The Markets Wait For The Tariff Talks To End
Following a subdued session, Indian equity markets settled on a flat note with a positive bias on Tuesday
On Episode 621 of The Core Report, financial journalist Govindraj Ethiraj talks to Amit Pabari, Managing Director at CR Forex. We also feature an excerpt from our upcoming interview with Jerry Chu, CEO at Lofty AI, part of our Build on Blockchain Series.
SHOW NOTES
(00:00) Stories of the Day
(01:09) The markets wait for the tariff talks to end with optimism and hope
(01:48) Why valuations of consumer facing companies are stretched beyond belief
(05:55) India’s GST numbers come in lower
(06:30) India’s factory output is up
(07:30) The rupee closed higher but why is it lagging Asian peers when the dollar is still weak.
(15:57) India has a Rs 100,000 crore R&D budget set aside
(18:09) 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 2nd of July, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, as we walk into the second half of the year.
Our top stories and themes,
The markets wait for tariff talks to end with optimism and hope.
India's factory output is up.
Why valuations of consumer-facing companies are stretched beyond belief, according to one brokerage.
The rupee closed higher, but why is it lagging Asian peers when the dollar is still weak?
India now has a 100,000 crore rupee research and development budget that's been set aside.
India's goods and services tax numbers come in lower.
And finally, how we could buy fractionalised real estate, or really, how many investors could invest in one piece of property.
The Markets Stand By
It was a subdued session of sorts with the markets closing on a somewhat flat note, but yet in the positive, as they stood by to see what would come out of the trade talks in the United States.
So after hitting a high of 83,874, the Sensex was up, or rather closed up 90 points at 83,697. The NSE Nifty 50 was up about 24 points to close at 25,541. The Nifty Mid Cap 100 and Nifty Small Cap 100 indices were pretty flat too.
Now we've been discussing valuations in Indian markets, and that's as a source of concern to at least institutional investors. A somewhat hard-hitting report by Kotak Institutional Equities just out says that, valuations of most Indian consumer-facing companies, including autos, paints, quick-service restaurants, and staples that includes fast-moving consumer goods sectors are unsustainable and fail all critical valuation tests. The analyst who wrote the report warned that the market's reliance on hope for a turnaround cannot prop up these inflated prices forever.
The report also divides this into three broad valuation tests, which I guess can extend into any sector. First, it looks at discounted cashflow models, which says a fair price-to-earnings ratio of between 13 and 21 times for companies with 4 to 6% perpetual growth, which is what we're seeing in some of these companies. Whereas the companies actually are at about 12 to 65 times earnings, and staples, that's discretionary, and staples are at 42 to 64 times.
Similarly, relative to history too, valuations are high, particularly if you were to compare to pre-pandemic levels, says the report, which also goes into considerable detail. It also draws a comparison with international peers and says that even compared to them, Indian valuations are high. Indian companies trade at massive premiums despite similar or lower near-term earnings growth and comparable five-year historical growth in many categories.
It says examples include companies like Asian Paints at 51 times versus Sherwin-Williams, that's the global one, at 29 times, Nestle India at 69 times, Nestle SA, that's the global parent, at 19 times, Hindustan Unilever, about three times its parent Unilever. Even Indian auto companies like Maruti and Mahindra do much better than global auto giants like Toyota, Mercedes, and even Chinese giant and fast-growing BYD. Companies like Tesla at 80 price-to-earnings are an exception, but then that is turning into a humanoid robot company, or as we understand.
So the positive gap between MNCs and their Indian subsidiaries, of course, has been highlighted and discussed, including in the core report in the past, and Indian subsidiaries are known to outperform their parentage. But Kodak is, of course, questioning these valuations because of growth prospects here and saying that the prospects are not as bright and the chances of recovery are low, and therefore these valuations are high and investors should therefore be cautious. On the other hand, we did discuss the phenomenal supply that we are seeing in markets globally as well as in India, including with analyst Ajay Bagga, and markets, of course, may not care for these things like valuations right now.
