Why Indian Markets Are Still Under Pressure
The benchmark saw losses for the seventh straight session, their longest daily losing streak in nearly seven months
On Episode 691 of The Core Report, financial journalist Govindraj Ethiraj talks to Rohit Jain, Partner at Economic Laws Practice. We also feature an excerpt from our recent weekend edition featuring energy expert Dr Anas Al Hajji.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Why Indian markets are still under pressure
(02:23) Why global investors are returning to China
(04:50) Gold, silver hit fresh record highs, what’s next?
(06:21) Lower GST rates will hit sales numbers of consumer product companies even as HUL warns of turbulence in the next few months
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 Tuesday, the 30th of September, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. And we did see some respite from the rains on Monday and our top stories and themes for Tuesday.
Why are Indian markets still under pressure?
How are global investors returning to China?
Low GST rates will hit sales numbers of consumer product companies, even as Hindustan Unilever warns of turbulence in the next few months.
Gold, silver hit fresh record highs. What's next?
Markets Under Pressure
The benchmark saw losses for the seventh straight session, their longest daily losing streak in nearly seven months.
Now, let's take a step back. The last year has seen some 170,000 crores or roughly $19 billion raised through initial public offers while everyone, including the institutional investors, appear to have lots of spare cash, thanks to you and me. IPOs are undoubtedly straining the market.
On the other hand, foreign institutional investors are continuing to sell as we've seen in subsequent or recent months. Given this, it's surprising that the markets have not fallen further. Obviously, domestic investors are providing the floor and sucking up IPOs as well.
A good part of it is intended for exits for promoters, founders, employees, venture capital, and private equity investors. So you need foreign investors if the markets have to rise in any concerted fashion, as several institutional investors have reiterated to me in recent months. On the other hand, foreign investors, or many of them are racing back to China, a country they had somewhat let go of, or a market they had somewhat let go of after the 2021 peak.
More on China in a bit. India's Sensex and Nifty closed flat after swinging away between gains and losses on Monday. The factors affecting market sentiment are still linked to tariffs and H-1B visas.
We also have a Reserve Bank of India policy decision on Wednesday, that's tomorrow, with the Monetary Policy Committee meeting starting today. At close on Monday, the Sensex was down 61 points to 80,364, and the Nifty 50 was down 19 points to 24,634. In the broader market, the Nifty Mid-Cap 100 was up 0.2%, and the Nifty Small Cap Index was down very slightly.
Global money managers are returning to China after years of aversion, attracted by a world-beating stock rally and a robust high-tech sector. Goldman Sachs said global hedge funds were last month the most active in onshore equities in recent years, a stark contrast to 2021, when some clients had deemed the market uninvestable, Bloomberg reported on Monday. It also quoted one fund, Pacific Investment Management Company, saying that investors are now more concerned about missing out than risks.
China has already seen a $2.7 trillion rally this year. Now, data is already reflecting this with inflows rising across asset classes and a coordinated advance that's apparently happened only in three of the past 10 years. But what's different this time, and we're still talking about China, is that it's driven by revaluation of assets and also better fundamentals.
Companies like Alibaba Group Holding have rolled out their own artificial intelligence model and chip makers like Cambricon Technologies have reported breakthroughs. Bloomberg quoted analysts saying that global investors are now being driven by a sense of FOMO, a fear of missing out in areas like tech, and they will increase their allocations to Chinese assets in the coming years. Now, in the past, we've seen funds switching out of China into India, and it is quite likely that India is seeing the reverse impact of this right now, which is maybe switching out of India and going back to China.
Now, while there is enough emerging market money going around, at least in theory, it does not help that there is no real attraction in Indian markets right now, except the longer-term story, where two valuations are seen as high in many cases. Back home, once again, the rupee closed at its near all-time low on Monday as foreign portfolio outflows continued and corporate dollar demand kept up pressure. The rupee closed at Rs.88.76 against the US dollar, its weakest ever closing, and down slightly from its close of Rs.88.71 on Friday.
Its all-time low was Rs.88.79 last week. So the closing was at Rs.88.76. The all-time low is Rs.88.79.
Gold
And while the markets and rupee may be under pressure, gold has hit a fresh record. So asset values across India are still rising, if you hold gold, that is. And it's now about $3,800 an ounce, thanks to a weaker dollar and challenges of a potential US government shutdown.
In India, silver prices on Monday were up Rs.7,000 to hit an all-time high of Rs.150,000 per kilogramme, while gold also hit a new peak of Rs.119,500. That's Rs.1,19,500 per 10 grammes, according to the All India Sarafa Association quoted by Business Standard. Back in the international markets, bullion was up as much as 1.4% to an all-time high of $3,812 an ounce, and that was six straight weekly gains, according to Reuters. And if you're a gold bull, here's some more good news.
