On Episode 884 of The Core Report, financial journalist Govindraj Ethiraj talks to Vikash Halan, Managing Director, Corporate Finance at Moody's Ratings; K. Ravichandran, Executive Vice President & Chief Rating Officer at ICRA ltd; and Poorvi Chothani, Founder and Managing Partner at LawQuest.

SHOW NOTES

(00:00) Stories of the Day

(01:52) Why oil markets are now nearing minimum operating levels

(02:39) Scent of a deal sends oil prices down, markets up

(03:59) Oil prices rose for the fourth time in May

(04:14) Moody’s, Crisil say Indian balance sheets were strong going into conflict

(16:14) What will the new Green Card rule mean for Indian visa holders in the US?

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

Good morning, it's Tuesday, the 26th of May, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. This, of course, is a holiday shortened week. The markets are closed on Thursday, and we will have a special edition on that day.

And our top stories and themes…

The scent of a deal sends oil prices down, markets up

Oil markets are now nearing minimum operating levels.

Moody's Crisil say India balance sheets were strong going into conflict and what that means.

What the new green card rule means for Indian visa holders in the United States.

And oil prices rise for the fourth time in 15 days.

Markets, The War, Oil and Gold

The United States and Iran are closing in on a deal that could reopen the state of Hormuz according to officials who spoke on Sunday, even as President Donald Trump insisted he would not rush into an agreement. Officials told Reuters that nothing is ready to be signed as negotiators work through precise language on key issues and final approval could still take several days.

Bloomberg reported also quoting Iran's semi-official Tasnim news agency saying the draft deal could still collapse because the U.S. is blocking several clauses, including Tehran's demand that its assets be unfrozen. Meanwhile, oil prices fell nearly 6% to two-week lows. On Monday, Brent crude futures were down roughly to about $97.50 a barrel.

At this level, we are close to the $95 a barrel figure, which many analysts here are using as a base case to estimate impact on business and economy in coming months and much more on that shortly. Meanwhile, more worryingly, oil markets are nearing minimum operating levels in Asia, with Europe likely next and the United States potentially facing shortages by July, according to market strategist Jeff Curry, who spoke to CNBC on Monday. According to him, headline global inventory figures can be misleading as much of the oil stored worldwide cannot be used immediately.

A large portion of that oil is needed to keep pipelines and storage systems running safely, leaving only a smaller share available for the market. Asia is already close to these so-called minimum operating levels, he told CNBC in Singapore. Reuters is meanwhile reporting that in April and May, Indian refiners raised imports from Venezuela, Brazil, Angola, and Nigeria to make up that shortfall, as well as continuing to buy Russian oil, also quoting data from Kepler.

Keeping with the general optimism over the weekend on the prospect of the deal, something that we were expecting, the Nifty 50 was up 312 points to close at 24,031 and the Sensex was up 1,073 points to 76,488. In the broader markets, the Nifty mid-cap and small-cap indices were up 0.9 and 1.3 percent higher. The rupee stands in for the third consecutive session and that was its longest winning streak in a month thanks to Reserve Bank interventions and of course a fall in crude oil prices.

It closed at Rs 95.23 paise, up 1.5 percent since Wednesday, according to Reuters. On Wednesday, the rupee had hit a record low of Rs 96.96 paise, that's almost Rs 97 to $8. Reserve Bank of India Governor Sanjay Malhotra said in an interview to the Mint newspaper that the currency may now be undervalued following its recent slide versus the dollar.

The rupee is down about 6 percent this year thanks to record foreign outflows from local stocks. Gold prices meanwhile rose by about a percent on Monday, following that optimism for a breakthrough in US-Iran peace negotiations, which weakened the dollar and lowered oil prices and thus of course softening the inflation outlook. Spot gold was at about $4,559 per ounce on Monday morning, according to Reuters.

And then the price hikes back home. State-owned fuel retailers increased diesel and petrol prices by Rs 2.7 and Rs 2.6, and this is the fourth hike in May since the hike started, which is since the 15th of May.