Meanwhile, the US and India are nearing a deal to lower tariffs on American imports here and to help India avoid levies imposed by the Trump administration going up sharply next week, according to Treasury Secretary Scott Besant, who spoke to Fox News, and he said that we're very close with India in response to a question about progress on trade negotiations, as per a Reuters report, which, of course, we know that we are close and we also broadly know what is holding it back from India's side, that is agriculture and dairy products. And we've now pretty much publicly said that there are red lines there. However, the July 9th self-imposed deadline of the Trump administration and the word is that several deals would have been lined up by then.
We, of course, going by the past, we'll have to wait and see. Meanwhile, a small report on gold, local brokerage Motilal Oswal is sceptical of further upsides and says that it needs fresh, significant catalysts and points out that we've seen gains of over 30 percent and over the past 25 years, Comex Gold has never achieved more than 32 percent returns in a single year, the brokerage firm said in a recent report. On the other hand, as we pointed out yesterday, Goldman Sachs at this point is saying that gold will still hit four thousand dollars an ounce by next year.
Morgan Stanley over three thousand eight hundred dollars by the end of the year. Citigroup is the only relative contrarian projecting prices below three thousand dollars per ounce next year. Gold is currently around three thousand three hundred and fifty dollars, give or take, per ounce.
GST Numbers Are Down
The goods and service tax collections for June were about 1.85 trillion rupees or 185,000 crore rupees, which is a 6.2 percent year on year rise, according to data compiled by Reuters. This, of course, comes on the back of the overall numbers that were released yesterday, which also sounded much better. June collections are down compared to May, when the number was about 2.01 trillion rupees or 201,000 crores.
GST revenue had touched a record high of 237,000 crore rupees or 2.37 trillion rupees in April.
Factory Output Is Up
It is, of course, tough to make out sometimes which way things are actually going, because we do see a combination of good macro signals and sometimes weak ones and sometimes, of course, numbers which fluctuate.
For now, India's manufacturing activity has now accelerated to a 14-month high in June, thanks to a substantial rise in international sales, which boosted output and sparked record-breaking hiring, according to the HSBC India Manufacturing Purchasing Manager's Index, compiled by S&P Global, quoted by Reuters. HSBC said that robust end-demand fuelled expansions in output, new orders and job creation, and factory output grew at its fastest pace since April last year, thanks to strong demand, while incoming new orders increased at the steepest rate in nearly a year, with international demand providing significant momentum. Export orders were also the third-highest growth or saw the third-highest growth rate since data collection began in 2005, March.
Where Is The Rupee Going?
So the dollar is off to its worst start to a year in more than half a century. The United States dollar has weakened more than 10% over the past six months when compared with a basket of currencies from its major trading partners. And the last time the dollar weakened so much at the start of the year was in 1973, when the United States had made a big shift that ended the linking of the dollar to the price of gold, according to a comprehensive report in the New York Times.
Back home, the rupee strengthened on Tuesday, alongside most Asian peers, and closed at Rs. 85.52 per US dollar, up about 0.3% for the day. While the rupee did strengthen on the day, it was not able to hold on to gains above the Rs.
85.50 mark. So the rupee is doing better in the last month and the quarter, but still lags Asian peers, including the Chinese yuan and the Korean yuan. So why is this happening? And what does this tell us about the outlook for the rupee? I reached out to Amit Babari of CR Forex and I began by asking him what is happening with the rupees flows.
INTERVIEW TRANSCRIPT
Amit Pabari: Recently, 18 days back, the RBI released its monthly bulletin. In the monthly bulletin, there is one beautiful piece of information, which is how much forward position does RBI have or is having. So, as on 30th April 2025, net sell position in RBI forward book is close to $72 billion.
Now, this $72 billion, let us break that or let us decode that. So, currently we are having a forex reserve close to $700 billion. Inside that, $589 billion is foreign currency assets.
And then we have gold and we have other aspects. So, out of $589 billion, 70-80% is in dollars. The remaining 20-30% is in different currencies.
So, approximately $470 billion dollar reserves we have. Now, if we are net sold off by $72 billion, which means that 15% of our total reserves is on the selling side. Now, why are we in such a position?
We have to go back to history. In September 2024, this $72 billion net sold position was approximately minus $16 billion. September to October, it increased drastically.
