Trump-Jinping Meet After Six Years Won’t Really Help Markets
The US cut tariffs on China related to fentanyl to 10% from 20% and this reduces the overall rate on Chinese goods into the United States to around 47%
On Episode 714 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajit Ranade, former Group Exec President & Chief Economist at Aditya Birla Group and now Senior Fellow, Pune International Centre as well as ttt, Head - Fixed Income at Kotak Mahindra Asset Management Company.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Why The Trump-Jinping meet after six years won’t really help markets
(05:24) Why US markets are weak
(06:30) Decoding the Federal Reserve’s rate cuts
(12:50) How more Indians are borrowing money at record levels for consumption and the dangers that come with it
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.
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Good morning, it's Friday the 31st of October, the last day of the month and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes…
Why the Trump-Xi Jinping meet after six years won't really help markets.
The US markets turn weak, why is that happening?
Decoding the Federal Reserve's rate cuts on Wednesday.
How more Indians are borrowing money at record levels for consumption and the dangers that come with it.
The US-China Mix
You can go by the news reports of the first meeting between President Donald Trump and Chinese leader Xi Jinping in six years, which I'll come to, or watch the official video from yesterday in which Donald Trump does all the talking, even patting Xi on the back as he often does, and Xi Jinping's expression is, well, expressionless, giving absolutely nothing away.
Now the Chinese like everything pre-scripted, as do to a fair extent Indians. Trump of course thrives on these unscripted moments and not the most conducive starting point or maybe halfway point for negotiations or discussions. So it was awkward, it appears, and thus in my estimation not a very encouraging sign of things to come.
What it does mean is that if the two sides, that's the US and China, start firing at each other again, mayhem will resume or continue in global trade as it is right now. Now the latest agreement does include a reduction in stiff US tariffs on Chinese goods in exchange for a pledge by China to crack down on chemicals used to produce fentanyl. China has agreed to pause for one year the sweeping export controls on rare earths, which it announced on October 9th, which kicked off the current fracas.
The US cut tariffs on China related to fentanyl to 10% from 20% previously and importantly this reduces the overall rate on Chinese goods into the United States to around 47%. Trump said in a report in Wall Street Journal that Beijing has promised to buy tremendous amounts of American soya beans but the agreement does little to address the fundamental divergence between the two superpowers whose economies are decoupling in many sectors and are racing for supremacy in areas like artificial intelligence, according to Wall Street Journals. Trump was of course quite effusive about that meeting and he said that on a scale of 0 to 10, with 10 being the best, he would say that the meeting was at a 12.
Meanwhile, according to the Wall Street Journal report, China has already ordered several soya bean cargoes from the United States grain handlers earlier this week, helping of course American farmers who've been in a panic this harvest season as trade tensions caused Chinese buyers to source the crop from elsewhere. And the drop in Chinese purchases has also hit Trump's rural political base, says the Wall Street Journal, and US soya bean farmers had called on the administration for help as they dealt with billions of dollars in lost sales to the world's largest soya bean importer being China. Now the question of course is that if this agreement lowers tensions between the US and China, the straight answer is yes, going by what we saw on Thursday, but we do not know for how long and in what form.
Trump is known to change his mind and President Xi's expression, well, gave away nothing in any case. If there is tension with China, quite likely there will be tension elsewhere too. India of course, who could have been but was not really present in and around Trump during his Asia visit, will have to wait a little longer for a potential agreement, which of course we're told is very close to being finalized.
On the other hand, with a lower tariff than before, China is definitely more competitive than it was last week in sending goods to America and of course that makes it more competitive in relation to other countries who are also exporting into America, including for similar goods like India. Now markets of course are stretched right now and going by the past, regaining a peak is usually when there is selling pressure every time the markets attempt to gain that peak or reach that peak. Remember the benchmark indices have gained over 5% so far this month and we are of course near lifetime highs that we last saw in September 2024.
On Thursday, the Sensex and Nifty were lower following those weak cues after the US Federal Reserve cut interest rates as expected, but said that it may not be the last cut or rather it may be the last cut of 2025, which means no more cuts in December as some were expecting. The Sensex was down 592 points to 84,404. The Nifty 50 was down 176 points to 25,877.