What is the Impact of the West Asia Conflict on the Indian Economy?

Rating agency Moody's, along with its India partner ICRA and separately Crisil Ratings, have put out impact assessments of the war on the economy and companies at this point.

Crisil has said the protracted conflict in West Asia has been goading domestic companies to realign supply chains, navigate pricing issues, manage higher fuel and freight costs and content, with of course a depreciating rupee. From a credit quality perspective, Crisil says its analysis shows India Inc. will remain resilient on the back of strong balance sheets, steady domestic demand and government-led capital expenditure, enabling it to navigate profitability pressures stemming from the lingering geopolitical uncertainties.

It says it stress-tested 34 sectors, which account for 65% of its rated corporate debt. It assumed supply chain disruptions could last for nine months this fiscal compared to six months in the base case, with crude oil prices averaging $110 per barrel for this fiscal versus a base case assumption of $95. Remember, we pointed out earlier that the current price of $97 is close to the base case assumption of most analysts for their forward projections.

Now, Crisil says that based on their results, they infer that the prolonged supply chain disruptions could shave off corporate operating profitability by about 200 basis points this fiscal, as opposed to a pre-conflict expectation of 12 basis points, with some sectors seeing a more pronounced impact. It also said that of the 34 sectors stress-tested, 22 would see operating profitability being culled more than 10% thanks to higher inventory costs and inability to fully pass on the burden to consumers. And for companies, managing costs and profitability will be a bigger challenge than achieving top-line growth.

It also says that credit profiles would be cushioned by controlled gearing levels and sustained domestic demand, and thus credit quality of only eight sectors accounting for 10% of their rated corporate debt would be materially impacted. Meanwhile, Moody's rating says credit conditions for Indian non-financial corporates remain underpinned by a strong starting position, robust balance sheets, and favourable long-term growth prospects. However, the conflict in the Middle East, says Moody's, will weigh on near-term earnings and cash flows for energy-intensive and fuel-dependent sectors.

It also says that India's heavy reliance on imported crude oil and liquefied natural gas and certain petroleum products exposes companies to higher input costs, currency volatility, and supply chain disruptions. I spoke with Vikash Halan, Moody's Managing Director, and K. Ravichandran, Executive Vice President and Chief Ratings Officer of ICRA, who's also Moody's India partner and affiliate, and I began by asking them if companies had stronger balance sheets and thus better prepared, what was the bad news or the flip side?

INTERVIEW TRANSCRIPT

Vikash Halan: From our perspective, because there is a bad news, that's why we were talking about all the shock absorption. The bad news is that we have energy disruption at the same time when we are looking at El Nino and its impact on potential consumption slowdown. With the energy disruption, of course, you're going to see a degree of inflation, which may have cascading impacts on both interstates consumption, discretionary spending, which can have also impact on government spending.

So that is the risk that we are highlighting. But because the kind of corporates that we rate in India, which are the cream of the crop, so to speak, and how they have managed their balance sheet over the last three, four years, what we're highlighting is that there is an ability to absorb those shocks. So there is clearly the bad news, but the good news is they have the ability to absorb the shock.

Govindraj Ethiraj: And what does that say in terms of India Inc's, let's say, the propensity to invest in capital expansion or new projects or anything along those lines, again, going back a few years?

Vikash Halan: You will see that there is a section in that report where we're talking about the slowdown in the growth rate of the CAPEX that the corporates are spending on. And this is excluding the infra part, by the way. So these are all the corporate side that we are looking at.

And that is not surprising, given that the level of uncertainties that we have seen over the last four or five years with one shock after the other, investment decision tends to thrive when there is a high degree of certainty. Whereas in this case, the level of uncertainty is certainly trying to move money away from investment, probably return capital to the or also trying to look for other destinations. So things like the AI and data centre or new energy, you will probably see money going in those directions.

And that's where, even globally, that's the trend. You're seeing a lot more CAPEX away from traditional industries and more on some of the industries that are on the horizon.