Why? Because during that time, the dollar index went up from September 2024 to January 2025. The dollar index moved from 99 to 110.
Which means that dollar got stronger by 11-12%. During that time, Shaktikanta Das, in order to protect the volatility of rupee, what he did? He was selling forwards.
So, at one point of time, our forward was minus $89 billion dollars, which has come down to minus 72 today. So, what has happened? That is the main reason why other Asian currencies, if they are appreciating by 3%, they are appreciating by 1%.
Why? This is the reason, as and when the flow is coming, RBI is trying to square off those positions which were held with them. So, $89 becomes $80, $80 becomes $72 billion dollars.
That is the fundamental reason why we are not getting stronger as compared to other Asian currencies. And let me give you an insight also. We did not get weaker also at that point of time, when other currencies got weaker, much higher than us.
So, basically, what RBI is doing? RBI is doing a fantastic job. Manage the volatility, boss.
Keep the volatility low. Once you keep the volatility low, then you are able to attract FII, you are able to attract FDI. That's the broader vision.
So, he is able to do it very well. They are powerful, they are smart, they are up to date. They know exactly when they have to sell and exactly when they have to buy.
That is the first broader reason. Second, what has happened in the month of June? RBI reduced the interest rate by 50 basis points.
So, basically, what has happened because of that? Interest rate differential between US and India have reduced drastically. And we have seen some amount of money going out from the bond market.
So, primarily, the first reason was more valuable. Second is a subset point. Because of these two reasons, we are not appreciating as much as other currencies like Japanese Yen or Chinese Yen.
Govindraj Ethiraj: Right. So, if you're saying that the forward positions are still high, does that mean that the outlook also, therefore, is such that we will not see much appreciation or very steady appreciation, if so?
Amit Pabari: If I become Reserve Bank of India's governor, then I will ensure that first I will clear off this $72 billion. Then only I will allow the Rupee to appreciate. So, basically, we can see that the pace of appreciation will be slow for some more time.
Govindraj Ethiraj: Okay. So, let me ask the other question. So, the dollar is weak and continues to be weak.
So, how do you see that in terms of interplay? Assuming, let's say if the dollar becomes weaker or the pace at which its weakening accelerates, as we've seen in the last couple of days, quite literally, there's pressure on the US Federal Reserve for change. There's still a lot of concern about where the tariff deals will land.
So, the dollar could become much weaker. So, do you see that having any further impact on the Rupee?
Amit Pabari: So, I will answer that question in two parts. First, the dollar index is currently trading near 97. If someone asks me today, what is your favourite view today?
I will say the dollar index should take support at the current level and bounce back again towards 101. You know, last time when we met, at that point of time, the dollar was trading near 105, 106. And we said that the dollar can go below 99 kind of a level and exactly the same has happened.
Now, I think the short dollar is an overcrowded trade. At this point of time, I will say, let me take a break on the overcrowded trade. Make a contrarian view and say that the dollar index can bounce back towards 100 and 101 kind of a level.
That's the view. Now, what will happen to Rupee? I think a broader range of Rupee can be AP for AP will act as a strong support.
AP for AP, AP5 will act as a strong support. And probably the Rupee can again move back towards 87, 87, 20 kinds of levels. As I said earlier in the interview that RBI is doing a fantastic job.
They know how to manage the currency and they have been able to do it very well. So probably if Rupee goes near 87, 87, 20 kinds of a level, they probably won't mind selling a few billion dollars at the peak level. And again, probably come and buy near 85, 85 and a half kind of a level.
Govindraj Ethiraj: Right. Last question, Amit. There's been a lot of action in the Euro and the pound against the dollar.
And we've seen how the Euro has obviously strengthened, which I guess it's not been for a while. Is that something that we should be looking at as well from an India point of view?
Amit Pabari: You know, to answer this question, the question arises, is it whether the Euro got strengthened because of its own merit or it got strengthened because the US dollar got weaker? We all know that the Euro got strengthened because the dollar got weaker because of its problems like debt, term tariff policy and all. In order to predict dollar-rupee momentum, we need to see what the dollar index is doing, what crude oil is doing, and what the RBI is doing.
