The Markets Show Surprising Resilience
Indian markets are displaying unusually a high sense of resilience in the face of increasing tensions
On Episode 574 of The Core Report, financial journalist Govindraj Ethiraj talks to Indrani Bagchi, Chief Executive Officer, Ananta Centre as well as R.S. Sharma, the former Director General of the Unique Identification Authority of India (UIDAI), and current Chairperson of both ONDC and the Algorand India Advisory Board.
SHOW NOTES
(00:00) Stories of the Day
(00:50) The markets show surprising resilience
(04:03) Asian currencies are charting new and unexpected paths
(08:15) India and UK announce a much-delayed Free Trade Agreement, dramatic customs reductions in some products may be coming
(11:29) Build on Blockchain
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 Wednesday, the 7th of May and this is Govindraj Ethiraj, headquartered in Broadcasting and Streaming from Mumbai, India's financial capital.
Our top stories and themes.
The stock markets show surprising resilience in the face of uncertainty.
Asian currencies are charting new and unexpected paths.
India and the UK announced a much-delayed free trade agreement. Dramatic customs reductions in some products may be coming.
Indian apparel could be a major beneficiary of the new UK FTA.
Indian Market Resilience
Indian markets are displaying an unusually high sense of resilience in the face of increasing tensions. Despite the government asking several states to conduct mock drills on May 7th, suggesting a greater preparedness for armed conflict, there was no real impact on the benchmarks, reflecting of course strong flows but also a perception that any escalation would be of a limited nature. We will have a foreign affairs expert on this shortly.
The indices opened in the positive and then started sliding down. The Sensex was finally down 155 points to close at 80,641, while the NSE Nifty 50 was down 81 points to close at 24,379. The broader markets were hit more, with the Nifty mid-cap 100 and small-cap 100 falling about 2.2 and 2.5 percent each. A report in the Business Standards says that foreign institutional investors' long-shot ratio in index futures has now risen to its highest point since October 2024 at 0.94, which suggests that FIIs are the most bullish in seven months. This of course is also evident from the flows, but this is another indicator. The long-shot ratio, Business Standards explains, is basically the number of open positions on the buy side of trade in the index futures versus the number of open positions on the sell side of trade.
A ratio below 1 implies higher open positions on the sell side of trade and vice versa. Foreign portfolio investors have been net buyers in the NSE futures and options segment for the last five straight sessions, and in general, the Sensex and Nifty have now recovered close to 10% since their April lows, which does make it a sharp comeback. But the IPO markets are experiencing the cumulative impact of too many bad or overpriced IPOs, which typically or mostly juiced out all the demand in the last year or so.
Now, this is not an unexpected phenomenon, as it is how most market bull runs or runs have ended and are usually accompanied by a flood of IPOs, which ride the descent into a plateau where the current markets seem to be. At least two initial public offerings worth about $760 million are expected to be delayed, adding to a growing list of companies postponing plans for IPOs thanks to weak investor sentiment, according to Reuters. An electric scooter company called Ather Energy closed about 6% down, reversing gains after distinguishing a premium of 2% to its issue price.
As many as 58 companies with regulatory clearance have not launched their IPOs due to global market conditions, according to Reuters. The Indian rupee slipped on Tuesday, tracking small losses in regional currencies as well as dollar demand from foreign banks, though a general weakness in the dollar prevented a further fall, according to Reuters, which added that the rupee closed at Rs 84.43 against the dollar, down 0.2% for the day. The offshore Chinese yuan retreated from a near six-month high hit on Monday on signs that the country's central bank may be unwilling to allow rapid appreciation amidst sharp rallies seen in other Asian currencies, most prominently the Taiwanese dollar, which we spoke about yesterday.
The dollar index was down 0.1% at 99.7 and the dollar is down 8% against major peers this year on the back of all that heightened policy uncertainty, according to Reuters.
An Asian Crisis In Reverse
There's been a lot of focus on bonds and currencies, but not as much as the action that's picking up in or rather as a fallout of the new tariff regime that has been announced in the United States and the overall uncertainty in global trade and the United States policies in general. A wave of dollar selling in Asia is a dangerous sign for the dollar as the world's export powerhouses start to question a decades-long trend of investing their big trade surpluses in U.S. assets, according to Reuters. Now, while this story is playing out, the fact that this thought is even being entertained, let alone being acted upon, is a significant shift in global market outlook.
