On Episode 959 of The Core Report, financial journalist Govindraj Ethiraj talks to Ambareesh Baliga, Veteran Market Expert as well as Prasanna Tantri, Associate Professor of Finance and the Executive Director of the Centre for Analytical Finance at the Indian School of Business (ISB).

SHOW NOTES

(00:00) Stories of the Day

(00:50) Operation Economic Outcast Is Not As Bad As Feared

(02:09) The US Sanctions Indian Trading Companies For Doing Business With Iran

(04:57) Govt To Transfer Its Conventional Missile Technologies To Private Sector To Hasten Production

(05:38) A Steady Flow Of IPOs Continues To Act As A Dampener On The Markets

(12:47) India Might Raise Close To $80 Billion Of FCNR (B) or NRI Deposits

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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 Wednesday the 26th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

The operation economic outcast is not as bad as feared and the markets recover.

The US sanctions Indian trading companies for doing business with Iran.

Government to transfer its conventional missile technologies to the private sector to hasten production.

Steady flows of IPOs continues to act as a dampener on the markets.

How long could that last and India might raise close to 80 billion dollars of NRI deposits. What must it do with these funds?

Markets, West Asia and Sanctions

Operation economic outcast seems to be a strange name for an economic war that's supposed to be the fitting continuation of a full-scale war being the one launched by the United States along with Israel against Iran on the 28th of February this year though it's mostly the United States now fighting it. As part of the economic outcast which markets were interpreting for now as less fearful than what they expected, the US has sanctioned four India-based companies for importing petroleum and petroleum products from Iran according to a press release by the United States State Department.

US Treasury Secretary Scott Besson on Monday announced the operation economic outcast which essentially involved new sanctions that aim to block all potential sources of revenue for Iran and it has told countries to cut economic ties with Tehran or face retaliation. Meanwhile Treasury Secretary Besson said against any country doing business with Iran as part of a sweeping campaign to isolate the Islamic Republic risks setting the United States on a collision course with China according to a Bloomberg report. The latest sanctioned salvo against Iran swept up businesses in China and Hong Kong but avoided the far more consequential step of targeting major Chinese financial institutions.

Beijing has threatened to retaliate against the United States and signalled it will not back down or back away from Iran. So from war mongering we to have stepped back to tariff mongering which kept us occupied for the best part of last year. Incidentally the four India-based companies facing action are trading and customs broking entities who are charged to have facilitated the import of multiple shipments of Iranian petrochemical products.

Meanwhile US Treasury Secretary Besson's plan to spend billions buying back bonds is a mistake Stanley Druckenmiller wrote in the Wall Street Journal. Druckenmiller is a billionaire investor who according to a Bloomberg report mentored Besson in his earlier career as a hedge fund trader and also said that governments defending prices against fundamentals always lose. The Treasury Secretary meanwhile gave no new signals on debt management following a report that his department could draw down some of its cash pile to fund buybacks.

Meanwhile oil prices fell more than three percent to a one-week low on Tuesday as traders shrugged off the latest sanctions campaign against Iran viewing the pressure as posing less risk to oil supplies than a military escalation according to a Reuters report which added that Brent crude futures were down almost $3 to $89.20 on Tuesday. With all this as a backdrop notably falling oil prices the Sensex rose 286 points to 77,656 and the Nifty 50 was up 115 points to 24,334. In the broader markets the Nifty mid-cap was up 0.5 and the small cap was down 0.1 percent.

Now the Sensex has gone around 697 days without a new record high making its longest stretch of weakness in years according to an Economic Times report. In 2026 the report says 37 percent of trading days delivered negative two-year returns the highest share since 2012. The rupee had a better day rising to an over one-week high on Tuesday thanks to the same pullback in oil prices and the currency of course is now tending to move in a narrow range thanks of course to Reserve Bank of India intervention according to also a Reuters report which added that the rupee closed at 95 rupees 41 paise.

