On Episode 927 of The Core Report, financial journalist Govindraj Ethiraj talks to Economist Ajit Ranade.

SHOW NOTES

(00:00) Stories of the Day

(01:09) West Asia Truce Collapses But Impact On Markets Could Be Lesser

(02:58) Direct Tax Collections Are Up 16%

(07:28) Electronics Trade Deficit At $8.4 Billion Now Forms 28% Of India’s Goods Trade Deficit, With Imports Growing Faster Than Oil

(09:22) Wholesale Price Inflation Is Up

(10:14) Why Loans For US-Bound Students Have Dropped 57% From The Previous Year

(11:03) Why India’s Sovereign Bond Yields Are Hiding A Problem

(24:23) Check Out Claude’s India Pricing Strategy

(25:13) Which Way Do You Think Ticket Prices Are Going For The Semifinals And Finals Of The World Cup?

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

Good morning, it's Wednesday the 15th of July and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai. India's financial capital.

Our top stories and themes…

The West Asia truce has collapsed for now but impact on markets could be lesser than before.

The electronics trade deficit at almost 8.4 billion dollars now forms 28 percent of India's goods trade deficit with imports growing faster than oil.

Direct tax collections are up 16 percent and so is wholesale price inflation which is up.

Why India's sovereign bond yields are hiding a problem and why loans for US-bound students have dropped almost 57 percent from the previous year.

Check out Claude's India pricing strategy

And which way do you think ticket prices are going for the semifinals and finals of the World Cup.

Markets, West Asia, Direct Tax and Forex

No one expected the truce in West Asia to last in any meaningful way but we were not fully prepared for what seems like a complete collapse at least for the moment. Renewed attacks over the weekend and US President Donald Trump's announcement that he was reimposing a US blockade on US shipping through the state of Hormuz pushed up Brent crude futures more than 10 percent effectively erasing a month of oil price falls.

Brent crude futures have jumped almost 13 percent so far this week and as of Tuesday morning were trading above 87 dollars a barrel. Interestingly according to the Wall Street Journal the nearly 10 percent rise on Monday was the largest daily percentage gain since May 2020 when prices were climbing back from the Covid lockdown crash which also quoted an adjunct senior fellow at the Centre for a New American Security, a Washington-based think tank saying the chance of the region and Hormuz going back to the old normal is effectively zero adding that if anything this reinforces it is the impetus to invest in other pathways as quickly as possible. The benchmarks in India could not have held out against such a steep jump in oil prices and the resumption of the West Asia war but on balance it would seem that the fall could have been worse were it not for the relatively positive sentiment presently prevailing in the markets.

The Nifty 50 and the Sensex were lower with the Nifty 50 falling 159 points to close at 24,052 and the Sensex falling 561 points to 77,054. The broader market saw the Nifty mid-cap and small cap also falling 0.4 and one percent each. The rupee fell to its weakest level in over a month thanks to higher oil prices and the hostilities in the Middle East and possible Reserve Bank of India intervention contained losses according to Reuters which added that the rupee touched a low of 96 rupees 23 paise and closed finally at 96 rupees 20 paise which is down 0.6 percent.

India's net direct tax collections rose about 16 percent year-on-year to about 650,000 crore rupees or 67 billion dollars for April to July 13th according to a statement from the government which said that the growth was driven by higher corporate tax mop-up. Net corporate tax collection was up 22 percent to 240,000 crores while India's gross direct tax collections including tax paid by individuals were up to 770,000 crores. Elsewhere the moves to attract more dollars into the banking system are working.

India has attracted roughly 10 billion dollars in inflows through the Reserve Bank of India special deposit programme for overseas Indians. A Reuters report said quoting unnamed sources several economists among others who the core report has spoken to as well have estimated that India could attract anywhere between 30 to 60 billion dollars of foreign currency deposits which would help narrow India's expected balance of payments deficit for the current year. The Reserve Bank of India announced a zero-cost foreign exchange swap facility at its June 5th policy meeting for deposits raised from non-resident Indians allowing banks to offer higher returns on such deposits.

Then a June 23rd clarification allowed the banks to lend against these deposits and place a lien against them permitting the use of leverage that could make the programme more attractive according to a Reuters report. Inflows have picked up over the past week after that clarification. The sources told Reuters though they added that the majority of the flows are likely to be back-ended referring to the September 30th deadline for those deposits to be collected.

