activities, they needed some kind of a partner. Take Suzuki, Toyota, Yamaha, Honda, all of them have a large presence in India.

Plus, they have a lot of electronics manufacturing, Sony, Daikin, Panasonic. See, we are not in the consumer doable financing or white goods financing. What we felt that we can start lending into the dealer financing, supply chain financing, because any manufacturing activity requires a lot of local suppliers, local dealers.

So, these are all the big part of the ecosystem. So, we felt that next phase of our growth, when we want to expand MSME, we can focus on that. So, that's how currently we are working with the MEFG bank to be the retail arm of MEFG to meet the requirement of the Japanese corporate, not just Japanese corporate, it could be anyone.

For example, MEFG where the funder, they financed the Tata Motors acquisition of EOKO recently in Europe for the technology and the upgradation of their manufacturing facility. And they also would like our relationship with Tata Motors to be deeper now. So, that's how I think the relationship with the wholesale bank and their customer and to Sriram and our customer.

So, it is going to become a large play going forward.

Govindraj Ethiraj: And what does this say about banking? I mean, is it also signify what's changing in the world of banking in the way people are looking at both ends of the spectrum?

Umesh Revankar: So, the way I look at banking, if you look at the worldwide, there's some numbers I have picked up. The bank lending is coming now. Bank lending is either happening through a non-bank or the credit societies in US or maybe through private credit.

And I think the entire structure of lending activity, which all of us felt banks are the lenders, I think their play as a lender is going to shrink going forward. And most of the retail and small ticket loan will be either a non-bank or other players in the market, depending upon how the markets are structured. Non-bank are unique to India.

It is not there across all over the globe. They're called shadow banks. Yeah, there's some other name they call.

In fact, I was looking at some numbers. Nearly 70% of the lending today to small businesses happen through a non-bank. Bank cater to a smaller portion.

So, in India also, I believe going forward, because building a banking infrastructure and providing service is a little expensive. So, definitely they would prefer somebody, local specialised entity to do it rather than they're doing it. So, I think non-bank will have a major role to play in India's growth story.

In fact, our finance minister even said going forward, she would like to see that 50% of the credit, future credit comes from the non-bank over the period. So, to that extent, I think non-bank will play a very big role. And the MFGL to see that.

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What Do We Know Of India’s Consumption Trajectory?

Two years ago this week, the Nifty 50 closed at 26,004, a record.

On Thursday, it was down to 22,421, or down about 13%. A State Bank of India fixed deposit, the dullest instrument in Indian markets, saw it compounded at more than 9%, given an appropriate tenor, according to columnist Shankkar Aiyar in his recent piece in the New Indian Express. So those who bet on equity are beyond disappointed.

But beyond the external factors, Aiyar says there is a structural fault line in India's consumption profile. The Union Finance Minister said two weeks ago that consumption depends on upward mobility, which in turn depends on a rise in income and in the number of income earners. I spoke with Aiyar, and I began by asking him how he was seeing consumption and mobility trends, and what we were depending on.

INTERVIEW TRANSCRIPT

Shankkar Aiyar: So this is the Micaba principle, which is basically every extra money that you have, surplus, goes into consumption. And when you don't have extra in a household, you have to take it like a household. If the household has extra income, then it will spend on consumption or investment of savings.

What's happening here is there seems to be a hit on the household income, which is showing up in different, different places. So if you look at the stock prices, I use stock prices to sort of tell the story of the K-shaped situation in the economy. If you looked at stock prices, it's a very interesting thing.

All the FMCG stocks are like down, and we had discussed the resignation by FMCG CEOs because they were not. And that shows that any margin compression that happens on the FMCG companies shows up in their stock price. Similarly, any margin compression in the household income also shows up in consumption.

Now, there are people who have written to me who have said that this doesn't, I mean, the market is not the economy, fair enough, but market is a forward-looking indicator, fair enough. So in September 2004, the market Nifty was at 26,000. Thereafter, the economy has grown, GST collections have gone up, consumption has gone up.

So why isn't it showing up in the consumption? Because the consumption basket is constrained by the level of income. And when the finance minister says that consumption will depend on upward mobility, she's only saying what the chief economic advisor said a few months back, that corporates are taking most of the gains on their balance sheet and not sharing it in terms of wages.

That's one point. The second point is that maybe there are no wages, maybe there is no income, maybe there is an unemployment shortage. The Niti Aayog report shows up that people who, 50 lakh students graduated, only half of them got jobs.

The story that most people think this market's divergence from the economy, which is that you have high economic growth, you have high GST collections, you have high tax collections, and yet the market is down, is only a recent phenomenon. No, it is not a recent phenomenon. In dollar terms, the BSE Sensex is minus 27%.

In Nifty itself, it's minus 14% year to date. Every index on the Nifty, barring two, is in negative territory. Over 90 stocks are near 52-week lows.

Something is happening, and this is what I was trying to draw the attention of the readers and the people in places. Right.

Govindraj Ethiraj: And you also talked about the K-shaped economy, right? So, this is the section that you just spoke of, which has obviously been hit. But there is another section that's obviously doing well or continues to do well, which is contributing to the positive side of consumption, at least on the higher end.

Shankkar Aiyar: So, there are two things happening, very interestingly in the sense. So, people, if you see in the indices, the two indices, which are going up are small caps and mid caps. Now, those are both dependent on SIP, which is the involuntary spending or investment by the Indian, because he or she cannot invest anywhere other than in India.

It comes in SIP in the mutual fund connection, which is strategically, if you look at it, is at a flat 30,000 per month. Now, if the economy was growing at 7.8%, if all the other assets were, this SIP should have gone up, which it is not going up. The other part of it is that large caps are being sold by FIIs and they are being subsidised by the SIPs because the money is flowing in.

If you look at it in a different way, the K-shape is also showing up in a different way. So, if you look at online orders, so the platform that does online order for upwardly mobile people, eternal, Zomato people, that's going up. But the platforms which are dealing with sub per capita income or what I call the less than the national average, that's showing up differently.

In fact, Govind, if you take up the universe of gig workers and the people who order online, you get a picture of the so-called middle class consumption basket. This is where we are. The middle class hasn't expanded.

That is the story here. The middle class is where it was because the number of jobs per population is somewhere where it just may be sufficient to keep the curve flat, but it's not going up. Now, there are other ways to look at it is that all the agitation on the streets, all the subsidies that the government of India is paying, all of this, the political Uttar Pradesh, Punjab and all will go for elections.

You will see the story repeat there. And this is something that needs to be studied. Even the GST, if you take off the customs and the refunds, is going at about 5%.

Your economy is going at something like 8. In nominal terms, your economy is going at 10%. But your GST is not growing it.

So, there is something going on here which needs to be studied. In fact, if they shared the GST data on district-wise basis or commodity-wise basis or sector-wise basis, you might be able to make more sense of it. My curiosity was triggered by one small fact that the companies which make equipment like Dixon and Amber Enterprises were both up.

And the companies who bought those equipment and branded them and sold them like Voltas, Haier and everything, were all down in 20s, minus 20%. So, there is something happening here which I wanted to look at. On a separate note, I have just crafted the Indian economy index as per a stock market index of nearly 250 stocks using the GDP as a template.

One of these days, I'll share it online and then we'll have a discussion about that.

Govindraj Ethiraj: Got it. Shankar, thank you so much for joining me.

Shankkar Aiyar: You're welcome. Thank you, Govind.