India's economic growth has slowed slightly to 7.1 percent in the April to June quarter according to a Reuters poll of economists on more subdued private investment those supported by consumer spending and government expenditure. Meanwhile Axis Bank which is also India's third largest private bank in assets is projecting higher credit growth thanks to demand from sectors including data centres and small businesses as well as retail borrowers looking to monetise their gold. According to its CEO Amitabh Choudhury who spoke to Reuters on Monday credit growth in India's banking sector has accelerated to 18.3 percent year-on-year in June according to the latest data from about 9.3 percent a year earlier.

The Axis chief told Reuters that credit is growing at more than 15 percent even excluding those segments which is essentially data centres, small businesses and retail borrowers monetising their gold.

Government Will Transfer All Defence Research To Private Sector

The government will transfer all defence research and development organisation or DRDO developed conventional missile system technologies to India's private defence industry for domestic production in a bid to transition these weapons from development to production according to a business standard report. There will be competitive bidding amongst Indian private firms for the right to receive the transfer of technology to be selected as the development come production partner and to undertake systems integration of these missiles in partnership with the DRDO a ministry of defence source told business standard.

The move is understood to exclude nuclear armed strategic missiles such as the Agni series.

A Steady Flow Of IPOs

More IPOs are consistently hitting the market sucking up local demand on the other hand smart investors have as we know been diversifying beyond equities into alternates and overseas markets for some years Almost 10 billion dollars of deals have been priced in August led by the government's 3.2 billion dollar sale of shares in life insurance corporation of India Manipal health enterprises 950 million initial public offer among several block trades and institutional placements according to a Bloomberg report which we also tabled yesterday. The report also said that local mutual funds and insurers retail investors returning global funds have all helped pick up the flow or the stock.

This strength could also provide the momentum for major offerings expected later this year from the national stock exchange and geo platforms according to that Bloomberg report. I reached out to Ambareesh Baliga veteran market expert and I began by asking him how he was seeing the trends of continued big ticket IPOs and its impact on the markets.

INTERVIEW TRANSCRIPT

Ambareesh Baliga: There is huge liquidity there in the market, but the question is, when does this liquidity flow into IPOs? So, as long as there is no major geopolitical issue and the last few IPOs have given decent returns, the money flows. For the IPOs which are there on the table, people see as to how much is left on the table by the promoters and the merchant bankers.

And unlike in the past, when I say past, I'm talking of the last many years, today is just all about a click of a button, funds don't ward off your account unless allotted. And the whole cycle takes less than four days, four working days, I mean, application to listing gains, if allotted. And if you look at the sort of listing gains with some of these IPOs are given, I mean, Bihari Lal Engineering, 78%, ShipRocket, Technograph, Ventures, Dhruv Transmission, all these recent ones, 28% to 48% sort of returns.

So, this is what mostly investors look at. I mean, they look at initial gains. If you're talking of the institutions and the mutual funds, I mean, they have a problem of excess liquidity.

So, any IPO which possibly could hold up is a good investment for the mutual funds. Like additionally, we have seen a large number of ESP divestments. I mean, they've already crossed about 50,000 crores.

Promoters selling, UAV placements, I mean, all this is getting absorbed. So, again, coming back to the same question, as long as the music is on, you're making money, you're investing.

Govindraj Ethiraj: And what does that mean for or what has it meant for the secondary markets, at least in the recent months?

Ambareesh Baliga: The secondary market, again, there's a different ballgame. I mean, here, I mean, if you look at the sort of earnings which have come, I think the earnings have been good. Good in the sense, it was better than what people had expected.

I think nearly 70% of the companies have beaten expectations. And at the same time, you look at the consumption, the consumption story continues. There have been a lot of upgrades which have happened, especially on the PSUs and the NBFCs.

So, I think overall, from that point of view, I mean, I continue to be bullish on the secondary market. But then we may not see a huge sort of a run up from here. But I supposedly hold up, I don't see a downside from here.

