The Markets Rise On Rate Cut News
India's Central Bank delivered what many call an outsized interest rate cut to its benchmark policy rate
On Episode 601 of The Core Report, financial journalist Govindraj Ethiraj talks to Vivek Kumar, Economist at QuantEco Research as well as Ashish Modani, Senior Vice President and Group Head (Corporate Ratings) at ICRA Ltd for Infra.
SHOW NOTES
(00:00) The Take
(05:29) The markets rise on rate cut news, strong macro fundamentals
(06:51) Steepest interest rate cut in 5 years surprises bankers, markets
(16:43) RBI says still wary of Crypto
(18:20) Inventory levels at auto dealerships rise again as entry level cars see sustained pressure
(19:43) Infrastructure shifts, sectors like roads are slowing down, newer, possibly unexpected ones are picking up
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 Monday, the 9th of June and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
The Take
The world was treated to an intense, inexplicable and completely public spat between US President Donald Trump and Tesla founder Elon Musk. Now that spat might be localised to the United States, but the lessons from and leading up to it should concern both business leaders and politicians world over.
India, as we will recall, went the several extra miles to bring Tesla to India. It did not work, not because there was not enough effort, but there was evidently too much. The reason was more to do with Tesla's falling sales elsewhere in the world in specific and the delayed adoption of four-wheeler electric vehicles in general worldwide.
As things stand, Tesla is not setting up a manufacturing plant precisely as the core report has predicted for the last many months. What Tesla has done is to lease mid-sized showrooms in Delhi and Mumbai and a yard presumably to store and service the cars which it will sell as imports. India's Heavy Industries Minister H.D. Kumaraswamy said last week that Tesla is not keen to manufacture electric vehicles in India. He said we are not actually expecting from them. They are planning to start with showrooms. He said while announcing the guidelines for the scheme to promote manufacturing of electric passenger cars in India.
Tesla is, of course, welcome to manufacture in India but must do so in broadly the terms or situation or conditions that most global car makers in India have been working in. So the news within the news was never about Tesla's cars or Musk's Starlink satellite broadband system which is currently, well, bulldozing its way into India and riding quite bizarrely on the marketing networks of its two potential rivals, Reliance's Jio and Bharti's Airtel. It was about Musk being treated as an extension of the Trump family and treated a little extra gently because of what his proximity to Trump represented and less to do with the technological superiority of his products, good as they are.
But with Trump and Musk in the middle of a verbal equivalent of a schoolboy scrap during lunch hour, where does that leave us? Well, the Washington Post reported on Sunday that NASA and Pentagon officials are urging competitors to quickly develop alternative rockets and spacecraft to Musk's SpaceX after President Donald Trump threatened to cancel SpaceX's contracts and Musk's defiant response. Government officials were apparently stunned after Musk said and then later recanted that SpaceX would stop flying its Dragon spacecraft, a move that would leave the space agency with no way to transport its astronauts to the International Space Station.
The threat apparently has alarmed officials at NASA, which entrusts SpaceX with the lives of its astronauts, and at the Pentagon, which relies heavily on the company to launch its most sensitive satellites, said the Post. Now, there might be legislative ways to ensure those rockets were available to the United States where it wants to deploy them, but matters may not reach that point. But the implications are clear, which brings us back to India's own attempts to appease Musk.
Possibly, we did not have much choice. Remember, the tariff cloud has been hanging over India ever since Trump got elected and in the run-up to his elections. Trump has a different businessman style of functioning, and his endorsement of Musk did suggest that opening the doors to Musk's business empire would smoothen the road in the more complex political and geopolitical discussions with the United States, including on trade.
It may not have helped much, but perhaps there was little choice. Now, there are two ways this can go. One, the Trump-Musk war moves into a zone of subdued but longer-term hostility, which means no business dealings beyond what is already there, or definitely not the smooth path that existed so far.