HCL Possible Data Centre Pivot and India Trade Deficit

Last year the core report asked why companies like Wipro and HCL tech who started out life as hardware companies were not venturing into data centres and the like. A news report that said HCL tech was considering a data centre for a came soon after now this is last year and so did an announcement from TCS more recently. The reason software companies have avoided anything hardware linked at least in recent decades is obviously the margin predictability of software services and of course investors who have rewarded them for staying true to this cause.

So much so that most IT majors have not really invested in anything beyond what their clients expected them to do including in core research and development either organically or inorganically. On Monday HCL technologies which is also India's third largest IT company after TCS and Infosys said it was investing as much as 3,500 crore rupees behind an ambitious push into AI data centres betting that owning everything from infrastructure and compute to models and managed services would produce more value than merely renting space and power. CEO Vijay Kumar in a earnings conference call said that the biggest opportunity is not to rent AI but to own the full stack.

The initial investment will create only a fraction of its proposed 50 megawatt capacity and subsequent spending will depend on the scale of the business cash flow generation and returns according to an economic times report. So will this strategy work perhaps but it is another indication of how carefully India's IT majors are treading when it comes to big bets or just bets particularly outside the classic services comfort zone but nevertheless it's a start. The markets of course are looking for more services income shares of HCL were down four and a half percent on Tuesday after analysts said the IT services firm's decision to maintain its annual revenue growth forecast signalled uncertainty in client spending and a slower recovery according to a Reuters report.

Meanwhile the upheavals around the AI universe or in the AI universe continue IBM shares fell 23% in pre-market trading on Tuesday after it released preliminary second quarter results that fell short of expectations according to a CNBC report. IBM reported adjusted earnings of about 2.93 dollars a share on revenue of 17.2 billion dollars below analyst expectations for earnings of three dollars one cent a share and 17.86 billion dollars of revenue according to that CNBC report. IBM CEO Arvind Krishna blamed the shortfall and weakness in the software and infrastructure business as clients shifted spending towards hardware purchases such as memory chips.

He wrote in a letter to IBM investors that, in the last few weeks of June, we saw clients shift their quarterly capex spend towards server storage and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. While we anticipated some supply-chain-related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization, according to that note written by Arvind Krishna, reported by CNBC.

Meanwhile, a report from Elara Securities, picking up on the trade data we reported yesterday, says that, structurally, the nature of India's import bill is changing, with the pace of growth in electronics import bill now up 46 percent year-on-year for the first quarter, eclipsing that in the oil import bill, which is up 23 percent for the past eight quarters. Electronics trade deficit at 8.4 billion dollars is now 28 percent of India's goods trade deficit, and the growing influence of electronics is becoming clearer, says that report. It also says that positive tailwinds from weaker foreign exchange are yet to be visible in electronics exports as, over the past six months, imports rose 31 percent year-on-year on an average, while exports rose less than half the pace of imports, at an average of 13 percent. Nevertheless, a weaker rupee is helping India's goods exports, which rose about 9.5 percent year-on-year to about 73 billion dollars for June. That's for overall exports; goods exports rose about 15 and a half percent to 40 billion dollars.

Elsewhere, a note from Kotak Institutional Equity says that a strong rebound in several sectors' mid and small-cap stocks in the past one to three months has forced them to rejig their recommended portfolios much faster than they would have liked to. The opportunity set has narrowed, but macro and earnings outlooks have likely improved, and they say that they assume the recent uptick in the West Asia war will be temporary, but do remain wary of negative inflation surprises. Indian equity markets, the report says, have delivered decent performance in the past one month, with mid and small-cap stocks outperforming large-caps on Monday. As we reported earlier, the NEC mid-cap and small-cap indices hit all-time highs during the day, or intraday. On valuations, the Kodak report says Indian markets continue to see wide variance, with consumption and investment stocks trading at fair to rich valuations, and BFSI and IT services trading at cheap to attractive valuations.

India's wholesale price inflation

India's wholesale price inflation rose to about 9.87 percent in June from 9.68 percent in May, thanks to higher food prices, mineral oils, basic metals, and chemicals and chemical products, according to data released on Tuesday, reported by the Business Standard. The wholesale price index for all commodities stood at 110.2 in June, compared to 109.9 in May. This rise in wholesale inflation comes a day after the official release of retail inflation data measured by the Consumer Price Index, which rose to 4.38 percent in June from 3.93 percent in May. Fuel and power inflation remained elevated at about 27.4 percent in June, though it was lower than the 30 percent in May.