The Reuters report says that ripples from Friday and Monday's record rally in the Taiwanese dollar are now spreading outward, driving surges for currencies in Singapore, South Korea, Malaysia, China, and Hong Kong. And these moves are actually sounding a warning for the dollar because they suggest that money is moving into Asia at scale and that a key pillar for dollar support is wobbling. Yesterday, we did report that a surprising 10% two-day jump in Taiwanese currency even as Hong Kong dollars was testing a strong end of its peg, as Reuters says, and the Singapore dollar has hit its highest in more than a decade.
Louis Vincent Gave, a founding partner of Gavicle Research, said that to him it has a very sort of Asian crisis in reverse. He said this in a podcast referring to the speed of the currency moves. Vincent Gave has also appeared on The Core report in the past.
The history is interesting and useful to recall. A capital flight in 1997 and 98 led to currencies from Thailand to Indonesia and South Korea essentially falling through the floor and leading to economic ruin at that point. One result of all of this was that as these countries recovered, they began to accumulate dollars to protect themselves against a similar situation in future.
Gavicle Gave said that since the Asian crisis, Asian savings have not only been massive but they've had this tendency to be redeployed into U.S. treasuries and now all of a sudden that trade no longer looks like the one-way slam dunk that it's been for so long. Now obviously this break has been triggered by U.S. President Donald Trump's aggressive tariffs which has rattled investor confidence in the dollar and also the uncertainty that has come with it given the fact that there is no consistent policy on tariffs. All of this has meant that the flow of trade dollars into U.S. assets has been appended. Asia's piles of dollars sit in China, South Korea, Taiwan and Singapore, which combined number in the trillions, says Reuters. In China alone, foreign currency deposits in banks, mostly dollars and mostly held by exporters, were close to $960 billion at the end of March, the highest in nearly three years, or that's almost a trillion dollars. There are signs that the dollar view is shifting from all corners.
Goldman Sachs said in a note on Tuesday, saying that investor clients had recently flipped from short yuan positions to long positions or they were shorting the U.S. expecting further weakness. Reuters also reported Hong Kong's de facto central bank saying on Monday that it's been reducing duration in its U.S. treasury holdings and diversifying currency exposure into non-U.S. assets. The other somewhat startling view quoted by Reuters was from Arindam Sandilya, a Singapore-based global forex strategist at JPMorgan Chase who said, again in a podcast, that the large and synchronised nature of currency appreciation is fuelling stock of some sort of currency accord amongst the region's central banks, referring to Asia.
Bloomberg reported that Taiwan's dollar led gains amongst 16 major peers tracked by them, jumping the most as it did in more than three decades on an intraday basis. The yen also rallied about 0.9 percent, leading the advance amongst the group of 10, while the euro was above the 1.13 dollar mark. The larger question, I guess, for someone sitting here is what does this Taiwanese currency movement mean?
Well, the global head of forex at Jefferies told Bloomberg that the rally in Taiwan's currency has the potential to spill over to the rest of the developing world or it portends some sort of currency agreement between the United States and China or the U.S. and the region that will result in all Asian currencies strengthening.
India And UK Sign A Deal
Prime Minister Narendra Modi on Tuesday said India and the United Kingdom had successfully concluded an ambitious and mutually beneficial free trade agreement along with a double taxation avoidance convention. Prime Minister Modi said that he was delighted to speak with his friend, Prime Minister Kier Starmer, and in a historic milestone, India and the UK have successfully concluded an ambitious and mutually beneficial free trade agreement along with a double contribution convention. He said and added that he looked forward to welcoming PM Starmer to India soon.
For Britain, a trade deal with India is crucial as it tries to recalibrate its post-Brexit trade relationship with the world in general. India is also the UK's second largest source of foreign direct investment, in case you knew that or didn't know that. For India, this is a major FTA with the fourth largest export market and will obviously help ease out things somewhat.
Total trade between the UK and India stood at about 21 billion dollars. In the last year, exports were at about 13 billion dollars, up 13 percent, and imports were about 8.4 billion dollars and down about 6.1 percent. Prabhu Damodaran, convener of the Coimbatore-based Indian Texproneos Federation, which represents about 7 billion dollars of combined sales of apparel, told me the India-UK FTA could significantly boost India's apparel exports.
The context he gave was that the UK imports about 19 billion dollars in apparel annually. Of this, China holds 21 percent share and Bangladesh has 18 percent share, while India is between 5 and 5.5 percent at about 1 billion dollars. India faces import duties of about 11 to 12 percent.
Now, if India doubles its share to 10 percent, it would mean over 1 billion dollars in additional export volumes, according to Damodaran. According to him, even with a duty disadvantage, India is already a preferred sourcing destination for UK buyers, and if the FTA includes clear duty concessions for textiles and apparel, then India's competitiveness will improve, especially against Bangladesh, enabling India to capture more share from both Bangladesh and China, he said. A Reuters report says India will slash tariffs on 90 percent of British products sold in India, from whisky and medical devices to machinery and lamb, with 85 percent of those becoming tariff-free within a decade.