The other is, of course, that the two will smoke the peace pipe and things will soon be, or close to be, normal, at least once again in the business context. Either way, it would appear that the excessive outreach to Tesla or Musk's companies will have to be tempered, if not rolled back. India too should hit the reverse gear on the relationship, even if slowly, or rather, let it evolve organically, so to speak.
Arguably, it had already reached there, though for different reasons. Either way, a valuable lesson has been imparted and hopefully learned. Mixing business and politics and friendship, even if fleeting and inevitable as it might be, is a tricky way to approach business or politics, whether in the US, in India, or, as in the current case, cross-border.
In perfect hindsight, India's courtship of Musk was perhaps not the best way to build bridges with Trump 2.0. In India, businessmen may exert high levels of influence in the political sphere, but they largely stay in their lane, at least in the public eye, because they also understand that people's power is something only seasoned politicians can harness. The Musk-Trump episode, of course, has a larger lesson for the political class, which is that depending too much on social media or the people who control it for political gains or outreach is a strategy that is fraught with risk at multiple levels and can backfire spectacularly.
And that brings us to the top stories and themes
The stock markets rise on rate cut news and strong macro fundamentals.
The steepest interest rate cut in five years surprises bankers and the markets.
Inventory levels at auto dealerships creep up again as entry-level cars see sustained pressure.
Infrastructure shifts, sectors like roads are slowing down, but newer, possibly unexpected ones are picking up.
And the Reserve Bank of India says it is still wary of cryptocurrencies.
The Stock Markets Jump
The Reserve Bank of India rarely surprises on the upside and has not for a while. So when it did, delivering a 50 basis points rate card as opposed to the 25 most economists were expecting, there was some joy in the stock markets. The Reserve Bank of India also unexpectedly reduced the cash reserve ratio requirement for banks by 100 basis points and shifted its policy stance to neutral from accommodative.
Not surprisingly, on Friday, the indices, which were waiting for a spot of good news exactly like this, jumped with the Sensex rising up about 746 points to 82,189. And the Nifty was up 252 points, crossing 25,000 to 25,003. This was the Nifty's best day in three weeks.
In the broader markets, the Nifty Mid Cap 100 and the Nifty Small Cap 100 closed higher with gains of about 1.2 and 0.8%. All on Friday. The rupee also gained somewhat on Friday after the Reserve Bank's steep rate cut. The rupee closed at Rs.
85.62 against the US dollar, up from its previous close of Rs. 85.79 in the previous session. Elsewhere, crude now has crossed $65 and is now quoting at $66.47, so over 66 just under 67, a battle on a strong US jobs report and the prospect of improved talks with China.
A Surprise Interest Rate Cut
India's Central Bank delivered what many call an outsized interest rate cut to its benchmark policy rate, bringing it to about 5.5% from 6%, the lowest level since August 2022. This is the biggest interest rate cut in five years. It's the third straight rate cut since February and is also below the median estimates of 5.75% in a Reuters poll. Reserve Bank of India Governor Sanjay Malhotra said in a media interaction, the move was taken as inflation had significantly softened and growth has been lower than aspirations amidst a challenging global environment and heightened uncertainty. It also came after a better-than-expected GDP growth figure in the last quarter, with the economy growing about 7.4%, which was more than what many economists had predicted. However, the current full-year GDP estimate is 6.5 to 6.5%. This, of course, is a slowdown compared to the 9.2% in the last financial year. The Governor said India's economy presents a picture of strength, stability and opportunity. He also referred to the inflation number for April, which was at 3.16%, its lowest level since July 2019. By the way, one projection by Bank of Baroda Research and I'm assuming others would align or be similar, says inflation for the month of May could hit 3% or even below that.
So the question that could follow would be, do you feel that inflation is at a low in the way you experience it in your daily life, your purchases, your cost of living? Well, that's for another day. The Reserve Bank of India, however, feels that most projections point towards continued moderation in the prices of key commodities, including crude oil, which of course has risen slightly now, but yes, it could moderate or stay in that $65 per barrel range or even below that.