In the broader markets, the Nifty mid-cap was up slightly while the Nifty small-cap 100 was down also very slightly. The rupee meanwhile fell to its lowest in two weeks on Thursday as outflows worsened the hit from a hawkish tilt in Federal Reserve policy which sent the dollar and US Treasury yields higher according to Reuters, which added that the rupee closed at Rs.88.69 against the dollar down 0.6% for the day after touching a two-week low of Rs.88.73 earlier in the session. Gold prices are slightly up but they are of course now below their all-time highs and spot gold was up 1.3% to $3,980 per ounce on Thursday morning.
Wall Street Pauses
Wall Street paused after a long stock rally after the Federal Reserve tempered expectations for a December rate cut and meta platform stock fell 12% as the social media giant is taking on debt to fund its artificial intelligence push according to a Bloomberg report. While the US and China have agreed to a one-year trade truce as we just talked about a little earlier, many investors are seeing that agreement is mostly priced in and there are of course questions still unanswered. Bond yields continue to rise alongside the dollar as money markets reigned in their expectations for policy easing, said the Bloomberg report.
Now the latest development says the report did give some reasons for the stock market surge to take a breather after multiple warnings about high valuations and a significant narrowing of participation in recent days. Analysts told Bloomberg that none of this means that the AI bubble is going to burst and that we are on the cusp of a major reversal in the stock market. However, it does raise the odds that we could see a short-term pullback at some point soon.
Federal Reserve Rate Cut
The Federal Reserve on Wednesday approved its second state interest rate cut though Chair Jerome Powell turned markets nervous after he hinted that there may not be another reduction coming in December. The Central Bank's Federal Open Market Committee by a 10-2 vote lowered the benchmark overnight borrowing rate to a range of 3.75-4%. In addition to the rate move, the Federal Reserve announced it will be ending the reduction of its asset purchases, a process known as quantitative tightening on December 1st.
Now the markets as we've pointed out seemed unhappy that the Federal Reserve was playing down a December rate cut. So what can we take away from that and of course how are prospects for India's own debt and fixed income markets? I spoke with Abhishek Bissin, head fixed income at Kotak Mutual Fund. I began by asking him to explain the Federal Reserve rate cut to a layperson.
INTERVIEW TRANSCRIPT
Abhishek Bisen: so rate cut is a monetary measure easing or tightening depending on if you're cutting it's easing and if you're hiking it's tightening it is like dropping a stone in a still water the larger the stone the higher the ripples will be created and the farther it will go so a 25 basis point is a relatively a smaller measure therefore the ripples will be smaller so accordingly there is an impact on the across what we call the yield curve so the short raw yield curve will be impacted the most because it has a very direct correlation and as it goes farther as the ripples fade so that also fade across the curve and the longest end may or may not have an impact because markets have a tendency to discount these events in advance and sometime market may believe that this is a very short term measure it may not last for a long time therefore it may not impact the longer end of the curve so when the federal reserve cut interest rate by 25 basis point as i said it was largely expected so since it was expected it was largely in the prices therefore the prices moved slightly adverse because they did not give any indication of something more than expectation coming in quickly therefore markets rather than moving this side at least on the longer end of the curve moved the other way around while the shorter end of the curve was relatively benign and it was very well behaved and effectively the curve became steeper.
Govindraj Ethiraj: India is now at about five and a half percent repo rate and we've not had any cuts since June 2025 so if there is easing happening in the rest of the world or at least in the United States in this case does this have any kind of indirect or follow-on effect on what we are seeing in India or what we are experiencing in India?
Abhishek Bisen: Yes definitely at the end of the day markets hate uncertainty the riskier the instrument the more will be reflected in the price of the instrument in terms of the price volatility will increase if there is a lot of uncertainty half of the people will go this way half of go that way and eventually you will get volatility all across the markets and the fixed income market the shorter end which is have a direct correlation with these events of break cut and rate hike will remain relatively calmer so if you just look and decide your order of the day by looking at the overnight rates or three month residual or a six month residual you will feel everything is in order but as you keep going towards the longer end of the curve or the equities or the commodities you will find chaos everywhere markets want forward guidance they would like to discount the farthest end of the future to the best possible able equity and therefore if the central banks do not commit anything or give confusing communication or are very cagey in terms of their communication or slightly rude in terms of giving any kind of benign guidance then markets will try and react adversely for positive measures also you are looking at the measure which is past markets want the future they want to predict the future because equities is a perpetuity discounting and you are able to commit anything beyond three one six month so eventually they will take that these events are happening positive but will unwind in six month or so or maybe a year therefore it is a non-unit for us and effectively it is going to react negatively
Govindraj Ethiraj: Abhishek thank you so much for joining me
A Measured Approach to Digital Currencies
The Reserve Bank of India will continue to take a measured approach in developing the Central Bank digital currency prioritising careful assessment over speed even as it maintains a firm position against private cryptocurrencies according to the Deputy Governor T. Ravi Sankar who was speaking at the Business Standards Annual BFSI Summit in Mumbai on Thursday.