U.S.-linked disbursements for education funding have fallen 57 percent in the last year, while those to the UK rose 24 percent, with other destinations also continuing to gain traction, according to a new report from Crisil Ratings, which looks at funding from non-bank finance companies towards education. So, overall, tightening of visa restrictions in many countries for overseas education has not affected the growth of the industry, at least from a funding point of view. The report says NBFCs could see growth in education loan assets under management at a steady 20 percent this fiscal, with increasing diversification across study destinations offsetting the impact on demand for U.S.-focused education from policy uncertainties, and this is something that we've heard from other NBFCs in the space on the core report as well. Interestingly, the report points out that the share of the portfolio transitioning from moratorium to repayment has increased.

Why India's sovereign bond yields are hiding a problem

Last month, the Reserve Bank of India's Financial Stability Report, or FSR, came amidst a turbulent macroeconomic environment. Oil prices had jumped thanks to the war in West Asia, the rupee had fallen thanks to heightened foreign fund withdrawals, and the Reserve Bank of India's own inflation forecast had been revised upward, according to economist Ajit Ranade, writing in a column in the Mint newspaper earlier this week. By the textbook, the central bank should have raised interest rates; instead, its Monetary Policy Committee held the repo rate steady at 5.25 percent for the second straight review, and India's long bond yields have stayed remarkably placid through it all, he wrote. He also argues that India's steady sovereign bond yields should not be read as a sign that everything is okay. So the question: why should it matter? Because, Ranade says, India's household debt has risen to almost 45 and a half percent of GDP and, dominated by fast-growing non-housing retail loans, credit cards, personal loans, and gold loans are now almost 58 percent of all household borrowing—a share that has been rising every quarter. Nearly half of all household debt, he says, is now taken for pure consumption, not for building a home or business. I spoke with Ranade and asked him to explain the linkage between sovereign bond yields and rising household debt, and why we should be looking at or be concerned about this.

INTERVIEW TRANSCRIPT

Ajit Ranade: Well, Govind, I was referring to the recent financial stability report of June 2026 published by the Reserve Bank of India. And there is a substantial portion of the FSR which discusses the rising levels of debt among the households. That is, they say that household debt to GDP ratio now is at a pretty historic high for India at around 45 or 46 percent of GDP.

And of this debt, something like 58 or 59 percent is actually towards non-housing or non-business or non-asset related loans, which means to say that the households are increasingly taking debt to finance their consumption needs. And in fact, this concentration is even higher among income segments, that is, households who earn less than 10 lakh rupees a year. And these are the very households for whom if there is a macroeconomic shock, like an illness in the family or somebody losing a job or some such thing, they will find it very difficult to absorb such a shock and be able to keep servicing the loan on repayment and EMI and so on.

So I was struck by the fact that if you look at the macro situation, that is the sovereign yield, if you look at the 10-year bond rate, that's been pretty stable. I think it's something like 6.75 or 6.8, closer to 7 percent. And that is, of course, as you know, related to the policy rates set by the Monetary Policy Committee of the RBI.

I commented saying that on one hand, because of the West Asia or the Iran war or the inflation spike and the fiscal deficit situation, both in the centre and the states, you would have expected some rate tightening. The textbook formula is that whenever you have anticipation of inflation, some rate tightening is expected. But the policy rate has been quite steady.

Other reasons that I mentioned in the article, the sovereign yields are steady, but underneath that calm is the situation of rising household debt stress. And that's going to lead to pressures like concerns about NPAs, concerns about credit risk, and therefore concerns about increased interest rates. So the connection between the two is a bit sort of convoluted, but you cannot have a situation where the long bond rate or the policy rate is stable, giving a picture that things are hunky dory, but when underneath, there is credit prescribing.

And I must, of course, mention that this is confined to the household debt. It's not corporate debt that is being discussed. And you may say that how much of an exposure for a bank is household debt versus corporate debt?

That's a separate issue.

Govindraj Ethiraj: Yeah, pose that question as well. But in a growing economy or in an aspirational economy, which India is, is this a bad number? I mean, when you talk about, let's say, household debt at 45.5% of GDP or 46% of GDP?