With the Fed set to cut further rates over the next six months, analysts said that they are expecting more upside for the yellow metal, reports quoted UBS saying that they were targeting a level of $3,900 per ounce. Deutsche Bank said that they feel official demand and exchange-traded fund holdings are playing a key role in gold strength, while jewellery demand and recycled supply are restraining factors. That's interesting.
And maybe what's playing out in India as well. Elsewhere, silver prices, we're talking global now, rose over $45, which is the highest since 2011, sorted prices of platinum and palladium. Gold has risen already about 45% this year, and banks, including Goldman Sachs and Deutsche Bank, have said they expect the rally to continue according to Bloomberg.
Decoding GST Rate Cuts
While the consumption tax cuts that the government announced on August 15 and put into effect on September 22nd or last week have begun to spur demand, how much is still something that we have to wait and see. The markets, in any case, seem to have discounted the impact of those cuts on company balance sheets, though the reasons are external as well, as we've been discussing all this while.
So it might be worthwhile to wait and see how things stabilize. Reuters reported Hindustan Unilever, the consumer products major, saying that while this measure supports long-term consumption, we've seen transitory impact in the form of disruption at distributors and retailers across channels to clear existing inventories with old prices. HUL also expects consolidated business growth to be nearly flat or in the low single-digit range for the quarter ended September 30th, with the impact continuing into October before prices start stabilising from November.
Now, I spoke to Dhairyashil Patil, National President of the All India Consumer Products Distributor Federation last week, and I asked him what kind of impact he was expecting on GST rates.
TRANSCRIPT
Dhairyashil Patil: Going, you'll have to take into consideration the 13% down of pricing. Now to gain the value year on year, they'll have to cross 30% in growth. So expecting a value growth for a company, I believe, will be very, very optimistic.
But still volume growth can be expected in this season. But the price drop is very, very huge. So on average, it is a 10% to 20% price drop.
And in the last at least four to five quarters, if you have seen, almost none of the companies have crossed any double digit. With a double digit downfall on value, we cannot expect to have a very growing season. But yes, we'll have volume growth.
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I also reached out to Rohit Jain, Deputy Managing Partner at ELP, who also co-heads the tax practice of the firm, focussing on indirect taxes, direct taxes, and transfer pricing, and I began by asking him how he was seeing the impact of rates on companies and how they were responding.
INTERVIEW TRANSCRIPT
Rohit Jain: Yeah, so Govind, thank you for having me here. So clearly, the first early impact was the disruption. So up to 22nd September, virtually there were no sales made by the company.
But what we have seen in the last seven days, it has actually been picked up. In fact, this morning when I was talking with one of the big auto giants, they said while we had the disruption, but now they have picked up and they would see a normal month, which otherwise they would have seen. So the most important thing is that there has been disruption in the sales.
But the second important thing is that what the government has advertised in relation to passing this benefit to the consumer, most of the companies, in fact, all of them have decided to pass on this benefit to the consumer. And therefore, there is a significant drop in the prices, particularly in the auto sector and some FMCG companies. The adverse impact that we felt is for the insurance sector, because while they needed to pass on the reduction in the tax rate to the companies, at the same time, they have taken a big hit in non-ITC positions.
And that is the big, big impact. Because at one level, they have to pass on the benefit to the policyholders. But at the same time, they are now not entitled to any ITC.
And that is going to be, depending upon the size of the company, each one is having 300 to 2000 crore per company as an impact. It is going to have a large impact. And that's a real shocker for them.
Govindraj Ethiraj: Rohit, can you explain that a little for those who don't fully understand how this is happening in the case of insurance companies?
Rohit Jain: So insurance companies today avail a lot of services. So let's take a classic one, which has all the broker agent services. Second, they have a lot of advertisement services.
They have all the routine services of promotion. All of these services, when they avail, there is an 18% GST being paid. Now, once they pay 18% GST, till date, they were entitled to take that as a credit to offset against GST, which is payable on the premium.
Post this rate rationalisation, the premium has become exempt. That means there is a zero tax payable on premium. The consequence of that is that all of the services that they avail will no longer be entitled to any ITC.
So you can imagine the agent's commission, the promotional services, the routine services that they take, everything is now taxed at 18% with no corresponding ITC. And depending upon the size of the insurance companies, from smaller to the larger one, what we have seen, the impact per insurance company is not less than 200 crores per year, going up to 2000 crores annually.
Govindraj Ethiraj: Now, to come to companies who are in the consumer product or even the auto space, and let me start with auto. When I was talking to the Federation of Automobile Dealers Associations just last week, they were saying that there is a gap between what they've paid the companies and what they will recover from the consumers. So, they were referring to a 4000 crore gap or a hole at that point.