Whisky and gin tariffs will be halved from 150 to 75 percent before falling to 40 percent by the 10th year of the deal, helping Britain's Scotch whisky industry and making it cheaper in India, which is also the world's largest whisky market. India will also cut automotive tariffs to 10 percent from over 100 percent currently. Other British goods which could face lower tariffs include cosmetics, aerospace, lamb, medical devices, salmon, electrical machinery, soft drinks, chocolate, and biscuits, according to that Reuters report.
Britain has also agreed to reduce tariffs on some products which were relatively lower than India, but leaving about 99 percent of Indian exports to Britain facing zero duties. It will also remove a tariff on textile imports from India, as we just pointed out, which will help India's apparel industry and it will open up export opportunities further for sectors like marine products, leather, sports goods, toys, gems, and jewellery, engineering goods, and auto parts.
Blockchain and Financial Assets
Last week on Build on Blockchain, we explored how Aadhaar, DigiLocker, and blockchain can come together to build secure, decentralised identity systems.
With Aadhaar as the foundation and DigiLocker offering verified documents, blockchain could add and will add user control and transparency. This week, we're joined by Aarish Sharma, the former Director General of the Unique Identification Authority of India, and also until recently, Chairperson of the ONDC. He's also the Chairperson of the Algorand India Advisory Board.
Dr. Sharma, who has worked on the foundations of India's digital infrastructure rollout, including the India Stack, joins me to talk about how blockchain could enhance trust transparency at scale. I began by asking him to take us through how blockchain works in the context of more security for financial transactions.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: Finance is the other use case and there are so many linked, I guess, solutions and problems to solve. What, according to you, in the finance ecosystem, whether it's KYC or others is, let's say, a problem that we need to, where we could apply blockchain solutions?
R S Sharma: Yeah, because basically what can happen is that the credentialing, the data credentialing is one important issue. So therefore, what I can do, I can basically put my data credential part on the blockchain and then easily, seamlessly share that. I mean, it's not, I don't depend on an institution to enable doing that, but I can myself, once public blockchain is allowed, thereafter, I'm allowed to put my data onto that blockchain and that data can be seamless, I can share it.
So now this can happen in electronic KYC because KYC is a very important topic. What is happening is that every bank is asking me to do reKYC and every fractured way of doing KYC. Despite the fact that India has had digital KYC being done since last about 10, 11 years, despite that we have been mutual funds of different KYC, the banks have different KYCs.
There is an attempt to make the central KYC and KRA, as they say, the common KYC, but it's still not in a great way. Blockchain could actually facilitate that whereby I don't have to depend on any institution. I can just simply, you know, enable that access to KYC.
So some banks asked me, all right, Mr. Sharma, we want your KYC. I could just give them a consent token saying to fetch my KYC from this place. And he's able to, he or she, the bank is able to do that.
So this is one of the other applications of blockchain. How do you see DigiLocker in all of this? DigiLocker, as you know, DigiLocker is essentially like a, what can happen is that DigiLocker, for example, the documents themselves need not be stored in the DigiLocker.
DigiLocker can become just the point where what could happen is that there are n number of documents. The hash value of those documents are actually put in the DigiLocker. Now, how they are stored in DigiLocker, whether it is a blockchain or whether it is a database in a DigiLocker of the hash values, this is something, an architectural issue and that can happen.
But the basic principle of blockchain which means that immutability can be achieved using the blockchain technology in the DigiLocker.
Govindraj Ethiraj: I was thinking, for example, if it's my, let's say, college leaving certificate or the degree certificate, you don't actually need to upload the degree certificate, which you have to now.
R S Sharma: Right. Absolutely. Absolutely.
What you can do essentially is that if there is a system of blockchain, then what you can do, the DigiLocker, you can just hash, create the hash value of that and put it on the blockchain. That becomes the place where you can share. So, for example, let me put it this way, in the health space, again, hospitals are creating these records, right?
Patient records. Now, if they somehow put it somewhere, wherever they want to put it, that record is not really the issue. If they can just put the hash value of these records in a blockchain, that itself becomes a very good way of data exchange, or the certificate exchange.
Similarly, the DigiLocker part, also the same thing can happen, whereby it becomes easy for anybody to just share the data.