Ajit Ranade: By India's own standards, it is a historic high. If you compare it to developed economies, of course, many of the economies, including Canada, perhaps Australia, Italy, and some of the other countries, household debt is closer to 100% of GDP. But you have to remember that in those countries, first of all, a large part of it is mortgages, housing debt, or business, you know, household businesses.

And this is a very active and liquid secondary market for mortgages. So in fact, there is a very strong connection between policy rates, and the rates which are applicable to housing loans and mortgages. So that's why people watch, for example, in the US, people watch the stance of the Federal Reserve Bank.

And that directly transmits that that is the short end, the policy rate is the overnight rate and the front funds rate. But that transmission mechanism from the short rate to the long rates, which is on housing loans, or even the sovereign treasury bonds, that transmission is, you know, very quick. And shall I say, the signalling mechanism works very efficiently.

In India, the policy rate today, what is called the repo rate is at 5.25%. And the treasury bond, which is 10 year long rate is around 6.8, or maybe 7%. This gap itself is unnaturally high. Bankers call it a steep yield curve, that is the overnight rate is which is fixed by the policy, or regulated rate is 5.25%. Long term loans are the sovereign rate is 7%, or 6.5%. So this is a spread of 150 basis points, when normally it should be just barely 60 to 70 basis points. So that itself is pointing to something, which means that either the people who are in the bond market, the bond traders are expecting that the short end rate is going to go up, but the is likely to raise the policy rates. But there is no such indication, the stance is still neutral, it has been dovish. And if the Reserve Bank is indeed concerned about the building credit risk in the household debt, then in fact, that signals should translate into higher rates.

Higher credit risk is not compatible with low rates. So we don't want to have a dichotomy where on one hand is low sovereign rates, stable and a rising debt situation or debt stress.

Govindraj Ethiraj: Right. And you've also touched upon you know, the credit cards, personal loans and gold loans are now about 58% of all household borrowing. And that of course, has been growing and also gold loans within that which has grown even faster at about 42% since 2024.

And we've talked about that on the core report earlier as well. So if gold is indeed you know, a strong monetizable mortgage asset, a mortgageable asset, what could be the concern here?

Ajit Ranade: So first of all, when a household takes on long term debt, if it's for housing, or if it's to build a business, even if it's for an educational loan for somebody in the family, that actually builds future incomes. So that is a loan that goes towards building an asset, and which will generate returns and so on and so forth. But if you're using debt, long term debt, or medium term debt to pay for your daily groceries, or your utilities, or living expenses, that is not a healthy situation.

So the fact that the increase in household debt, which has gone up to 45.5% of GDP, and which has increased quite a bit, and it's increasing quarter on quarter, if that is increasingly going to meet consumption needs, that is not a healthy situation. Of course, you need to still I don't think there is much clarity on how the end use of these loans, but the RBI report itself hints at consumption loans. Secondly, that gold loans which have grown by 42%, what is happening is gold prices spiked up hugely, gold prices went up sharply.

So households are simply refinancing their old gold loans. So it is as if they're using the newer and higher value of gold, which is pledged as collateral to refinance the old loan. That also is to me, it sounds like a coping mechanism.

The fact that gold loans are going up because the underlying monetary value of the gold asset, which has been pledged, has gone up, is not telling me that they're entering new businesses or building new assets. In fact, given the volatility in gold prices, what happens if the gold prices sharply come down by 10%? Then the loan to value ratio, which the bank will monitor, will be dangerous.

So they will ask for either more collateral, or they'll ask them to liquidate some of the loans, they'll repay some of the loans. And then if the households are not able to withstand that shock, that is something which will lead to an NPA. Even the RBI itself has flagged this.

They don't like the gold loans to go up indiscriminately high and at a rapid pace. Gold is of course a very easy, monetizable collateral, and households use it. But so long as these loans are being used to build something like an asset, I think that's a healthy signal.

But if it is used to meet current expenses, that is not necessarily a healthy thing.

Govindraj Ethiraj: Right. And we've also had a situation again, which we've touched on in the past, where net household financial savings have been falling, and are now maybe a little above 5%. And with used to be 11% of GDP about five years ago, is maybe a little over 5% today.

So what does that signify in the context of all that we've spoken so far?

Ajit Ranade: Yes, that is the other development, which is worth watching and which is worrying because households are ultimately have been the stable source of funding the fiscal deficit at the centre as well as at the states. And the household savings, financial savings ratio, net financial savings, as you said, has been down to 5%. Again, a historic low.

