On Episode 831 of The Core Report, financial journalist Govindraj Ethiraj talks to Garima Kapoor, Economist & Executive Vice President at Elara Securities (India).

SHOW NOTES

(00:00) Stories of the Day

(01:09) The markets rise for the second day as oil prices fall on peace manoeuvres.

(03:22) Influential voices in the US like Blackrocks Larry FInk want Iran to be neutralised. What does that mean?

(05:38) A month into the war, what has and will be the impact on India’s economy. Breaking it down.

(17:23) OpenAI to dump Sora in a sign of rising AI costs and resources.

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

—

Good morning, it's Thursday, the 26th of March and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. Today is a markets holiday and a normal course we would not have had in addition, but because the war mongers are working, so are we.

That brings us to the top stories and themes…

The markets rise for the second day as oil prices fall on peace manoeuvres.

Influential voices in the United States like BlackRock CEO Larry Fink want Iran to be neutralised. What does that mean?

A month into the war, what has and will be the impact on India's economy?

OpenAI to dump Sora in a sign of rising AI costs and resources.

Markets and Blackrock

If you are in the United States right now, the biggest crisis you're perhaps facing is that security check lines at some airports are long and you have to reach those airports several hours earlier, which of course has nothing to do with a war. The United States chose to fight in Iran and everything to do with a partial government shutdown with some 50,000 workers apparently going unpaid. Yes, gas prices are rising there and so are potentially the cost of borrowing, including for mortgages, and that is causing some concern.

But factories are not shutting down, workers are not going back to their villages and all restaurants and hotels are functioning normally, which is of course quite the opposite in India and across Asia and South Asia. Even South Korea stepped up its emergency economic planning on Wednesday. As the Prime Minister warned the government must prepare for the worst-case scenarios from a Middle East conflict that has shown no sign of abating.

According to a CNBC report, the government has planned to set up an emergency economic task force led by the Prime Minister to coordinate cross-ministerial efforts. In another sign of a cross-Asia impact of the US-Israel war against Iran, signs are growing that Asian countries are hoarding jet fuel, according to Bloomberg, which added that South Korean carriers got notified about refuelling restrictions from some countries and the government is discussing whether to redirect export-bound jet fuel to the local market. Philippine Airlines President said in an interview they may soon resort to fuel rationing and Vietnam's aviation agency plans to cut flights from April, according to that Bloomberg report.

Meanwhile, Europe could face energy shortages and fuel rationing as soon as without a reopening of the Strait of Hormuz, the Guardian quoted Shell's CEO saying. The CEO of Europe's biggest oil company said it was working with governments to help them address the oil and gas supply crisis, which has already led to energy rationing in Asian countries, which of course we only know too well. The Shell CEO told an oil industry conference in Texas that South Asia was the first to get that brunt that moved to Southeast Asia, Northeast Asia, and then more so into Europe as we get into April.

He also said the crisis now in its fourth week had already affected supplies of jet fuel, which have doubled in price since the start of the conflict and he predicted diesel would come under pressure next, followed by petrol as the summer driving season begins in the US and Europe. Back in the US, not surprisingly, a lot of influential voices still want Trump to finish the job and even secure funding for it. Finish the job could of course mean anything, but it could definitely include a ground invasion that could start any day, which of course will only be the start point.

Incidentally, some 1,000 US paratroopers will land there in the next day or so, according to CNN. BlackRock CEO Larry Fink, whose firm also has substantial investments in India, has advocated a neutralisation of Iran, whatever that means. His focus is freeing up the Hormuz Strait to lower oil prices, which of course quite blissfully ignores the potential outcomes of that effort and what it was like there before February 28, which is of course nothing was happening and life was normal.

So while there is much talk of diplomatic negotiations that have commenced between Iran and the United States, with a list of 15 demands from the US being exchanged via Pakistan or maybe even Turkey, the probability of any immediate positive outcome at this point is low. Well, the markets are definitely hoping something will happen and it's really hope that seems to be driving the benchmarks up as they did for the last two days and with some healthy commentary from Donald Trump. The Nifty 50 was up 392 points to 23,306 and the Sensex was up 1,205 points to 75,273.