He said that India was technologically and operationally prepared to expand its digital currency pilots but would refrain from rushing into a full-scale launch. He said many countries were experimenting with CBDC but we do not want to rush or launch at full scale because everyone globally is just starting off. The use cases he said are still very different and limited and emphasised that central banks worldwide were still analysing the broader macroeconomic and policy implications of CBDCs and reiterated the tech-wise use case programmability.
India is by and large ready and also highlighted cross-border payments as a key area where CBDCs could have a transformative effect. He says that in the cross-border space there is absolutely no improvement. It still takes four to five days for settlement and five to six percent cost of transaction and to solve this problem he said he believes CBDC is the answer.
Investments and Ports
Danish shipping company Musk said on Thursday its APM terminals arm may invest about two billion dollars in the peepal port in western India. It said in a statement reported by Reuters it signed a memorandum of understanding with the Gujarat Maritime Board on increasing capacity at the port. It also said that subject to a long-term concession agreement with Indian authorities the expansion will significantly enhance the port's capacity and capabilities.
India On A Borrowing Spree
Indian households have long been regarded as cautious savers but are quietly taking on record levels of debt. According to the Reserve Bank of India's financial stability report household debt in India is now 42 percent of GDP at the end of 2024 up from 26 percent in 2015.
According to a column by Dr. Ajit Ranade, economist and former vice chancellor of the Gokhale Institute of Politics and Economics in Pune and also chief economist with the Aditya Birla group. In this column he says that in absolute terms the total debt is nearly three times bigger. The average debt per individual has jumped 23 percent in just two years which means average debt per person is rising at twice the speed of national income and that is an important point that we will come back to.
He says that it's risen from 3.9 lakh rupees in 2023 to 4.8 lakh rupees in March 2025. Now about 55 percent of this borrowing comes from non-housing retail loans such as credit card dues, personal loans, auto loans and gold loans while traditional home loans make up only about 29 percent of total household debt. He also says that an increasing share of household borrowing is being used not to build assets but to make ends meet.
A study by the Bank for International Settlements spanning 54 countries found that while higher household debt initially boosts consumption and GDP beyond a threshold of 60 percent of GDP it begins to drag growth down reducing long-term GDP by 0.1 percentage point for every additional point of debt. India's ratio though currently lower Dr. Ranade says is moving in that direction. I reached out to Ajit Ranade and I began by asking him why he felt that this was a matter of concern at this point.
INTERVIEW TRANSCRIPT
Ajit Ranade: Consumer debt, that is debt taken on by Indian households, is currently 43% of GDP, as per the RPI's Financial Stability Report. And about a decade ago, it was 26%. So, in 10 years, as you know, GDP itself has increased possibly twice as big.
So, in fact, in absolute rupee terms, the household debt actually has almost tripled. So, that is one thing. And as it gets closer to 60%, that's kind of considered to be a danger mark.
So, compared to other peer countries, 42% can be considered to be manageable. But what is of bigger concern, two things. One is that the pace at which it is rising is almost much faster than the growth of national income or household income.
And secondly, the composition of this debt, it is not debt which is taken on to create future assets, productive income generating assets. That is, if you take loans for your business, or you'll take education loans for your children, or perhaps even building a house, the components that's rising faster are what are called consumption items. So, either you're paying for your credit cards, or you're paying for groceries, some of it is for consumer durables, or even to pay EMIs, you know, the EMI burden.
So, now, 55% of all consumer loans constitute non-housing. That is, housing is about 29%. This consumption, what I call consumption related loans for consumption items are 55%.
And the remaining about 15-16% is for agriculture and business. So, that's the concern. One is the pace at which it is rising.