Govindraj Ethiraj: Right. So, a lot of smart money, for instance, is really or has moved into alternates of some form or the other and has also seen maybe good returns. So, are you seeing a dichotomy now in the markets, you know, retail investors investing in mutual funds through SIPs or otherwise that money going into, let's say, IPOs, or to some extent, supporting the secondary market, whereas the smart investors are really alternates, overseas investments, and so on.

And is that sort of changing things in any way?

Ambareesh Baliga: Well, I don't really see that changing in a big way. But yes, I think in the last couple of years, a lot of HNIs have started looking at alternate investments. We have seen a huge flow of retail into mutual funds.

And let me tell you, I mean, IPOs, yes, make some difference, but they don't make a huge difference to the NAV. So, I mean, I wouldn't consider IPOs as a major reason for retail investors to be investing in mutual funds. But at the same time, if you look at the individual portfolios of retail investors vis-a-vis mutual funds, mutual funds have done far better.

So, that's the reason why quite a few retail investors, after burning their fingers in the market, would still prefer to invest in mutual funds.

Govindraj Ethiraj: Right. And what are the trends that you're seeing right now, Ambrish, in terms of how the markets are responding or not responding to signals, whether within or from outside? So, one signal from within could be the Q1 results, which are good or considered broadly good, but not much response from the markets, and external signals, which continue to be, let's say, oil prices and geopolitical tensions.

Ambareesh Baliga: See, on the geopolitical side, clearly, I think the US-Iran war has moved from the ground level to economic warfare, which is desi sanctions. I suppose that'd be a new normal. And markets will surely take that in the stride.

Because if you see the last couple of weeks, whatever statements have been coming, it hardly makes a difference to the markets. Otherwise, we would have seen the markets cracking majorly. Now, when it comes to fresh sanctions, I mean, do you think Russia and China will stop dealing with Iran?

Surely not. Only India will have to find a way out, because Iran is the last consumer of tea and rice, which is exported from here. Along with that, there are a lot of other goods, but these are the major ones.

So, but when it comes to earnings, like I said, earnings really were better than expected, and more so on the small cap and the So, we are seeing a lot of flows. I mean, unlike 2025, in 2026, and especially in the last couple of months, we have seen a decent amount of flows into mid cap and small caps. And that's where people have made money.

Govindraj Ethiraj: Right. Therefore, or given all of this, what is your outlook for the next quarter or so?

Ambareesh Baliga: See, next quarter or so, at least in the year end, I'm decently bullish on the markets. But like I said, I don't see a runaway rally from here. But at the same time, I will not be surprised if FII flows reverse, in the sense, FIIs again start investing into India.

And this, in addition to the earnings and the geopolitical issues, more or less settling down, I think rupee will play a major role. Because of the sort of FCNR deposit flows, which you've seen, I think it'll be much higher than what was expected earlier. So that's one reason why the rupee could actually hold up.

And along with that, if the crude prices don't really move up sharply from here, that will be another trigger for rupee to possibly appreciate. As and when that happens, I think you'll see more of FII money coming in. And that I suppose, I mean, would support the markets too, like in a large way.

And at the same time, we are seeing that the mutual fund flows continue. Retail investors continue to pour into mutual funds. So that again, will get invested in the secondary market.

So I don't see a fall as far as the markets are concerned. I think 24,000 for Nifty is a very good support level. I'll not be surprised if you see levels of closer to 25,000 over the next month and a half, two months.

Govindraj Ethiraj: Right. And within this, you talked about mid-caps and small caps. Are you seeing any sectoral movements or is it a more valuation and size-based rally or a size-based movement?

Ambareesh Baliga: No, you haven't. You'll keep seeing sectoral movements. For example, in the last couple of days, we have seen sugar shooting up sharply.

Again, based on the quarry prices going up. So that sort of movements you have. But overall, it would be more to do with the individual performance, the quarterly performance by these companies.

I think that is what will lead these individual stocks in the mid-cap and small caps to move.