Govindraj Ethiraj: Right. And I'm going to come back to a larger question on how Moody's is looking at India right now, Vikash. But Ravichandran, so 26-27 outlook.

And within that, which sectors are looking better, given all of what we've just talked about and which are perhaps, let's say, under more pressure?

K Ravichandran: Yeah. So even under the current challenging times, we believe there are a couple of themes where the outlook would be fairly good. Number one being defence.

Defence is one area where India is trying to invest more and a lot of private sector participation is happening over here. As a result, order book position of both PSUs as well as private sector, they are at multi-high level. While there's always concern around the working capital cycle and liquidity-related issues, in general, payment certainty is there.

So because of that, there is good visibility on the orders. Second area is on the capital goods. Power sector, especially, has been seeing a lot of investments on the renewable energy area, as well as transmission systems and also the distribution side of the value chain.

Because of that, there's huge demand for capital goods like transmission towers and transformers and rectifiers and so on and so forth. Capital goods is playing an important role in the current construct. And third is on the hospitality side.

Hospitality is a space where it's going to be a steady sector. A lot of investments are happening, especially from the private equity players. And many of these chains are investing in different cities, and they're adding beds and modernising their equipment and so on and so forth.

At the same time, the penetration of insurance is increasing in the sector. As a result, the value that you get from every patient is increasing. And as a result, overall, it's a good story for the hospitality sector as well.

While this industry is subsidised, a subsidy question has not been to the extent the industry would have liked. Because of that, there is pressure on margin as well as on the liquidity also. Because of the ATF price impact and also the depreciation, this business is highly impacted.

And we believe there could be huge cash losses in the current year. Despite the retail price increase on petrol and diesel, still there is a large gap to cover. So from that point of view, this year could be a very challenging year for the OMCs.

Perhaps government needs to give them more time, even if food prices were to correct to $70 to $80 in a post-war scenario. Perhaps government needs to give OMCs more time to absorb these losses in a steady environment. So these are three directly exposed sectors.

In addition to that, we have a negative outlook on the microfinance sector in the financial sector space and paper and print media and so on and so forth. There are about nine sectors where we have negative outlook. But officially, our major ones would be the ones I've already discussed.

Govindraj Ethiraj: Right. And what's your best case and worst case? Assuming, let's say, the war, or even if there is some resolution to the war, but let's say oil prices remain high, there is not much movement of energy through the state of Hormuz.

Assuming all of that stays as it is, or the impact is as it is, what's the impact do you see on balance sheets going into next year? And if assuming that's the bad case, then what's the good case or the better case?

K Ravichandran: Best case is about $95 per bundle for the group. You know, the companies in this sector will finally dodge and their ability to borrow money from the banking system and capital markets is fairly, you know, at a good level. And also some of them are owned by sovereign.

While in the case of, you know, Petalus sector and Alliance sector, perhaps there is pressure which could be emanating if, you know, the average group price were to go beyond $100. You know, at that point in time, you know, losses could be so huge that, you know, it could eat away some of their net worth and, you know, the financial flexibility which these companies are enjoying. So everything would depend upon how long the conflict, you know, sustains.

If it is, let's say, three to six months from here on, you know, credit quality will mostly be contained. But in case if it had prolonged, then, you know, because of margin pressure as well as additional debt, that will put pressure on the credit matrix and, you know, ratings could be under pressure at the near term.

Vikash Halan: What we have seen over the last three months is not really the actual level of shortage because there was a lot of reserve drawdown, there was a lot of seaborne crude that made its way through refineries. So we haven't really actually felt the impact, the full impact of the disruption. But if this lasts for a long period of time, there was analysis that was done by some of the equity houses around, you know, how much reserves are needed to keep the reserves operation because the pipelines, the containers, everything needs to be operational.

And we can run out of that, at least the point of no return by September by certain analysis. So if this lasts long, A, you don't have that much seaborne crude that is available. B, the reserve have a limited amount of time that you can do or draw down on.

So if this lasts for long, their only option left after that is demand destruction. Other than demand destruction, you won't be able to balance the energy demand and supply.