So there's been a kind of a decline in household savings. And that will also reflect in the fact that not only the financing of fiscal deficits is jeopardised. And by the way, at a time when the fiscal strain on the government is significant, both as I said, at the centre and states, the states have their welfare schemes, it's not going to be easy meeting those deficits without again, it affecting the cost of borrowing, which is interesting.

So the other thing is that when household savings are going down, it is affecting the deposit mobilisation of banks. And of course, the fact that households are now participating much more in equity markets through SIP, that money is coming back into the banking system. But the mix of deposits that the banks are receiving is changing from household CASA kind of thing, current account savings accounts, to corporate deposits.

Now, corporate deposits are a bit risky for the bank because they are callable at short notice. They're extremely sensitive to very small moments. If the deposit rate is good on the 0.25%, households don't immediately liquidate their FDs. But a corporate may not behave the same way. So they're callable. So the banks have to keep a higher buffer of what are called high quality liquid assets to be able to meet those callable deposits.

So that means the banks have to store up more on these high quality assets, liquid assets, which are government bonds, which creates an artificially high demand for government bonds, which again keeps the yield low, which is back to our headline story, which is how the calm at the surface, but that is, you know, beneath the surface and all this churn, household deposits coming back as corporate deposits. And that creates a requirement for more risk buffers from the banking side.

Govindraj Ethiraj: So you've already suggested that we need to watch the gold-owned segment more carefully or the gold-backed lending more carefully and ensure that households are protected or not protected, but are shielded to some extent if prices drop. So that's one part of the problem. What's the larger solution that you're looking at?

I mean, if we are to essentially come back to how do we spend less or reduce our spending as proportionate to asset creation within households?

Ajit Ranade: Yeah, the larger picture, Govind, is the following that if we recognise the underlying problem that the household debt stress is rising, and more and more of the debt is going towards meeting consumption expenses, that is not a problem for the RBI monetary policy to solve alone. That means that perhaps stagnation of real wages or incomes, that means because of job anxiety or prospects of unemployment. So until the households start getting reasonably good wage growth, income growth, and employment growth, until then, they will have to resort to using these gold assets, gold collateral, to meet their consumption needs.

So the larger picture is that we have to focus on policies which are beyond monetary policy. This is a public policy issue. How do we ensure that there is healthy wage growth across a wide section of society?

Remember now, this stress is much more worrying when it is affecting the low-income categories. Up to 10 lakhs, I said. In fact, up to 12 lakhs, they are not even in the income tax category.

So we have to focus on how can we get much larger pace and scale of employment growth and wage growth. We know that the rural wages have been moving very slowly, if not stagnating for a long time. So this is a larger issue.

And perhaps some of it has a global dimension to it, but this is not something that we can rely only on the monetary policy to make it easier for the low-income people to get loans. That's not the solution. The solution is a much larger policy, public policy response.

Govindraj Ethiraj: Ajit, thank you so much for joining me.

Ajit Ranade: Thank you, Govind.

Claude’s India Pricing

Anthropic has unveiled a rupee-denominated pricing for Clod, the large language model which many Indians use, simplifying payments for customers in India, which also has one of its largest Clod user communities. Clod Pro plan is available at 2,000 rupees per month, and Max, which has higher limits and priority access at high-traffic times, is being offered at about 12,000 rupees a month. The rupee-base pricing is already available and can be seen on its website and mobile apps, according to the company. It says it's testing local pricing in Indian rupees for new consumer subscriptions for Clod Pro, Max, and Team plans as part of a broader push to offer local pricing across markets, according to reports in media.

Cheaper Tickets for World Cup Football Matches

The elimination of the United States and Mexico in the World Cup is proving to be a win for fans looking for a deal on tickets, according to a CNN report out on Tuesday. For Friday's battle between Spain and Belgium, prices have fallen 65 percent, says the CNN, quoting a secondary ticket marketplace called TickPick. The United States would have played in the game if it had won earlier this week, so before the United States' loss on Monday, the cheapest ticket was about 3,200 dollars on TickPick, and now they're going at 1,100 dollars for the afternoon game in Los Angeles. As for Mexico, their loss on Sunday against England sent prices down 45 percent. Prices for the cheapest tickets for Saturday's showdown in Miami were about 4,000 dollars, and have now fallen to about 2,000 dollars.