On the other hand, the Reserve Bank of India did point out that there is a threat of weather-related uncertainty and the evolving tariff-related concerns and what they could do to global commodity prices. I reached out to Vivek Kumar, economist at QuantEco Research in Mumbai, and I began by asking him if the sharp cuts reflected deeper or underlying concerns about the state of the economy.
INTERVIEW TRANSCRIPT
Vivek Kumar: Why did the Reserve Bank front-loaded monetary policy accommodation and in fact change the policy stance from accommodative to neutral as a result? So there is no one single answer to this. There are multiple angles involved.
One would be, which comes from the macroeconomic projections, is the fact that the Reserve Bank of India is extremely comfortable about its inflation projection. That's number one. And it's giving them space.
All said and done, I think if you're taking that leap of faith that I'm going to front-load things now, you are at the back of your mind somewhere believing that whatever you're projecting on the inflation front is most likely to be the worst-case scenario. So when the RBI is saying that it is going to be 3.7 percent, it's actually going to be 3.7 percent in the worst-case scenario. So that's one way to look at it.
So there is an extreme amount of faith in that projection and RBI is thinking even if something goes wrong, I'll still be able to hit that mark. So I have that confidence and that confidence is giving me that energy to make that leap. That's one way to look at it.
The other way to look at it would be to say that it's nothing to do with macroeconomic projection. It's all about the style of operation. Every governor has his own imprint on policymaking.
We've seen governors in the past who've not followed the usual convention of going in multiple steps of 25 basis points. We've seen 30 basis points, 40 basis points rate changes in the past. We've seen governors in the past who've not been extremely bothered about CPI inflation, who probably have been much more bothered about inflation expectation.
We've seen governors in the past who have been rather than interest rate hogs, liquidity hogs. So every governor has his or her own style of operation. Maybe front-loading, maybe surprising the market because the surprise element in macroeconomics or in fact central banking is one of the key elements of policy communication.
Maybe that is something which is a style or maybe the way the new administration works. So that's the other angle. The third angle which is more a practical angle, which probably is an afterthought rather than something with the market participants went into the policy, which is that if it is clear that you are going to cut anyways in August, so what difference does it make between June and August now that IMD has upgraded their own forecast for monsoons from 5% surplus to 6% surplus.
So the bar for doing that extra bit between now and August, it's a gap of just two months and you have that clarity from the IMD. So it's like you were anyways going to do it, you might as well bring it up front because you know that the transmission process to real economic activity, I'm not talking about transmission from monetary policy to money market rate. The transmission from monetary policy to real variables in theory takes about four to six quarters, that's a longer period we talk about.
So if you probably want to up front things in a steady manner, in fact in an aggressive manner, you could possibly squeeze that time not from four to six quarters to maybe somewhere close to two to four quarters. So that probably is the objective and all said and done the governor has twice, this is a successive policy where he's reiterated that the aspirational growth is seven to eight percent. So somewhere the governor is also being driven, although the forecasts do not indicate that because forecasts would be much more micro in nature, they are just a few quarters away, but as far as aspirational or the medium-term growth forecast is concerned, he's also driven by that objective of pushing the economy or nudging the economy towards the aspirational growth rate.
So maybe try and improve policy transmission trend front load as much as possible.
Govindraj Ethiraj: And I'll come to whether interest rates to what extent will act as levers of change or levers of growth, but before that at five and a half percent, how close are we to let's say recent lows or recent historic lows?
Vivek Kumar: So nominal comparisons probably will not be of great help. What probably would help you to see is how the repo rate compares on a real basis or in fact the term which RBI uses is the ex ante real policy rate. So what they typically mean by this is they take the current level of nominal repo rate and deflate it with the expected inflation.