The broad markets did better. The nifty mid cap and small cap indices were up 2.3 and 2.6 percent each. The rupee was weaker on Wednesday.

Even as the central bank intervened, Reuters reported that the rupee was close to its record low of 93 rupees 98 paise but close at 93 rupees 97 paise. Meanwhile, UBS global wealth management has downgraded Indian and Eurozone equities, warning their sensitivity to elevated oil prices makes them more vulnerable if the Middle East conflict drags on. It might be very difficult to reach a final conclusion on the Iran war in a very short period of time, a Asia equity strategist at UBS told Bloomberg TV and added that they had downgraded Eurozone equities and Indian stocks to neutral on Wednesday morning.

So interestingly, the benchmark indices in import dependent markets like India and Europe have dropped more than nine percent since the war started, which is of course more than double the decline in the United States.

And meanwhile, gold prices were up on Wednesday, thanks to falling oil prices and also easing of inflation concerns. Spot gold was at about $4,558 per ounce according to Reuters on Wednesday morning. Remember, it had hit a four-month low of $4,097, that's about $4,100 on Monday.

Meanwhile, oil prices were also down for all the reasons we've been talking about and were quoting at about $100 a barrel. That's for Brent crude.

Economic Impact of the War on India

What is the overall economic impact of the war so far looking like and how many quarters of earnings could be hit in India? Before we come to that spillover from the war in the Middle East are threatening to push the rupee past 98 per dollar and hurt Indian stocks, Reuters quoted analysts at Bernstein saying, highlighting like UBS, the country's vulnerability to shocks arising from a sharp rise in energy prices. Bernstein's base case is for hostilities in the Middle East to conclude within a month while its bear case looks at a war extending for a year.

The Bernstein analyst said that if the conflict lasts much of 2026, the repercussions could be catastrophic, citing supply risks, double-digit inflation, and economic growth in the two to three percent range. There are also projections the base case could leave India's benchmark nifty 50 at around 26,000 by year-end, which is a two percent cut from Bernstein's earlier target, according to the Reuters report. And the bearish scenario could push it below 20,000 and weaken the rupee beyond 110 to the dollar, about 17 percent lower than the current levels.

Even if a lengthy conflict is avoided, the Bernstein analysts see a realistic chance of the rupee breaching 98 per dollar this year. So, what is the overall impact analysis looking like from what we've seen so far and what we know in what will now be a month of the war, and what's the outlook ahead, and what could be the policy responses, most importantly? I reached out to Garima Kapoor, chief economist at Elara Securities, and I began by asking her for an assessment.

INTERVIEW TRANSCRIPT

Garima Kapoor: The impact can be divided in two. One, of course, the importables, which are globally tradable commodities, are already seeing a significant increase. The landed price, a significant number of items where we have import dependency is rising.

However, the impact has been significantly contained so far because a pass-through has not yet taken place. Hence, what you see is a twin effect, that in inflation numbers, you may still not see a significant increase, particularly the consumer price, because the pump prices have not yet been increased. You don't have an adjustment as in that is taking place for LPG, excluding some increases on the commercial cylinder or a premium gasoline.

So the impact then has been contained. But you see a significant ramification on the rupee because that's the trade channel, especially the channel in terms of your demand for the dollar that cannot be controlled, and RBI has very limited control, although RBI is trying to intervene. So I would say after one month of war, where there is tremendous volatility in terms of energy prices, there's a spike in energy-led substitutes as a second round of impact.

But on inflation for domestic, particularly consumer inflation for India, we've not seen a pass-through yet, but it all is reflecting in the currency.

Govindraj Ethiraj: Got it. So what are the signals that you're looking at at this point to assess what could be, or rather what is being impacted if it's not inflation? Or is inflation the key figure?

Garima Kapoor: See, the inflation is a key figure, but there is a trade-off. As a central banker, you cannot control all variables, right? There's a challenge of impossible trinity.