Govindraj Ethiraj: Right. And I mean, I'm assuming the demand moderation could perhaps happen because we are raising prices now every week for the last four weeks in India.

Vikash Halan: No, that's not going to solve. And it's not just India.

Govindraj Ethiraj: Across the world, yeah.

Vikash Halan: And the demand destruction or demand moderation, as you say, will mean that you actually need to put in actual rationing, you need to mandate work from home, you need to restrict air travel. So there is all those measures, you know, somewhat similar to what we saw during the COVID, when we saw demand declining by 10 million barrels all of a sudden, right? And that is the amount of destruction that we may need, moderation that we may need to balance the markets.

Govindraj Ethiraj: Right. And yeah, so we definitely need to are looking at inflationary conditions now, and rate hikes seem imminent. What do you feel we should be heading towards?

And what could be ideal, at least in the next few months?

K Ravichandran: Yeah, from a cross standpoint, you know, certainly there are pressures which are evident. Already, you know, the market indicators like overnight index swap, they're indicating that, you know, perhaps there's a need to raise rates by at least 100 basis points, if not more. But at the same time, you know, policymakers will look at growth impact.

So it's going to be a carefully thought out decision, which will be data driven. RBI has articulated that if need be, you know, they would also look at that as one of the tools. But you know, I would believe that would be a lost resort.

You know, we will try all of the tools available, you know, whether it is in terms of liquidity enhancement measures, or you know, dollar strengthening measures, those tools will be used first before rate hike comes into the picture.

Govindraj Ethiraj: Okay, Vikash, last word, what's the Modi's outlook for India, given all of this and your call on rates?

Vikash Halan: I mean, I can't take a call on the rate per se. But the general direction is if inflation goes up, you would expect a tightening cycle to follow. That's the extent of my knowledge on the rate hike.

But when it comes to our outlook for corporates in India, we continue to remain fairly comfortable with where the credit stands. Over the last six or seven quarters, we have seen net upgrades, most of the corporates are rated investment grade. And in fact, most of them have a stable outlook.

We think there is a lot of buffer to absorb some of the risk. And we continue to remain fairly constructive despite, you know, the headwinds that we see.

Govindraj Ethiraj: Right, Vikash and Ravichandran, thank you so much for joining me.

K Ravichandran: pleasure.

Vikash Halan: Thank you.

How will New US Visa Restrictions affect Indians?

On Friday last week, the US has moved to significantly restrict who can obtain permanent residency in the country, potentially affecting the fate of Indians on temporary visas who are awaiting a green card. The US Department of Homeland Security, which oversees the US Citizenship and Immigration Services, or USCIS, announced that those applying for green cards must return to their home countries to do so, which reverses a practise that has been in place for almost 50 years.

People usually apply for green cards in two ways, going to a US consulate overseas or applying to one while already in the US, which is called an adjustment of status. The new USCIS policy memo, according to an Indian Express report, targets the second more popular route used for decades by Indian workers on H-1B visas, students transitioning from F-1 to work visas, and spouses on H-4 dependent visas. The new policy, the report says, is especially concerning for Indians because they dominate the decades-long backlog in employment-based green card categories like EB-2 and EB-3.

For many Indian professionals, the wait stretches beyond 15 or even 20 years. I reached out to Poorvi Chothani, founder and managing partner of LawQuest, a global immigration law firm with offices in Mumbai, Florida, and New York, and she joined us from Florida. And I began by asking her how she was reading the announcement that came over the weekend.

INTERVIEW TRANSCRIPT

Poorvi Chothani: So basically what the USCIS policy memorandum has instructed its officers to do is they've reminded them that all green cards actually should be processed overseas. When they were approving them within the country as per the adjustment of status application filed, it was actually a courtesy and it was now at their discretion whether they grant this courtesy or not. And the discretion they've said is unless it is in the economic advantage of the country or the person is subject to extraordinary circumstances, adjustment of status is not the norm.

That is actually the exception. So what they've done is they've changed their policy of adjudication. They haven't changed the underlying law.