Decoding The India-Pakistan Tensions
The Ministry of Home Affairs on Monday evening asked several states to conduct mock drills on May 7th, that's today, amidst rising tension with Pakistan in the wake of the Pahalgam terrorist attacks of April 22nd. The drills would include air raid warning sirens, crash blackout measures and training civilians to protect themselves in the event of an attack, among other things, and they would be organised across 244 categorised civil defence districts in the country. To get a sense on how India is approaching this situation currently, and also to understand what would drive India's response going forward, I reached out to Indrani Bagchi, CEO of Foreign Affairs and Leadership Think Tank, Ananta Aspen, also columnist with the Times of India, and I began by asking her how she was reading things now, but also to give us a sense on how India has responded to such threats and actions in the past.
INTERVIEW TRANSCRIPT
Indrani Bagchi: Basically lined up the Indian army along the border. This was after the parliament attack on 13th of December 2001. Operation Parakram, which was the sort of forward deployed Indian army, that sort of closed down, shall we say people retreated after about seven, eight months.
But then four years later, we saw a series of terror attacks all the way until the 2008 Mumbai attacks. Again, the response was mainly diplomatic. There was no military response in that sense.
Move forward to 2015, 2016, the Pathankot attack, and then the Uri. For the first time, India turned its response into a military response. So there was a military response to the Uri attack in 2016, where Indian soldiers actually went across the line of control, demolished some of the camps.
Cut to 2019, after Pulwama, we had the Palakot strike, more or less, I mean, there was a ceasefire since 21. So we've been reasonably sort of, shall we say, unused to a military attack. That's been the trajectory of the thing so far.
But the evolution has been from a diplomatic to a military response. This time, I think we are again looking at a military response.
Govindraj Ethiraj: That answers partly the question that I was going to ask. But really, if you say it's going to be a military response, and you're saying the trajectory has now clearly moved into military responses, what kind could it be? And what is the thinking again, or what is the kind of thinking that would define our response?
Indrani Bagchi: See, a couple of things. One is they've taken all the non-kinetic responses. So I mean, we barely have a relationship with Pakistan, even before this attack.
Whatever little there was, has now been stopped. I would say the most damaging response from non-kinetic response from India so far has been the suspension of the Indus waters treaty. Most people don't quite get what that might mean.
And you can't actually see that happening right now. It will be devastating for Pakistan as we go along. Give it six months, give it eight months, give it a year.
It's a long term damage that Pakistan will have to live with. And that damage will be in many, many different ways. But that is still not missiles flying at each other.
So what's the kind of thinking in Delhi? From all the diplomatic conversations that the minister, foreign minister and the prime minister has been having with their interlocutors, they have basically readied everybody that there will be a military response, whether it is a multiple strike response or a single response, which does not merit a retaliation. Because one of the things that we don't want, no Indian certainly wants, is a full scale war.
Nobody wants that. I don't think even the government wants that. But they do want to show a muscular response.
And there is space in the world to accommodate that response. What we don't know now, there are two things here. One is that India would be keen to avoid the mistakes of Balakot.
And there were mistakes, very clear and obvious mistakes. So whatever they are planning, and I think they'll be waiting it out to sort of let tempers come down, etc. before launching any such thing.
Also, a launch of this variety, or a military response of this variety to a nuclear armed neighbour requires a lot of planning. And I don't expect it to happen very soon. Although I will probably be proved wrong, because nobody really knows.
But that's generally the thinking in Delhi. They want to keep the level of the war down, as in a restrained attack, preparing for a restrained response.
Govindraj Ethiraj: You mentioned mistakes. So what are the mistakes that were made then in Balakot, which people should take note of?
Indrani Bagchi: It was literally India's word versus their word. India basically said, we've killed 180-200 people. Pakistan said nobody has been killed.
Now we had nothing to show that people had been killed. That onus of display of the damage. I mean, you can see what Netanyahu is doing in Gaza.
It's all filmed. It's all in real time. That's reality TV.
That wasn't there. Then we had this dogfight with the Pakistanis. We had ancient aircraft.
We had a dogfight. Abhinandan fell on the other side. We shot down our own chopper on this side.
There was some neatness that was lacking.
Govindraj Ethiraj: Now to the question that really listeners and viewers, I guess, want to know. How should businesses and markets be looking at this phase? And how long could it last?
And is there an outcome that one would know of or could project or predict?
Indrani Bagchi: I don't think we are at a stage where all bets are off. I don't think we are at that stage. I'm pretty certain this government does not want to lose some of the economic momentum that India has.
So they would be calibrating their response to ensure that damage, if any, to the economy is minimised. So I don't see any panic kind of activity among investors yet. Although tomorrow there is a security drill.
I'm not sure how that will be received by everybody. But I think everybody is in a wait and watch mode.
Govindraj Ethiraj: Indrani, thank you so much for joining me.
