War Tensions Pull Down Indices Again
Israel and Iran have now attacked each other for five days and that is influencing how the markets are behaving
On Episode 610 of The Core Report, financial journalist Govindraj Ethiraj talks Dipti Deshpande, Director and Principal Economist at Crisil.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Analysts are scratching their heads over oil prices
(02:01) War tensions pull down indices again
(03:17) Nifty 500 companies have reported single-digit yoy sales growth (+5% yoy) for eight quarters now
(05:41) Economists would prefer not to have gold in India’s inflation indices. Here’s why
(14:15) Sebi eases compliance for foreign investors in sovereign debt
(15:19) The Link Between Jobs and Investment
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday the 19th of June and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes, war tensions pull down indices once again.
Analysts are scratching their heads over oil prices.
Nifty 500 companies have reported single-digit year-on-year sales growth for eight quarters now.
The Securities Exchange Board of India eases compliance for foreign investors in sovereign debt.
Economists would prefer not to have gold in India's inflation indices. Here's why.
The Markets And Oil
There is an interesting headline on CNBC. It says oil analysts are scratching their heads over the Iran-Israel conflict. I would extend that to an analyst watching Indian markets as well because the one big x-factor right now is oil prices and we've seen them go up sharply in recent days.
Brent crude is now just under $77 a barrel and these levels are quite frankly worrying. Moreover, considering we don't know where they're headed. Internationally, analysts are struggling to predict the extent to which Israel and Iran's escalating conflict could influence oil prices.
CNBC reported saying energy markets are weighing the likelihood of direct US involvement in the conflict as well as the potential for major supply disruptions, particularly worst case situations like Iran blocking the Strait of Hormuz, which we spoke about yesterday, which links the Persian Gulf to the Gulf of Oman. An analyst at oil broker PVM told CNBC that our market is settling into a world where missile exchanges are commonplace, but the cynicism of it being normal has yet to set in because of how easily the situation could escalate, which is so true. Not a day goes by without missiles and drones being launched either in the Middle East now between Iran and Israel or between Russia and Ukraine for years now.
Back home, the Sensex and Nifty were both volatile, having opened in the pressure. Israel and Iran have now attacked each other for five days and that is influencing how the markets are behaving, even as investors are trying to see if there is any sign to the end of this war or for now what the US Federal Reserve will do on potential rate cuts in the future and risks from, of course, rising crude oil prices to the US economy. So the Sensex closed after some fluctuations at 81,444 down about 138 points and the Nifty 50 was down 41 points to 24,812.
This is on trading day on Wednesday. In the broader markets, the Nifty mid-cap and the Nifty small cap 100 were down 0.46 and 0.23%. Elsewhere, the rupee also declined further thanks to persistent corporate hedging activity and elevated oil prices, according to Reuters, which added that it closed at Rs. 86.47 against the US dollar, down from its previous close of Rs. 86.24 in the previous session. Gold prices now eased off, with spot gold having come down slightly to $3,379 an ounce in mid-day trade on Wednesday and much more on gold shortly.
Earnings Weakness Leads To More Earnings Downgrades
Meanwhile, overall growth numbers for the last quarter continue to look weak as expanded analysis comes in, which is analysis of more companies. A report from Kotak Institutional Equity says continued weakness in parts of the economy has resulted in continued downgrades to consensus earnings across market capitalizations for FY26 and 27, which is the coming year's earnings, and that's for Nifty 500 companies. Small caps saw a 6% cut in their FY2026, the FY25-26 earnings per share estimates, versus 2% for large caps and 3% for mid-caps.
So, the downward revisions have been broad-based, says Kotak, with consumer-facing businesses seeing larger cuts. On the other hand, Nifty 500 companies have reported single-digit year-on-year sales growth, that's plus 5% year-on-year, for the eighth quarter in the fourth quarter of 24-25, that's the last quarter, for which results have come. On the brighter side, earnings before interest depreciation and profit after tax both grew.