Govindraj Ethiraj: All right, Ambareesh. Thank you so much for joining me.

Ambareesh Baliga: Thank you. It's always a pleasure, Govind.

What Are the Potential Downsides to India’s FCNR Bank Deposits?

India has mobilised about 73 billion dollars in foreign currency in under 11 weeks mostly through FCNRB or foreign currency non-resident bank deposits or NRI deposits and the rupee of course has not moved much.

The inflows are primarily strengthening the reserve bank of India's foreign exchange buffers and not being used to push the currency higher according to many reports. Elsewhere state bank of India said that it was confident it would pull in about 10 billion dollars from non-resident Indians and foreign investors. The FCNR deposit scheme might cross 80 billion dollars and while the inflows have been welcomed the bill that could be presented for them later may not Prasanna Tantri associate professor of finance and the executive director of the centre for analytical finance at the Indian school of business has argued that this is external debt with potentially clustered maturities for which reserve bank effectively bears the exchange rate risk.

He's argued that we have created a large future vulnerability for limited present stability. The question however I posed to him when I reached out to him was what should the pathway be now and how could we be using these funds.

INTERVIEW TRANSCRIPT

Prof. Prasanna Tantri: First of all, as I've told you last time, this is the money that was not needed. Anyway, it has come. It's a debt.

Your viewers will know that we will borrow eventually 80 billion dollars from the rest of the world, NRIs, with a guaranteed exchange rate. And what we have done so far is passively put it in forex reserves. You know, technically what RBI has done, it has not used to fight the rupee.

That's where rupee is doing what it was doing before. When the crude goes up, it goes down. Today, when the crude fell, it appreciated.

Rupee hasn't behaved any differently, simply because RBI has not used to fight the rupee. So what RBI has done is, as if we were short of forex reserves at 660 billion dollars, and we needed some money, and we got it. And we got it in a manner that by giving future guarantee, this is what has happened.

All of these have similar maturity going. The problem is after 3 years or 3 to 5 years, there will be an outflow. Now, we should make sure that how do we prevent a sudden outflow after 3-5 years.

All of this. You know, in 2016, 20 billion dollars went. We did not even know because there was nothing going on in 2016.

But in 2029 or 2030, you know, God forbid, there is some China-Taiwan issue going on. And at that time, some 100 billion dollars goes out of India. The thought that it's going to go, that rumour itself, and can create a run, and you know, that would lead to another 100 billion dollars going.

So we should now, having done this, we should try our best to prevent that from happening. And one way to do that is to see if that money be used locally. For instance, can you give them some incentives to invest in withdraw from that account and invest in equities in India or buy houses in India.

You know, my biggest worry is what if this has crowded out and I'm praying that it should not, I'm wrong on this. What if this has crowded out remittances? Because one of the areas where government and RBI did not do anything actively, and because of that, I think we've done very well, is remittance, which is 155 billion dollars.

My worry is, imagine some NRI who would have remitted their money to their parents anyway. Now they say, look, there is this window, let's lend. So we have converted remittance into a loan.

Hopefully that has not happened. I don't know. I don't have evidence.

So the short answer to your question is we should see whether at least half of it can be leaked out from this guaranteed thing into spending in India, into investment in housing, into investment in Indian equities, under some swap. Anyway, you're giving swap, this guarantee is much bigger swap than a tax cut. So that is my, that's going to be my recommendation.

If I have to manage this, this is what I would do. This clustered one-time outflow, three years from now is going to create problems.

Govindraj Ethiraj: Okay. On the belief that this was likely to or meant to support the rupee, of course, some other economists have also pointed out or argued that was not really meant to be the case. What's your sense then?

I mean, if it was not meant for the rupee, and as you're saying, it was more to bolster forex reserves, what are the objectives that are being served?

Prof. Prasanna Tantri: Yeah, unfortunately, you know, I'm sure you also track their communication very clearly, there is no clear hypothesis, which you can reject. Earlier, even the previous RBI leadership, there was hypothesis right or wrong, it was scientific, you could have rejected. Here, I don't know what the hypothesis is.