When they talk about expected inflation, they look at the four quarters ahead of expected inflation. So basically one year ahead inflation projection. So based on this metric, if the RBI governor himself said that they're looking at inflation close to 4.5 percent in FY27, we're not talking about FY26 anymore now, since we're talking about one year ahead inflation expectation. So 4.5 with a 5.5 repo rate gives you a one percent real policy rate. Now this real policy rate of one percent is the lowest in the post-COVID recovery phase. And as far as RBI's own estimates of real interest rates are concerned, it's a wide range.
On the lower side it is at 0.8 percent, on the upper side it is at 2.1 percent. So you could assume that the midpoint somewhere lies around one and a half percent, and we are now below that midpoint. So we are fairly accommodative as far as the real interest rate is concerned.
So even ignoring what the policy stands to see, as far as the real interest rate is concerned, we are fairly accommodative.
Govindraj Ethiraj: Right, so interest rates and liquidity are one set of instruments to achieve that aspirational growth that you just referred to. What else is left at this point of time for the government or the government plus reserve bank to think of?
Vivek Kumar: Well, the bag of goodies has been almost emptied now, in his own words. So he said that the space to support growth, he said it very unambiguously, that the space to support growth incumbently is going to be limited. So he's not closed the doors, but he's given an ample amount of signal that now there is very little left as far as the conventional, let's say policy arsenal is concerned.
Very little space left for them to manoeuvre or move around. So yes, can they extract another 25 pages? Yes, but then that will be data dependent.
Can they infuse more liquidity? Of course, they can infuse more liquidity. They have other instruments to do so as well.
But they're now probably approaching their limits, and this is a clear signal which came, and this is one of the reasons why probably you didn't see a lot of enthusiasm in the bond market reaction post the policy. So from a policy simulation perspective, now conventional arsenal is going to be limited. What the RBI could possibly do is more so on the unconventional front, they could possibly look at much more regulatory easing if it is required at all.
The idea going forward is that hopefully now things will not be required from a policies perspective. And whatever now needs to be done, or in fact the spectre of uncertainty is lying on the external sector front, and that is where the government has a much bigger role to play with respect to, you know, forging new trade ties or trying to get a better treaty for the country. So RBI's role going forward is now likely to get limited.
Govindraj Ethiraj: Right, Vivek, it was a pleasure speaking with you. Thank you so much for joining me.
Govindraj Ethiraj: Thanks, Govind. I hope it was helpful.
Crypto Fears
The Reserve Bank of India governor on Friday said the central bank is still concerned about cryptocurrencies as they can hamper financial stability. He was responding to a question post policy about the developments and the backdrop of the Supreme Court's observation on cryptocurrency last month. The interest in cryptocurrency has obviously revived thanks to developments in the United States where there seems to be a clear revival for crypto and an embrace of crypto by the regulatory agencies, including the government.
The governor here said that there is no development as far as crypto is concerned. The committee is looking into it and that we, that's the Reserve Bank of India, are concerned about crypto because it can hamper financial stability and monetary policy. The Supreme Court last month asked the government to formulate a clear-cut policy on regulating cryptocurrency while underlining its impact on the economy.
A Supreme Court bench, according to a report in Business Standard, termed the Bitcoin trade as an illicit trade, more or less like a Havala business. India is working on a discussion paper for cryptocurrencies and an inter-ministerial group comprising officials from the Securities and Exchange Board of India, the Reserve Bank, and the Finance Ministry are looking into global norms. Cryptocurrency is technically not illegal in India because there is no regulation, which of course does not make it legal either, but the discussion paper will give the stakeholders an opportunity to place their views.
The government is also taxing gains from cryptocurrencies and, as of course pointed out, taxing income from cryptocurrencies does not legalize it.