So if RBI wants to control the rupee, which it did try in the early part when the escalation started, it did intervene very aggressively in the currency market, you saw that it was having its ramifications on the domestic liquidity and the yield started to rise and so forth. Now, probably you know that rupee is reacting to something which is not so much internal, but almost everything external. If the oil and the energy prices were to settle down such that its impact on current account deficit is not permanent in nature, and the outflows that we're seeing on FBIs, which have been extremely severe over the last few trading sessions, also tried to normalise, then we're looking at the picture that rupee will find a floor.

If you try to intervene a bit too much at this point in time, I think it might end up being futile. And if you end up tightening your financial conditions aggressively, it will have a long-term impact on growth, which will be difficult to unwind in the short term.

Govindraj Ethiraj: Right. And speaking about financial conditions for a moment, how are you seeing that even across other markets, including in the United States, where we've been hearing stories about private credit?

Garima Kapoor: See, in the United States, the private credit challenges started almost synchronously somewhat before the escalation started. But since the escalation has picked up, the global bond yields are rising. You've seen US 10-year oscillate in very close to 4.5%. You are likely to hit a mortgage rate which will be closer to 7%. You are probably also seeing more than bad US gasoline prices above $4, which could mean that eventually if this persists, US CPI is well about 3% to 3.5%. So clearly, there are signals that the domestic bond market, the fiscal economy, and the equity markets are beginning to show signs of nervousness. The massive selling that you're seeing, for example, in gold and silver is because margin calls are getting pulled across the board because of across-the-board selling. So I do see some tentativeness in global financial markets that is beginning to reflect, particularly more vividly over the last one week or so.

So if the war were to continue and the costs of the war are escalating, then I would worry about financial conditions tightening even more aggressively in global markets and hence its ramification in the Indian market for sure.

Govindraj Ethiraj: You talked about FPI, or Foreign Portfolio Investor outflow. So why is that accelerating even at this point?

Garima Kapoor: When you look at the basket of countries, Asia 1 is the most impacted, number one. Number two, beyond Asia, the smaller countries like South Korea, or Philippines, or Hong Kong, or Japan, larger economy than Japan, has greater dependence on oil from Middle East. But in India's case, it's not just oil that is impacting India, it is availability of liquefied petroleum gas.

So as we know, even if the war were to settle today, and let's say it were to end, the permanent damage that is being caused to the availability of gas and plus to the supply of LPG that is coming from Middle East particularly means that you will see some bit of pain percolating well into next quarter or couple of quarters. That's one. Number two, rupees depreciating the hardest among all emerging market currencies.

Top it up with the initial depreciation that we saw when India was considered as a contra AI trade. And third, more importantly, there is also a belief that this time around, if availability of energy that becomes a challenge, then whatever nascent recovery that India had seen in earnings, particularly in the quarter to the current financial year, will start to again weaken. And that would mean another quarter or two of damage.

So it's probably a combination of variety of factors. But I would see if you stack up India across other emerging market Asian peers, we started or entered this escalation on a much stronger footing. Corporate balance sheet, common balance sheet, current account deficit, 2% inflation, all were significantly at a multi-year lows.

And hence the ability to absorb the buffers to absorb also far superior now than they have been under any other previous crisis of energy.

Govindraj Ethiraj: Right. If I can ask you to or request you to compare these two periods. In the trade war, when we estimated the impact, we said it would be half a percent hit on GDP.

When it was at peak, 50% tariffs that is exports to the United States. Now, what could be the potential impact on overall growth numbers as things stand if you've already computed it?

Garima Kapoor: So our estimate says that if oil prices remain at 100 and above through the entire financial year, the first round and second round impact of that, because the impact is not just coming from oil, it's also coming from across the commodities. And even if there was a partial pass through of it, that the growth in the financial year 27 growth could get impacted anywhere between 60 to 80 basis point, if not more, because there is an impact that's flowing through to various channels and not just first level, but second and third derivative as well. But for that, we do assume that this persists for a very long time.

And by long time, we mean 27 for the financial year. In our assessment, if this deescalates the next couple of weeks, there is a quarter of loss. She will start to normalise again.