The earnings before interest tax was 12% and profit after tax was 7% year-on-year, with several consumer-facing companies reporting margin expansion. Nonetheless, a broad-based earnings cut was seen across the Nifty 500 index universe. So, Kotak's report says that the Q4-24-25 results of the Nifty 500 companies shows that the broader universe continues to struggle with weak revenue growth, which as we just said was plus 5% year-on-year.
So, sectors which did better were construction materials, consumer durables and apparel, diversified financials, healthcare services, hotels and restaurants, internet software and services, pharmaceuticals, telecom, and transportation, which showed decent to strong sales according to that report. Now, the contribution of the top 100 companies to revenues of the Nifty 500 index universe has remained stable at around 70%, while the contribution to profit after tax has been broadly again stable at around 75%. So, one insight here is that while sales growth is weak across market caps, the EBITDA growth is stronger for mid and small caps and that's something other analysts have been telling us as well.
On the other hand, profit after tax growth was weak for large and small caps but strong for mid caps led by banks, metals, mining and pharmaceuticals.
The Gold Index
High prices are playing truant with inflation. Gold prices are now up almost 30% this year alone as we've been tracking quite closely. So, economists feel that gold should be removed from inflation indices, particularly core inflation. This is also a good time to note if you did not know earlier that gold does figure in inflation numbers.
So, core inflation is a measure that indicates the underlying trend in price level changes in the economy by stripping out those components of the consumer price inflation that are volatile and prone to short-term fluctuations like food and energy. So, core inflation does not move very sharply month on month and while central banks across the globe usually look at headline inflation, they also track core inflation as it shows the trajectory of headline inflation. All of this is from a new report from Crisil Ratings called Gilded Distortion.
How the price of gold is affecting core inflation signals. So, most central banks use exclusion-based methods to track core inflation. So, the report actually says that if gold prices had followed their usual trend, core inflation would have been about 3.4% in May instead of the reported 4.2%. Keeping out gold shows that the core CPI rose only about 65 basis points over the last 12 months ended May 2025 as against the 111 basis points increase in the more commonly used core measure. So, gold has 1.1% weightage in the consumer price inflation, which doesn't sound very high, but it's 2.3% in the core inflation pack that's tracked by the Reserve Bank, which is evidently also higher than other leading economies. So, a key and interesting argument is that gold prices are driven institutionally by investment interest as well as central banks who are buying gold and not individuals and we've actually seen and see that demand drops when prices of gold go up like it is right now as gold hovers in the 100,000 rupees per 10 gramme range. So, I spoke with Dipti Deshpande, Principal Economist at Crisil and I began by asking her why she and her colleagues would like to see gold removed from the inflation indices and in what way.
INTERVIEW TRANSCRIPT
Dipti Deshpande: So, I think there are 2-3 reasons why you'd want to keep gold out of the core inflation measure per se. So, if you look at gold, it's first of all very volatile in nature and a core inflation measure typically tends to keep out the volatile components. So, that's how food gets excluded, that's how fuel gets excluded and when we look at gold, it suggests that it's much more volatile than these two.
So, that may be the number one reason for a typical definitional perspective of core. The second is that if you include gold prices in core, it doesn't seem to do much value add. So, why do you basically look at a core inflation measure?
It's basically something that tells you how the underlying price pressure in the economy is. For instance, if there is more demand than supply can meet, then till the time supply catches up, how is that excess demand influencing prices? Now, including gold in core inflation measures doesn't really help us identify the underlying core demand measures in the overall economy.
Why do I say that is because if you look at gold prices, although Indians do purchase a lot of gold jewellery, global prices are not quite influenced by India's purchases of jewellery per se. In fact, if you look at World Gold Council's data for 2024 specifically, it tells you that as gold prices rose, jewellery demand in fact went down. It was the investment demand, be it from investors from central banks and coins and bars, etc., and also gold ETFs, for instance, which drove up prices of gold. So, I think these two, three reasons basically suggest that gold may be kept out of the core inflation measure, especially during times of economic uncertainty when gold prices tend to spike up quite a bit.