These are the major points which are going to impact us. Euro is a derivative of the dollar, so we don't pay attention to it. These three big factors are the dollar index, crude oil and the RBI.
These are the main factors which can drive or which can predict, which can help us to predict dollar-rupee momentum.
Govindraj Ethiraj: Amit, we've run out of time. Thank you so much for joining us.
Amit Pabari: Thank you. Pleasure is mine.
India's R&D Budget
If there was one lesson from all that we've seen and experienced this year so far, including America's trade aggression and China's trends in innovation, then it is our relative lack of investment in research and development as a country, including private business, a subject we return to often on the core report. And perhaps a lesson has been learned. The union cabinet in India, that is, approved a one trillion rupee or 100,000 crore rupee corpus for the research, development and innovation scheme, which hopes to spur private sector investment in strategic and high growth sectors through long term low cost funding.
The fund was originally announced in the July budget for 25-26 by the finance minister. And at that time, 20,000 crore rupees had been earmarked to the Department of Science and Technology for this. The government said in a statement reported by Business Standard that recognising the critical role that the private sector plays in driving innovation and commercialising research, the RDI scheme aims to provide long term financing or refinancing with long tenors at low or nil interest rates and is designed to address gaps in private sector research funding by offering growth and risk capital to sunrise sectors, industries with high growth potential, such as deep tech, AI and green technologies.
It will also finance technology acquisition of strategic importance, which could help India strengthen its domestic capabilities in key areas of global competition, according to that statement.
And meanwhile the union cabinet on Tuesday approved the Employment Linked Incentive or ELI scheme which aims to support job creation, improve employability and strengthen social security across sectors with a specific focus on manufacturing. Now this scheme was announced as a part of the union budget 24-25 and will incentivise the generation of over 35 million jobs between August 25 and July 27 and aims to spend about 99,400 crores which is about 100,000 crore rupees.
Of the total beneficiaries around 19 million employees are expected to be first-time employees entering the formal workforce according to a statement from the cabinet.
Build On Blockchain
And coming up now, our Wednesday special on Build on Blockchain. And today we go more specifically into real estate and fractional real estate, something that you may have heard of, but how technology could reshape the way we own and invest in real estate, even if the property sizes are much larger, but each of us want to have a stake.
So traditionally, property ownership, as you know, is expensive, complex and out of reach for most. But what if you could buy a piece of the building or land just as easily as buying stock in a company? So there is a company which, among others, is working on this. It's called Lofty, and it's built on a platform using blockchain to fractionalise real estate, making it accessible, liquid and transparent.
I'm now joined by Jerry Chu, CEO and co-founder of Lofty, based out of the United States and a leading voice in the effort to democratise property ownership through decentralised tools.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: Jerry, thank you so much for joining us today. So tell us about Lofty. What does it do in the context of tokenized real estate?
Why did you think of setting up this venture? What was the problem that you were trying to solve or are trying to solve?
Jerry Chu: Yeah, absolutely. And thanks for having me here. So Lofty, we're basically building the world's first online real estate exchange.
So for short, we say we're trying to build a NASDAQ for real estate, right? And so the analogous here is essentially the equities market. So stocks, if you think about that.
So traditionally, stocks long, long, long time ago were originally traded in paper format. So there were physical stock certificates. And Wall Street was actually famous because there used to be a tree on Wall Street where all the stockbrokers would hang out and basically yell at each other of, hey, who wants these certificates?
And that's how the exchange, quote unquote, was set up originally. So that's actually very similar to how real estate is still done today, right? Typically, there's a lot of paperwork.
You're dealing with governments, intermediaries, you're dealing with brokers and agents. But over the years, as technology evolved, the stock market evolved with it. And so now, obviously, you don't have those people with physical certificates yelling at each other anymore.
Almost everything is digitized and routed in a digital fashion. And that's where these exchanges came from. So the NASDAQ is a great example of that.
And so for some reason, real estate hasn't really caught up with technology yet. And so our belief is that the same efficiencies that you would see and the same benefits that you would see from physical stocks trading in a digital fashion, you would see the exact same results and benefits if real estate were traded and transacted in the same way. And realistically, you could probably see better results, better efficiencies, better price discovery for everyone.