But longer it continues, longer you take to normalise things. And hence, the assessment is that shorter or quicker it ends, the ramifications will be far lower than otherwise. But yes, having said that quarter one, financial year 27 earnings is certainly impacted.

Because while you were in quarter four, financial year 26, Jan, Feb was good. You started the month of March with decent amount of inventory. So not all sectors are getting impacted.

And as the shortages or the costs remain more pervasive in nature, quarter one is certainly likely to see a significant impact in earnings.

Govindraj Ethiraj: Right. And from a policy perspective, given the monetary or fiscal tools that one could use or can use, what do you think the response should be?

Garima Kapoor: We do have significant, I should say, ability to absorb the shock. One, because we have been consolidating fiscally for last six years. So 4.1 fiscal deficit. Okay. One, government made very conservative estimates. So 4.1 technically could have been 4%. Okay. That means you have a buffer of 10 basis points. Plus your normal GDP, because of inflation spiking, a deflatable increase in normal GDP will not be only 10.5%. We'll see about an upwards of 100 basis points. So you get that buffer on the denominator. And third, during such crisis period, and because prime minister did allude to the fact that treat this as COVID, where you have very limited internal defences, but you just have to tie to the crisis. I think government of India would be okay to let its fiscal balance deteriorate a bit by 20, 30 basis point, because it calls for.

Now, when it comes to monetary policy, we're already at the fag end of the rate cutting cycle. Anyway, we're not anticipating any more rate cuts. I think RBI would treat this shock as exogenous for the time being, and would wait for it to start reflecting in inflation expectations.

Only when inflation expectation and the second and third order derivatives of inflation start to spike, such that you're looking at inflation dangerously close to 6% for a foreseeable future, not for a short term. Only then RBI will react. In any history of monetary policy and rupees responses to interest rate shows that rupee does not respond very favourably to short term interest rate spikes, as much as a response to geopolitical growth as well as flow.

So I do believe RBI will wait and watch and remain cautious and to ensure that it doesn't lead to more pervasive and permanent shock in terms of inflation. So long as inflation is within the band, 2 to 6%, I don't see RBI hiking rates.

Govindraj Ethiraj: Right. Optimistic note to end on. Garima, thank you so much for joining me.

Garima Kapoor: Thank you, Govind.

—

If you are in an apartment complex without a piped gas connection, this is your time to push for it because often in the past there have been problems because of right-of-way clearances, at least in cities where gas is already flowing in parts.

All this might mean more digging on some roads, but presumably since the roads are being dug all through the year in any case, this may not make much of a difference. The government also said that constraints on liquefied petroleum gas and natural gas supply are expected to persist for a long time due to damage and shutdowns at Gulf liquefaction facilities supplying India, as well as continued blockage at the state of Hormuz. It also said that a uniform framework is needed to remove hurdles such as land access issues, delays in approvals, and high charges to speed up pipeline construction and expand the use of piped natural gas across India.

It also sets timelines for pipeline approvals with permissions deemed granted if authorities fail to respond in time and requires landowners and local bodies to allow pipeline access. The AI frenzy will pause, no doubt about it, not because people suddenly realise we really don't need all this AI and the trillions of dollars required to fund the infrastructure for it, because the costs are mounting. The biggest one actually will be energy.

Whichever way you look at it, there is no way countries like India can at this point prioritise, for example, data centres which will pull energy from a depleting pool, whichever specific fuel is powering it. The Iran war has amply demonstrated how fragile the energy ecosystem is, again for countries like India. Remember, industry is powered by gas in several parts of already shut down, including, for example, the tile-making ceramic factories in Morbi in Gujarat.

All of this means that coal-fired plants are stepping up so that domestic consumers are not much affected and you could see or will see other fuel options also being explored actively.