Car Sales Are Down
Overall auto industry numbers were up 5% for the month of May, but passenger vehicle sales are slowing down about 3.1% year-on-year. Numbers were weaker month-on-month, with sales falling about 13.6% or close to 14%, according to the Federation of Automobile Dealerships Association. Inventory days, which the core report tracks closely and had hovered around 50 days, have now moved up to 52-53 days, says FADA.
Entry-level models in passenger vehicles continue to be a hit, something that Maruti chairman R.C. Bhagawar also pointed out a few days ago, and that in turn reflects the income and outlook challenges, particularly for first-time consumers. Tightening of financing, as we've discussed earlier, is also affecting the segment, with banks having raised the risk weightages for loans basis directions from the Reserve Bank. So, in a way, the Reserve Bank may have cut interest rates, as we've just talked about, but that may not have much impact on these kinds of consumer segments, including cars, since getting loans is linked to the perception of the borrower's ability to repay rather than the rate of interest, and the risk weightages have made that tighter.
Dealers have said the Tuvola market has been strong because of a higher number of auspicious marriage days, a strong Rabi harvest, and pre-monsoon demand, especially in semi-urban and rural markets.
Infrastructure Shifts
India has a roughly $1.1 trillion infrastructure investment outlay on the cards right now. The National Infrastructure Pipeline was launched in 2019 to attract investment in infrastructure projects with a cost of more than Rs 100 crore each.
As of March 2025, it had covered about 13,000 projects, with a total cost of about Rs 185 trillion, nearly half of which is concentrated in the transport sector, a report put out a few months ago by rating agency ICRA had said. Most of these investments, actually 99%, are driven by the government or government entities, and the private sector is just 1%. Transport, energy, real estate and water management are the main sectors or where most of the investments are going in, and the sub-sectors under this are roads, railways, metros, renewable energy and non-renewable energy, as well as transmission lines, which account for about 60% of NIP investments.
More than 40% are energy, traditional sources of energy also form a large share. The challenge in all of this is the rate of completion, which is around 20%, ICRA said in that report, which was released about two months ago. Interestingly, while segments like roads have slowed down, newer segments have picked up, including some you may not have thought of.
I spoke with Ashish Modani, Group Head and Senior Vice President Infrastructure at ICRA, and asked him how he was describing these new trends and the shifts within infrastructure spend.
INTERVIEW TRANSCRIPT
Ashish Modani: ICRA has recently come out with a report on the Russian sector. So what we're looking at is traditional segments like roads, there's a certain level of pressure over there where the orders inflows have slowed down, especially from the Ministry of Road, Transport and Highway Central Government, road projects have slowed down. But what we are seeing is in the overall scheme of things, the other segments have gained momentum with urban infrastructure, like metro projects. You're talking about the renewal space that has seen extremely good traction in the last two years.
And another emerging segment is coming up with the data centre where a lot of investments are happening, and we'll continue to find good traction in the Indian infrastructure space. The traditional transportation infrastructure sectors like railways, airports and ports also continue to find good traction in the overall scheme of things. So what we have seen last year is that quarter one and quarter two have been sluggish, the pace has gained momentum in quarter three and quarter four has been a reasonably good quarter for the sector, while the overall year numbers are slightly weaker than what we anticipated earlier.
But still, in the last H2, the second half of the last fiscal has provided a good support to the overall year numbers.
Govindraj Ethiraj: You're saying that roads are the one segment that has relatively slowed down, whereas other public expenditures in areas like airports, metros have continued at the same pace or at a strong pace like before.
Ashish Modani: So road specifically, the government is pushing towards VOT toll projects. In the last five to seven years, what we have seen is the majority of the projects were reported to the EPC route or a hybrid NOT model. Now what the government is trying to push forward is to increase the private sector participation, they are trying to address some of the challenges which were raised by the various developers in the past, especially on the toll projects.
And they are expecting a good project awarding activity in the current year. So let's see how these things will pan out. Let's say for the last five years, the overall toll projects which are awarded were very, very minuscule.