Govindraj Ethiraj: So, are you reacting because now gold prices have gone up 30% in the last year or rather this year? Would that change again or are you saying that this is like a permanent case, keep gold out permanently? I mean, what if prices keep going down after this?
So, for example, Citibank says that it'll hit $2,600 per ounce next year. So, in which case the argument reverses, doesn't it?
Dipti Deshpande: Absolutely. I think we've also in fact highlighted time periods, although it's a small mention in the document, there was a time period when gold prices were not picking up, but it was the underlying pressure in the economy that was higher. So, the gap between core and the gap between core excluding gold can increase during such times.
So, the idea is not to immediately replace the overall core inflation measure, but it is also that in addition to the core inflation measure that primarily is being looked at, this be another important measure which is specifically looked at during times of economic uncertainty.
Govindraj Ethiraj: Right. And what is the extent of distortion that you're seeing from your vantage point as an economist, number one. Number two, why couldn't we just exclude gold in our calculations because it's all just calculating a number, isn't it?
Dipti Deshpande: Yeah. Yeah, that's right. Although it's a small weight in the overall index per se, if you take the core, which is a sub-index, it tends to assign a slightly higher weight to gold.
So, if you just look at the last 12 months, that is between May 2024 and May 2025, core inflation actually went up by 111 basis points. And that's why it's at about 4% for the last 3-4 months. Now, 17% of that increase in core inflation was simply because of gold prices.
So, in simple manners, if core inflation went up from 3.1% in May 2024 to 4.2% in May 2025, in that period, we'd actually see gold inflation go up from 18% to 32%. So, that's the kind of spike that there's coming and it's influencing the way core behaves. Now, if you were to leave out gold entirely, or if you were to assume that gold inflation went up by its trend rate, then core inflation is definitely going to be lower.
So, the underlying trends in the economy may not be suggesting that inflation is actually picking up at that pace. So, I think that's essentially the reason.
Govindraj Ethiraj: Right. So, just to go over those figures again, so you're saying in the last year, there's been a 16% increase in core inflation because of the rise in gold prices?
Dipti Deshpande: Yeah, 17% of the rise in core inflation is exactly because of gold.
Govindraj Ethiraj: 17% of the rise in core inflation is because of gold prices. And what's the 18% to 32%?
Dipti Deshpande: So, 18% inflation was gold inflation in May of 2024. In May of 2025, the gold inflation rate was 32%.
Govindraj Ethiraj: Right. So, which means we've now been seeing gold prices rise for more than two years now. So, that's what this is reflecting.
Yeah. Got it. Do other countries also adopt a similar philosophy or how do they, the leading economies, treat gold in their inflation computations?
Dipti Deshpande: So, it's common to have a very simple measure of core inflation typically. Most countries tend to exclude food and fuel. India does so too.
Food, fuel and energy is what. There's only one central bank that's Turkey that keeps out gold. But I think what's important is that the weight of gold in our inflation index is higher.
So, for India, the weight of gold in the core inflation index is about 2.3%. And the kind of increase that we spoke of tends to, you know, therefore, steer core inflation to that extent. But if you look at some of the other prominent central banks, that weight is less than 1%. So, I think that's the kind of difference there is.
So, therefore, naturally, when you look at RBI, although it often commonly talks about a measure that excludes food and fuel, in addition to that, they also constantly look at several other measures of which two of the measures do exclude gold. So, they are doing their job. I think many of us other analysts do need to look at a measure that excludes gold to understand what the underlying pressure is.
Govindraj Ethiraj: Right. Dipti, thank you so much for joining me.
Dipti Deshpande: Thank you.