RCB and RR

The Aditya Birla Group, the Times of India and Blackstone's Perpetual Private Equity Strategy Company have signed an agreement to acquire 100% of Royal Challengers Bangalore or Bangaluru, encompassing both the men's Indian Premier League franchise and the women's Premier League franchise from United Spirits, which is a subsidiary of Diageo PLC and values the franchise at about $1.8 billion and all of this of course is pending approvals. Under the new ownership structure, Aryaman Birla, Director at the Aditya Birla Group, will serve as Chairman and Satyan Gajwani of the Times of India Group will serve as Vice-Chairman of the franchise. Now, Bloomberg has added that the London-based Diageo is on the verge of a financial windfall because of this transaction as it could reap more than half of that $1.8 billion roughly sale possibility.

In 2008, Vijay Mallya's United Spirits, the company he ran at that time, bought the Bangalore franchise for $111 million during the inaugural IPL auctions. The objective at that point was that the cricket team would become a major advertising vehicle for United Spirit brands, particularly Royal Challenge Whisky, according to that Bloomberg report. I reached out to noted sports and cricket writer and commentator Ayaz Mehman and I began by asking him how he was seeing this transaction and what could have been driving it at this point.

INTERVIEW TRANSCRIPT

Govindraj Ethiraj: Ayaz, thank you so much for joining me. We've seen two quick deals in the IPL space of teams. One was for Royal Challengers Bangalore and the other was for Rajasthan Royal, both roughly around the same price, $1.7 billion. And the question that I have to start with is, what's prompted or what is likely prompting the sale of two teams, one of which won an IPL just recently, as in such a short span?

Ayaz Memon: A couple of things, Govind. It's a good point, which a lot of people have glossed over. So Rajasthan Royals has been looking for buyers for a fairly long time, either divesting stake or selling outright or whatever it is.

Manohar Bhadale, the major stakeholder, has been looking around, shopping around for buyers for a fair while now. It was a question of when rather than why. Where RCB is concerned, I think RCB, things started hotting up after Diageo took over and then Diageo looking for some kind of an exit.

I think they said about a month back or two months back that March 31st is what their deadline was for themselves. As it happened, a lot of things transpired within that in the last five, six months. They won the IPL.

So, you know, obviously the brand value soared. And then there was the tragedy at the Chinnaswamy Stadium where they came in for a lot of flack. You know, I think somewhere that also hastened their decision or at least made sure that they don't say, OK, we'll put it off for another year or two years.

So the price they were looking for, from all accounts, just gathering, not that it's officially been put out, was 2 billion plus. So there was talk of 2.2 billion is perhaps going to be kind of a soft offer or unconfirmed offer. So it's settled for a little less than that, but it's a full sale.

And I think that they're meeting their deadline in that sense, you know. But look at it from the overall perspective, the valuation of the team is mind boggling.

Govindraj Ethiraj: RCB was bought for 111 million dollars.

Ayaz Memon: Yeah, which in those days the dollar was 40, 42 rupees. So it was 450, 460. And Rajasthan was even less than 400.

So, you know, and now it's more or less the same price, give or take a little bit. So obviously the Rajasthan Royals shareholding is a little more complex. We have to wait and see what happens there.

Over here it seems to be a direct, you know, there's a consortium and then one party selling and, you know, there's a consortium buying. So it's a little simpler to understand. Though the price, I was interested in seeing what Lalit Modi had to say and he tweeted about it and saying that when the figure came out 1.78 and it was not officially confirmed, he said, no, no, it has to be more than 2 billion because that's what, you know, he thought was a fair value, if not more than that. So that's where we are.

Govindraj Ethiraj: Right. From the way you're putting it, these seem to be two opportunistic deals from two sellers who were in the market for some time for fairly different strategic reasons. And in the case of Diageo, it's fairly clear it's a UK-based company and they may have been wanting to get out of this.

It was always bought by Vijay Mallya as a brand vehicle for the Royal Challengers Whisky and so on and so forth. Rajasthan Royals may be a slightly different case. So is there any connection between all of this and the overall health of the IPL franchise?

Ayaz Memon: I think so. I mean, look at it in terms of rupee terms, just as a ballpark figure of 15,000 crore for each of these franchises. And if you extrapolate, you know, which is not the best way to do valuations, but there are 10 teams.