And the second is the composition is going more towards paying for consumption, current consumption items and not creating future productive capacity.
Govindraj Ethiraj: Right. So, let me look at both angles. So, one is you're saying that the pace is rising.
So, what is it about the pace that could be of concern? Two things. I mean, one is there is a behavioural change, people are spending more, the propensity to spend is perhaps increasing.
And obviously, there may not be a historical benchmark. The second is what could be wrong? Or what is the danger here, given that the expenditure on consumption is in a way going back into the economy?
Ajit Ranade: As I said, you know, if it's not creating future productive capacity, you're simply borrowing to pay for current consumption. So, there are both supply and demand factors. As you said, there's a cultural shift in the credit culture.
So, buy now, pay later, kind of culture or buy on credit cards. In fact, consumer durables, that is, you know, washing machines, ACs, are being bought with EMIs. So, in a way, that is a good sign that people now have access to credit.
And credit is nothing but borrowing from your own future income. So, those can be considered to be positives. The desire for instant gratification and the enabling of these digital aggressive marketing channels.
You must have heard many of us have phone calls saying, I'm calling from XYZ bank and would you like a personal loan? There are these supply factors which are almost, you know, you can call it loan pushing. There are demand factors which are changing credit culture.
But more importantly, let's not forget factors like stagnant rural wages. People's incomes are not rising fast enough to make ends meet. So, that's why they have to resort to consumer loans.
The huge increase in gold loans. In the month of July, the RBI reported its 122% growth, monthly growth rate. But overall also from year to year, it's risen by 70%.
Gold loan is not only a sign of some productive investment, it's also sometimes a sign of distress. So, you have to be careful. While it's good, more and more credit is available.
And to the extent that it is giving a boost to consumer items and therefore industrial expansion. But you have to look deeper into what purpose is it going, what is the credit culture, how much is the EMI stress, even for example, taxi aggregators, Ola, Uber type of taxi drivers, they take loans to take a vehicle, but then they get crushed by the EMI burden. And by the way, interest rates are not coming down.
So, it's a bit complicated, but I think even the RBI report is putting some caution on this fast growth in consumer loans.
Govindraj Ethiraj: But in some ways, from what I can sense, your concern is predicated not so much on the rise in the credit culture, but on the fact that incomes are not keeping pace.
Ajit Ranade: That's right. You know, if household debt was increasing, and household incomes are also keeping pace, perhaps we would not have been as worried. And the fact is that the net financial assets of the households, actually, by the way, are at the 47-year low.
They went down from something like 11% of GDP to 5% net financial assets. So, on one hand, the household balance sheet is becoming more precarious. On the other hand, household indebtedness is rising.
That just says that employment opportunities, the pace of growth of household incomes is not as fast and robust as being able to bear a burden of higher loans, especially when loans are going to service current needs and not building future assets.
Govindraj Ethiraj: So, if you were to look at how this has shaped up in other countries, we've talked about 43% in India. In other countries, it could go to 90%, I mean, in terms of debt to GDP, or even more. But it's not a concern there.
And we're obviously talking mostly about developed economies. So, why is it a concern in India?
Ajit Ranade: Well, in Australia and Canada, the household debt to GDP ratio is above 100%. I think in Canada, it's even higher. And in many other countries, in the USA, it's about 70%.
In China, it's 63%. Now, the thing is, these developed countries, by the way, have a very strong, comprehensive social security system, which covers everybody. Secondly, they have deeper and much more liquid mortgage markets.
They also have overall stability in household incomes. Even if the growth rate is not high, per capita incomes are higher. There is a good unemployment insurance mechanism, which is a part of social security.
India does not have these institutional buffers. In fact, households in India had something to fall back on, in terms of social security, that would be kind of offsetting this indebtedness. But we don't have that.
So, one illness in the family, some kind of shock, some kind of, you know, crop failure, if you're already indebted, that can really cause huge distress. And not to forget, by the way, that the phenomenon of farmer suicides in some states of India continues to be a very serious problem. And many of the suicides are related to debt problems.
Govindraj Ethiraj: Right. If we were to pose the question on demographics, now, a lot of the consumption or the propensity to buy now and pay later may be younger demographics. Whereas, let's say, the challenges of, you know, social security or grappling with issues to do with household indebtedness may only be manifest later.