So that is a problem we're trying to solve and tackle here at Lofty.
Govindraj Ethiraj: Right. So walk us through the process of conversion. So, for example, in stocks, when we went from paper to paperless trading, I mean, we called it dematerialization.
And then there was a certain process by which the physical paper disappeared and it became just like a bank account. Bank accounts used to be physical. Then it's now all digital and online.
That path is somewhat familiar to most people. How does it work in this case?
Jerry Chu: Yeah, absolutely. That's a great question. And so this is kind of where the underlying technology of the blockchain comes in.
And, you know, when people hear that word like blockchain is unfortunately over the last few years filled with a lot of crazy stuff, sometimes outright scams, sometimes things that aren't considered very serious by traditional financial players. But the underlying technology really is robust and there's a lot of actual use cases for it. So in our case, the way it works is that the underlying deed or, you know, the ownership as recognized by the government is actually owned and held by a very special type of company, a limited liability company here in the United States.
And even within that, there's different types of limited liability companies. In this case, it's known as a DAO LLC, which means that on paper, the government recognizes that there is no single owner or manager of this company, and instead it is managed by a smart contract on the blockchain. And in this case, that smart contract records the digital tokens that represent ownership in this underlying company.
Right. So you essentially own the asset by proxy. So the company will own the property's deed.
And let's say you own 50 percent of the tokens or the shares of this company. Well, then by proxy, you own 50 percent of the property. Right.
And you can own any number. You can own 0.1 percent. You can own 2 percent, 5 percent, whatever, you know, the flexibility that's created is like whatever you want to index into this asset.
And this is how the chain of ownership is structured. And that company doesn't own anything else. It doesn't do anything else.
The only asset it ever holds is this underlying real estate property. So through this process, we are able to, quote unquote, tokenize a physical real estate property so that its ownership can be recorded and traded on the blockchain. And that's how we digitize this.
Govindraj Ethiraj: So sort of as a sort of closing question, how do you see the path ahead for not the underlying industry, which is real estate or exotic cars or whatever, but the growth of tokenization and what you feel one needs to be done, if so, to grow that part of it, as to use that as the lubricant to enable more transactions, enable more conversion of physical assets into distributable assets and so on?
Jerry Chu: Yeah, absolutely. And I think that's a great final question. I think we just need to sort of take a note from existing or like previous transformative technologies that have come before and kind of reshaped society and look at the adoption curve and how people ended up sort of adopting to that technology.
Right. I think blockchain specifically and crypto has too much of a focus on the technology, which is honestly quite interesting, but also very advanced. There's a lot of like cryptography and things involved, like, you know, even from a technical perspective, most people would have no understanding of any of this stuff.
Right. But if you want to draw sort of an analogy, like even the Internet, you know, how many everyday person actually understands fundamentally how the Internet works? Right.
They probably don't. They don't really understand the difference between, you know, HTTP versus HTTPS. But the interesting thing is that, you know, almost everyone's on the Internet today.
Right. And so I think from a technology shift perspective, one day, absolutely almost everything that is currently illiquid, like real estate or cars, eventually will be sort of tokenized and transact in a digital format. But I don't think the customers and people involved really need to understand how any of that works.
You know, imagine, you know, going up to a car showroom or a museum and be like, hey, you know, this is a cool car. Take out a phone, scan this QR code and you can be an owner in it and you benefit from the ownership and the price appreciation. People don't really care how it's done underneath.
They just go, oh, well, that's really cool. And if they want to do that, they'll do it. And so it really is about abstracting the core technology and really surfacing more of the benefits.
People clearly use the Internet for very obvious reasons. It benefits them. It's extremely useful.
And that's what we as an industry just need to do, make tokenization useful to people and then stop talking about tokenization and stop using the word. So I really think the entire industry just needs to take a page out of previous platform shifts or whether financial instruments or like actual core technology and just go, well, how did people market that? How did that become mainstream?
And take a note out of that and kind of stay out of their own way, essentially.
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This segment is part of our ongoing special coverage, Build on Blockchain, brought to you and supported by Algorand.