The law still remains. But by doing this, what they've added is a standard of review because now there's a standard of review of extraordinary circumstances which wasn't there before. So some lawyers are interpreting that as a change in law because you cannot change the adjudication standard unilaterally like this.

That is what the argument is. What we in our firm are doing is we are playing a wait and watch game. We are waiting and watching because we luckily don't have any critical cases that are going to get impacted today or tomorrow or you know in the next 15 days.

So we are playing a cautious game for now.

Govindraj Ethiraj: Right. If I can take a step back, could you define for us what green card actually means and what do people get when they acquire one?

Poorvi Chothani: Got it. So green card is the term that is used to describe an immigrant visa. The United States grants two types of, broadly speaking, two types of visas, non-immigrant visas and immigrant visas.

When you get an immigrant visa, you get the right to live permanently in the United States and after a passage of time and physical presence in the country, you may be eligible to apply for citizenship. So loosely, this is called a green card and this name came historically because when they started issuing these cards as evidence of immigrant status or permanent resident status, that card was a green colour card and it has since then continued in that vein. So that is why it's called a green card but it's actually an immigrant visa granting permanent residence rights.

Govindraj Ethiraj: And what is the transition from green card to citizenship and is that automatic?

Poorvi Chothani: No, green card to citizenship is also not automatic. You have to have spent at least half of the time in the United States in the five years preceding the date on which you apply for citizenship. You file a form called N-400 to apply for citizenship and let's say you're applying on June 1st, you take the period five years going back from then and at least 50%, roughly speaking, there's a numeric value but at least 50% of those days have to be spent physically within the United States and any travel abroad should not be for more than six months because if you have been abroad for six months, that is outside the United States for six months, your clock resets and your five-year period starts from that again or your two and a half year period starts from then again depending on how we are going to calculate it.

So it's physical presence, minimum stay, and no absence of more than six months. In addition to this, what last year the government Trump administration also introduced a good moral character requirement. So you've got to prove that you do not have anything negative in your history.

So of course, if you have a criminal record or something then you may become ineligible for citizenship. But now they've added another standard to it where you have a good moral character. In that what they can do is they can go to your neighbours and ask them that is this person of good moral character or if this person has a small shoplifting episode or something then what happens.

So they go deeper into the person's profile to gauge whether this person is deserving of U.S. citizenship.

Govindraj Ethiraj: Right and one of the constituencies that's affected by or affected the most by this appears to be the H-1B visa holders. So what happens to a classic H-1B which of course many of them are IT industry people as well.

Poorvi Chothani: So an H-1B visa is actually a non-immigrant visa. It allows people to work in the United States and it allows them to have immigrant intent. So now let's compare this with another visa category to understand what the difference is.

So if you're coming to the United States to study you come on an F-1 visa usually and that F-1 visa is a pure non-immigrant visa. You cannot have immigrant intent when you apply for the F-1 or when you enter the country on an F-1 visa. While with the H-1B visa you can have dual intent.

You can have an intention to remain and work temporarily in the United States or you may have permanent immigrant intent. So that's why it's called a dual intent visa. Now many people who are on the H-1B track are also on a green card track.

Not everybody who has an H-1B is on a green card track. But if the employer files a green card application for them by doing a labour certification that's testing the local labour market, proving there is no local worker etc. They come on a green card track and the one stage of the green card track is filing a form I-140.

When you file that and that is approved then a person who's on an H-1B can get extensions beyond six years. Because an H-1B non-immigrant visa is confined to six years of continuous stay in the United States then you leave the country with a one-year cooling off period and you may be able to start another stint of six years. But if you are in an advanced stage of green card then you can have unlimited three-year extensions or sometimes one-year extensions until you get your green card.

So there are many folks who are on that. They're all waiting for the 15-20 year lapse that they have to wait for before their visa number becomes current. That means their priority date becomes current.

Now while they're on that they can continue to be on H-1B but they have to wait for their green card number. Now when their green card number becomes current they may be able to file an adjustment of status application and this is where the new policy memorandum kicks in. At that time after waiting for 20 years and their priority date becomes current if they go for adjustment of status they may not be granted that they may be denied that.