And therefore, maybe, you know, young people are spending more clearly and, you know, doing so on credit. But it's possible that over the years, things will even out. Is that something that could change or address this issue?
Ajit Ranade: Well, I remember when the finance ministry folks were posed this question, the net financial assets of households is dramatically down to 5%. They kind of responded by saying that, no, no, no, households are just buying more mortgages, more housing loans and more consumer durables and so on. So, they kind of almost dismissed that as not something to worry about.
So, in a way, when young people take on loans to buy, you know, way beyond their monthly incomes, you can say it's a vote of confidence in their own future, you know, that they are confident that their future is going to be brighter and they're going to get better jobs or better incomes. So, to that extent, I guess we should be encouraged. We need to look at the macro data also.
Look at the youth unemployment rate. Among college graduates, the unemployment rate is almost 30%. We are hearing about job losses, we are hearing about the impact of AI, automation and all that.
This is not something to be greatly alarmed about at this stage. But we have to pay attention to this phenomenon. I mean, the public policy response has to be addressed, for example, we can have a much more broader, comprehensive, public-supported social security in terms of public insurance.
We do have the Arrogyous Yojana, health insurance, and universal health insurance. We do have the employment guarantee scheme for the rural areas and so on. Then we have the NPS and EPA for the Provident Fund, which is for retirement, of course.
So, we need to see if there are enough buffers and safety nets. Credit does contribute to growth, there's no doubt about it. But we need to kind of calibrate it, you know, what becomes a little bit reckless.
And that's the caution.
Govindraj Ethiraj: Right. And in terms of public policy responses, so for example, let's say the Reserve Bank raised risk weightages last year, and now has reduced them again, because it raised them precisely because of this, because there was a lot of unsecured retail lending or borrowing. Clearly, the system seems to be aware and is maybe responding appropriately.
But what else could be the policy response if this is an issue that needs to be addressed, let's say more proactively?
Ajit Ranade: So, the Reserve Bank will, of course, be concerned about systemic issues about financial stability of the financial sector, banking sector, and non-banking sector also. So, this policy response has to be a combination of things to be done from the monetary authorities, but also the government, because, you know, the Reserve Bank wants to prevent bank failures. So, they increase the risk weights on these unsecured loans to 125% of the loan.
And that's why microfinance loans, by the way, are also access to credit for low-income families, which actually has gone down by 16.5% in the last one year. But the other side is that the gold loans have gone up hugely. Now, some of it is a substitution effect.
And it's also at the same time while RBI has been tightening the norm for NBFCs and banks as well, but they have relaxed the regulation regarding gold loans. For example, the loan to value now is allowed to go up to 85% of the gold, and now that the gold prices have gone up. So, it's kind of calibrating.
But beyond the monetary authorities' responses, I think we also need, as I said, to examine how we can give a comprehensive set of insurance, such as unemployment insurance, such as health insurance. So, if there's a widening net of comprehensive publicly provided safety nets, that then can coexist with an aggressive credit culture. So, it's true that the young people, when they go for credit, when young, an Ola cab driver goes and buys a new Maruti car and engages, you know, becomes an entrepreneur, in a manner of speaking, he or she is expressing confidence about their own future.
But we don't want them to run into suddenly, you know, that it's much bleaker. One or two years later, they're just trapped in working 17 hours a day and barely making enough to pay the EMI. By the way, the related phenomenon of what happened in the instant payment system is also enabling those game-related subsidies.
I mean, there are also people who are taking loans, remember, short-term unsecured loans. So, there is a lot of granularity when we look at this phenomenon. There are aspects that we need to worry about.
But overall, certainly, consumption spending is a driver of economic growth and consumption spending is driven by availability of credit. A company like Bajaj, for example, has issued something like, I don't know, 50 million cards. These are not credit cards, but these allow you to buy consumer durables.
So, you get instant loans. So, those are all basically expressions of confidence, no doubt. But I'm just saying we need to calibrate.
And when we get closer to 60% of GDP, we are at 43, there is research which shows that actually the growth rate starts reducing. So, there is an optimality there. I mean, we can't keep on increasing consumer loans infinitely.
We need to find out what the right level for India is.
Govindraj Ethiraj: Ajit, that's a good note to end on. Thank you so much for joining me.
Ajit Ranade: Thank you, Govind.