More Freedom For Foreign Investors In Sovereign Debt
And before we go, some news from the Securities and Exchange Board of India, which on Wednesday cleared a series of reforms aimed at improving market efficiency, startup participation, and investor access. An important one was eased compliance for foreign investors in sovereign debt. Foreign investors buying only government bonds need not disclose their investor group details as these securities carry low risk, according to SEBI.
Foreign buying of Indian shares and bonds are subject to limits and investors have to disclose their investor group details to enable monitoring of the limits. SEBI also allowed resident and non-resident Indians and overseas citizens to contribute to the corpus of foreign investors who buy exclusively Indian government bonds. It also eased restrictions on employee stock options for startup founders after listing and permitting voluntary delisting of public sector undertakings.
It also approved changes to allow greater flexibility for alternative investment funds and more on some of these announcements in coming days.
The Link Between Jobs And Investment
We spoke of slowing earnings growth for companies in the Nifty 500 universe. The other problem which we didn't touch upon in that particular piece is slowing private investment or CAPEX and how that links to jobs. My colleague Puja Mehra, who hosts the podcast How India's Economy Works, spoke with Amit Basole, Professor of Economics and Head Centre for Sustainable Employment and the lead author of the State of Working India report on her podcast.
And she asked him, how could policy makers ensure India's workforce is adequately trained and equipped to occupy those employment opportunities as they come up?
TRANSCRIPT
Amit Basole: Some amount of job creation was happening. It wasn't as much as we needed. Given how many people, young people were entering into the workforce and given how many people were leaving agriculture looking for other opportunities, we did not create enough jobs even back then.
And there were all these discussions of jobless growth, job loss growth even. But post 2018, the situation has actually worsened somewhat, which is that we entered first a period of slowdown and then the pandemic, which resulted in significant reversal of the structural transformation process such that people fell back into agriculture, fell back into the fallback sectors. And the last few years post-pandemic has been a story of trying to recover from that shock, but it has not been as good as we hoped, meaning that even now, as of the latest available numbers, the number of people in agriculture remains higher than it was pre-pandemic.
So that reversal that has happened has not yet corrected itself. So the legacy employment challenge that we always had, which is that the Indian economy grew fast but couldn't create enough jobs, has worsened now because on top of that problem, we have this other problem that people moved back and we need to pull those out as well.
Puja Mehra: How do we understand this? What is the reason? Of course, the pandemic was a shock, but now it's been some number of years.
So what's holding up?
Amit Basole: I think that is the really important question. And also given that the GDP, at least as going by GDP numbers, growth has not been bad post-pandemic, it's even more perplexing as to why we are in this situation. Perhaps one can answer that in two parts.
One is we should also go back and emphasise that the reason India's legacy employment challenge was also there, let's say compared to someplace like China, is that one, of course, we didn't perhaps grow as fast as China, but also our growth occurred in sectors which were not particularly labour absorbing sectors, in the sense that most of our labour force is not higher educated. There are 10 standard passes and so on. So we need high productivity jobs for those kinds of people, not for college educated people only.
While the sectors that grew in India, the service sectors, were largely driven by college educated people who are the minority of the workforce. So we had productivity, we had growth, but in this small sector not generalised. While in China, because growth was largely driven by labour intensive manufacturing, etc., you could get people who did not have higher education, put them in higher productivity work. And that remains something that we need to do in India today. But to answer your question of what has happened now, we have also experienced a prolonged period of depressed private sector investment. Even before the pandemic, private sector investment was not as great.
Then the slowdown happened, the pandemic happened, and the post pandemic recovery, although there was a bounce back, and a lot of profits were made, particularly at the upper end, when you even have highlighted this, they didn't translate into reinvestment to that same extent. So we are still in apparently a kind of economy where people are reluctant to invest, aggregate demand remains muted. And so, barring a few pockets of the economy, generally, there is no boom.
And therefore we are not seeing the job creation of the kind that maybe we saw in that boom period, the 2004 onwards period. And I don't know what the reason for the prolonged depressed private sector investment is.