At the moment there is no prohibition to file adjustment of status there's only changes how it's going to be adjudicated. So assuming that you can still file after 20 years you will file it but there's no guarantee you will get it. What we saw recently just yesterday I mean two days ago one of our colleagues and fellow lawyer got an RFE in an adjustment of status case.

An RFE is a request for further evidence. In an adjustment of status case these are very rare unless there's a criminal record or a medical issue or something like that or an eligibility issue. But this RFE was very interesting.

It has asked about 8 or 10 questions on proving this person's worth to the United States. What is your salary? What is your economic benefit to the country?

What is your community engagement? What are you contributing to the community etc etc. All these are leaning towards the current policy memorandum criteria of discretionary decisions for worthy people.

This shows us one thing that the USCIS was very well prepared this time. They came out with the announcement and the RFEs were ready to issue. So this was like well planned and announced on a Friday you know it just threw all the immigration attorney's office put the people in a panic and that too at the beginning of a three-day weekend.

So all these green card holders were on H1B and are worried that their adjustment of status application which may be because it's already filed for many cases or which they're going to file in the near future is in jeopardy.

Govindraj Ethiraj: So will they have to leave to pursue that?

Poorvi Chothani: Yes they may have to leave because if the adjustment of status is denied that doesn't mean they're not eligible for the green card. They still may be eligible for the green card but they'll have to leave the country go to their home country because now they can only apply in their home country because of another change that came about last year. They can only apply in their home country and they will have to wait for a visa appointment.

Now this gets even more alarming because the consular officers remain the same. They have not increased the capacity of people at the embassies and consulates to handle the onslaught of this additional work that is going to come to them. So the same officers that issue F1 visas, H1B visas also issue the green card visas and just now the volume of green card visas was small and it was usually family-based because most of the employment-based visas were adjustment of status applications within the United States.

So now the U.S. embassy and consular staff is going to bear this onslaught of new work and that is going to increase wait times. So let's say this person his priority date is current, the adjustment of status is denied, he has to leave the country, apply for a green card and come back. That could be a lapse of several weeks, months, years.

We have no clue and that could then in effect break his employment and then the employer will say I don't need you because I have to replace you within the country. The domino effect of this announcement is going to have devastating impact on many families.

Govindraj Ethiraj: Poorvi, thank you so much for joining me and walking us through what this new law means or proposed law means.

Poorvi Chothani: I mean I just want to leave your audience with this. It's not all doom because if you are an economic advantage to the country like you're a high earning AI technology or anything technologist or anything like that, you could still get the adjustments of status approved. So it's not all doom and doom but it's going to be decided on a case-by-case basis.

Govindraj Ethiraj: Wonderful. Thank you so much, Poorvi.

Poorvi Chothani: Thank you. Nice talking to you, Govind.

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IT companies' H-1B visa approvals have fallen sharply this year as the administration in the United States tightens rules around work visas and green cards, as we just discussed, pushing the industry towards more offshore work from India and greater local hiring in the US. A report in Mint quoting official US data says India's six largest information technology services firms, that's TCS, Cognisant, Infosys, HCL, Wipro, and Tech Mahindra, were given about 11,000 H-1B visas as of 31st March 26, which is down 40% from the previous year when they got about 18,400 visas. H-1B visas allow Indians to temporarily work in the US in specialised occupations, including IT services.

Now, there are, of course, two trends here. First is that Indian IT services companies are reducing and for years have been reducing their dependence on H-1B, even also the incremental $100,000 visa costs announced last year. And the US government is pushing strongly towards attracting highly skilled foreign workers and protecting the wages.

So the stress here is highly skilled and protecting wages, working conditions, and job opportunities for American workers. Back to green cards, many H-1B visa holders live on H-1B visa extensions while applying for a green card, the total limit for which is 9,800 per year. Larger applications and fewer green card slots lead to backlogs that can span decades, as we just discussed.