Now, exposed, the hypothesis seems to be that we were running short of forex reserves, you know, at 650 billion. You know, this is, it's like we were not 15 billion, it's 650 billion, for God's sake. You know, that seems to be the hypothesis.

And now we have showed up our forex reserves by 75 billion dollars, and taken this enormous risk, which will show up after some time. That's how it looks like, you know, I don't think it was done to appreciate the rupee, which they have not done. And you may argue that counterfactually rupee would have collapsed, that doesn't seem to be the case.

You know, the reason why rupee has become stable, as you know, Govind, there is some AI scepticism coming in now, you know, Korea has become volatile, Nasdaq has become volatile, moment there is AI scepticism, money outflow from India will go down. And as we discussed last time, we are doing phenomenally well on exports. And our current account is not in deficit.

So with all that there is flow to the currency, currency cannot go on like fall forever, you know, there are people, you know, the money is coming in also. So I don't see counterfactually, this would have been any different if there was no such scheme to the rupee. So then the only explanation is we were short of forex reserves in RBS view, and they have showed it up by 75 billion.

And if you do the math, it exactly adds up to that we have some 720 billion now, we were down to 650. They've just added to forex reserve and release some rupees to bank account and the banks are holding it in STF. Funny part is that, you know, the STF is three and a half lakh, two and a half lakh crore.

In COVID we had gone to four, five lakh crore. I understand you have increased money, domestic money in the system, and hoping that it won't have any consequences, or we can blame the inflation that will happen on crude or some drump or someone later. That's what we've done.

Govindraj Ethiraj: Okay. I mean, sticking to currency and the impact of it, you've argued in the past that a depreciated currency will help the economy. And you've also pointed to the fact that many exporters are already showing better realisations and numbers. And that's also reflected in stock prices, for example, in some apparel companies, among others.

What's your sense? I mean, assuming that part of a deliberate or not so deliberate experiment has succeeded? What's next?

Prof. Prasanna Tantri: Well, there I think RBS has done fabulously well. One good thing is what I like is they did not use this money to artificially appreciate the rupee. They could have gone into the market and, you know, made this 90.

That they didn't do. Rupee is doing what it would have done otherwise. You know, that I appreciate.

They have just showed up forex results. That's all they've done. It's nothing to do with rupee.

You know, you may argue that because of 720, the confidence on rupee has increased. No, that doesn't work. Markets can see this is a risky bet.

It's not that people have invested on future. You give guarantee, people trust that you will not collapse after three years. That's all it indicates.

It doesn't indicate that people think that you grow or anything. So I think that part, I think is intact. Fortunately, RBS has not created rupee appreciation.

They did not take rupee back to 88, 89 using this money. That they did not do. The fact that they have kept it passively means rupee will do whatever it would have done.

And I'm telling you because of exports and remittances, there is a flow to the rupee. My point was not that you should let it go to 130. Because as inflows come in, there is a limit to FII outflow.

Even FDI has improved compared to last year, although it's nowhere close to where it should be. In a quarter, we have done the whole thing as much we did last year. So given all that, some of it is definition moving.

As you know, not everything is genuine. Some of it is definition. Even then, compared to last year, quarter on quarter, it's still an improvement.

So rupee is doing what it would have done even otherwise. That's a good thing. And I think our export momentum hopefully will continue and things will be better.

Only worry is this risk after three years. If there is an outflow, if there is a run, 100 billion is good enough for it to create trouble. This year, last year, our net FII and outflow, just to remind you, was 16 billion, which created so much havoc.

Imagine 100 billion leaves. And then there is speculation around it. Some George Soros of that time comes.

And if there is a crisis going on, that's what I fear all the time. What if there is a crisis right at this time? Because we have chosen our time.

Now crisis has to choose its time.

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

Prof. Prasanna Tantri: Thank you.