So we're looking at what 150,000, 1,50,000 crore as just the team's values. And then there's a whole ecosystem around it. So what is the brand value of the IPL itself?

Well, go figure, you know, I don't really have the wherewithal to do it or the expertise.

Govindraj Ethiraj: So basically, you're saying that the value has obviously gone up tremendously in the last few years. So the health is good.

Ayaz Memon: The health is good. You know, and I keep saying that the health of any such league, certainly the IPL also depends so much on the health of the economy and not just the Indian economy. Let me tell you now there are buyers coming from all over from the US, from, you know, somewhere else.

So also what kind of money they have to park into a venture in India. But obviously the IPL's staying power, in a sense, is getting fairly well established. It's about 18, 19 years old.

Even with, you know, all the background or the backdrop, you've got a war going on in the Gulf. That doesn't seem to have dimmed the enthusiasm of the buyers, certainly.

Govindraj Ethiraj: Right. And it's quite likely most of the work on these deals would have been done before February 28. How are you, or rather, what would you say to the incoming owners?

I mean, not to them directly, but are there any lessons in some ways? I mean, how sort of successful owners have treated their franchises versus those who may not have been so successful within the IPL context?

Ayaz Memon: I think, you know, the learning for me and for others is also that the game is paramount. So you have to keep that game healthy. Obviously, that means also keeping the players, you know, the flock of players for all these franchises, not just happy.

Happy can be very misleading. It just means paying more money, but that doesn't mean that you'll win, just paying more money. So they have to be there.

Cricketing-wise, happy means that you have the facilities, you have the opportunities, you know, talent scouts are doing a good job. There's a whole ecosystem which comes into place. So, yes, there is huge money being pumped in, but it can't be a case where you pump in so much money and say, now in the next three years, I must double my money and kind of get out there.

So that's not going to happen. Remember, the IPL valuation has reached here, but the real growth, in my opinion, has been there, I think maybe in the first five, six, seven years for various reasons. It got entrenched and then the valuation has started growing.

And I think for that to happen, the first lesson is that the entrenchment can't get loosened, you know, it can't be loose, otherwise things start then falling apart. So I think that's really the big lesson.

Govindraj Ethiraj: Got it. Last question I asked, how's IPL season 26 looking?

Ayaz Memon: Now, I think there'll be extra interest in what's happening in the IPL. Everybody will be wanting to see what happens. There are some discordant notes, you know, for instance, Sunrisers, Hezbollah, not in IPL, but in the 100 tournament in England, they've chosen a player from Pakistan to represent their team there, which has evoked a lot of criticism in India.

But that apart, I think it's really, you know, like every year, it's very difficult to say which is the front running team. You know, I mean, obviously there's a defending champion, there are all nine others are claimants to topple the defending champion. And the spread of talent is so even that it's very difficult to say.

The biggest champions have been in the IPL, certainly, I mean, Mumbai Indians and Chennai Super Kings, who won the title five times each. So they are extremely strong, and they have a legacy or a habit of knowing how to play to win. But I think it's going to be really exciting again this year.

Govindraj Ethiraj: Ayaz, always a pleasure to talk to you. Thank you so much for joining me.

Ayaz Memon: Thanks, Govind. Always a pleasure talking to you. Take care. Bye-bye.

RIP Sora

OpenAI's pulling the plug on soda is seen as a reflection of the high costs of compute and resources required to run something for which monetization is not fully kicked in. In December, Disney said it would invest a billion dollars in OpenAI and as part of the deal was set to licence more than 200 characters from Disney, allowing users to create and share AI-generated videos with beloved Disney characters, according to a Wall Street Journal report.

The three-year agreement allowed people to wield a lightsabre, for example, with Luke Skywalker or insert themselves into Toy Story. A Disney spokesperson told Wall Street Journal that the investment into OpenAI isn't proceeding and they said that as the nascent AI field advances rapidly, we respect OpenAI's decision to exit the video generation business and shift priorities elsewhere. Altman said the SORA team will now focus on giving priority to longer-term bets such as robotics.