Prior to 2024 and earlier five years, there were hardly any projects which were awarded. What we have seen is some good traction in the last year and in the current year, we are expecting around 10% of the projects awarded by a ministry to be in the VOT toll model. The overall progress has been slightly slow.
So we are not expecting a material jump in the near term. But what we are seeing is a gradual improvement in the overall toll project awarding in the current year.
Govindraj Ethiraj: So when we talk about areas like renewables and data centres, I'm guessing there's also a shift happening from, let's say, the high level of public expenditure we saw in the last few years into more private expenditure. At least that seems to be making up for the gap in this overall infraspend. Is that a fair point?
Ashish Modani: Yeah, you are absolutely right. So if you look at the budgetary support, largely it has been flattish for the roads and railways ministry. But if you look at the sectors like data centres and renewables of power, they are largely run by the private sector companies.
And that's where the good investments are happening. So that is a good piece because here the counterparties are also a reasonably strong counterpart. And the project cycle has also not been a four to five year.
Let's say the renewable projects get completed in a two year time frame. And the data centres project also gets completed in a three year time frame. So these are pretty short projects.
And in terms of the kind of investment that is required it is also significantly high.
Govindraj Ethiraj: So how or when did organisations like ICRA or I'm sure others begin to include data centres as infrastructure investments? Or was it there for a long time?
Ashish Modani: The data centre has been classified as infrastructure. They are already given infrastructure status by the ministry. And that's why when you're talking about my commentary and when you're talking about our research commentary, it is also including data centres right now.
In the next three years itself, we are talking about 1.5 to 1.8 lakh crores of investment in the data centre, which is quite significant.
Govindraj Ethiraj: Right. So if you were to look at the next six months or so, how are you seeing the two or three trends that you've talked about? One is the increased investments in areas like renewables and data centres, a lot of it driven by private.
The fact that roads are going to be steady, but we are not likely to see the kind of investment which we may have seen in the last few years. And some of the other areas that the government is investing in, including railways and so on. So what's the outlook like if you were to include all of this?
Ashish Modani: So let me divide this segment into three parts. One is on the roads. We are expecting that the order inflow has slowed down.
And let's say when the project gets awarded, it takes around six to nine months for the project to kickstart, right? So we are expecting a decline in the overall road construction space in the current year in FY206. Vis-a-vis that, in the renewal space, we are talking about 32 gigawatts of renewables getting installed in the current year in terms of data centres.
Again, a good investment that will be spanning out in the current year. So the road will take a backseat. Renewables and data centers will continue to grow at a good pace.
The other segments like metro, the urban infrastructure projects, the water treatment and the projects associated with the gel-driven mission will continue to see good traction in the current year. But that will be a steady state growth.
Govindraj Ethiraj: Okay. Last question, Ashish. So if you were to look at, let's say, the contribution of infrastructure to overall domestic growth, how do you see that changing between the last couple of years and let's say the year ahead?
Ashish Modani: See, the government has also realised that the kind of investment that infrastructure, infrastructure will, investment will have a multiplier impact on the overall GDP growth. And that has been acknowledged by all the stakeholders. That's why we have seen a sizable and significant improvement in budgetary outlay towards all the infrastructure space and the capex outlook and the budgetary support also.
So definitely we are expecting to continue to see a very healthy double-digit growth in the overall infra outlay going forward. One thing people talk about is they largely talk about the central government support. But there are states which are also coming up in the overall scheme of things.
Good investment is happening in the irrigation space. Some of the states like Maharashtra have awarded significant growth projects in the last one year. Now once this project starts, when it gets kicked in, this will also translate into a good revenue growth for various contractors who are involved in these projects.
Apart from the central government period, state capital outlay is also going to be a key driver for the overall infrastructure momentum in the coming few months.
Govindraj Ethiraj: Right. Ashish, thank you so much for joining me. Sure.
Ashish Modani: Thanks, Govind.