Where does that stand?
Rohit Jain: That is one unfortunate impact or negative impact of this. So whenever cars have been sold by the auto companies to the dealers, there was a compensation cess which was payable. That compensation cess was anywhere between 18 to 20% depending upon size of the car.
That compensation cess in respect of all the cars that they have in their inventory and they have accumulated compensation cess ITC is not available to them henceforth because the compensation cess has been now omitted. So when they sell the car after 22nd September, there is no compensation cess payable. But they have already paid that compensation cess to the companies when they bought that car.
Now that compensation cess estimated across the network is anywhere between 2500 to 3000 crore. The government has clearly come out that they will not do anything in respect of this. That's a cost that has to be borne by the entire supply chain.
Now the question is who will bear that cost? Is it the auto companies will have to take that hit or the dealers will take that hit and that is going to be a big tussle which is going on today. The dealers clearly are saying this is a big impact.
20% of the value of the car purchase is not going to be a small impact and therefore dealers are wanting this to pass on to the OEMs, auto companies, whereas auto companies are saying that you bought the goods as per your own inventory management. How can you now ask us to compensate you for that?
Govindraj Ethiraj: Okay so anyway so you're saying this is still a live issue. So similarly in the case of consumer product companies again the same I guess pipeline issue and where the product is right now and what the price that has been paid to the company by retailers and dealers. So again is it going to be a similar situation where the companies will have to eat that or companies or dealers will have to eat that difference?
Rohit Jain: No not for FNCG. It's just a transitional issue because some of their products have already got an impact of 12 percent but when they sell it to it now they will charge only 5 percent but that's a transitional issue. There is no loss of ITC for FNCG companies that were always available to them and will continue to be available to them.
The only difference is the cash flow. So auto and FNCGs have very different footings. FNCG companies may still need to support the dealer in terms of cash flow management but there is no loss of ITC to them.
Govindraj Ethiraj: Right. So overall if you were to look at how it's affecting industry at this point before things recover are there any other sectors which are more affected? We've already talked about insurance and auto.
Is there any other sector that's more affected right now and which may not be able to recover?
Rohit Jain: Yeah the one sector which has got adversely impacted is the hospitality sector because they have below seven and a half thousand room tariff now been taxed at five percent GST and their ITC is completely gone and that is a big impact for hospitality sector because their major cost is the operation and management contract with the brand and all of them is taxed at 18 percent. So they are really getting adversely impacted because of this rate rationalisation.
Govindraj Ethiraj: Right. So you're saying hospitality, auto and insurance are the three sectors that have been affected the most. All other sectors are able to manage it and only are facing transitional issues would that be fair?
Rohit Jain: That's right. Even auto I feel it's a one time transition issue for compensation but insurance and hospitality is really adversely impacted.
Govindraj Ethiraj: Right. Rohit, thank you so much for joining us.
Rohit Jain: Thank you Govind.
Will We See Fresh Interest Rate Cuts At This Point?
Well, the general feeling is not that we will not see fresh interest rate cuts at this point.
The Reserve Bank is quite likely going to hold its current policy rate of 5.5% on Wednesday. A Reuters poll showed that nearly three quarters of economists expected a pause, but major banks, including Citi, Barclays, Capital Economics, and State Bank have flagged the possibility of a cut, citing downward risks to growth and a benign inflation outlook. The Reserve Bank has cut rates by about 100 basis points since the beginning of 2025, and private investment, of course, remains weak.
Reuters quoted Citi Economist, saying that the October meeting is live again, noting that the Reserve Bank could opt for an insurance rate cut to cushion against external shock or deliver a dovish pause with a clear signal to act soon. Moody's holds its ratings. Moody's ratings on Monday affirmed India's long-term local and foreign currency issuer ratings and the local currency's senior unsecured rating at BAA3, with a stable outlook on the back of robust economic growth and sound external position.
It also affirmed India's other short-term local currency rating at P3. Moody said that the rating affirmation and stable outlook reflects their view that India's prevailing credit strengths, including its large, fast-growing economy, sound external position, and stable domestic financing base for ongoing fiscal deficits would be sustained, and these strengths lend resilience to adverse external trends, in particular as high U.S. tariffs and other international policy measures hinder India's capacity to attract manufacturing investment, it said in a report in Business Standard. It also said that India's credit strength is balanced by longstanding weakness on the fiscal side, which will remain.
On August 14, last month, that is, S&P Global Ratings upgraded India's sovereign rating by a notch to BBB from BBB minus with a stable outlook, its first upgrade for India in over 18 years.
Oil and Trade
Oil prices might be somewhat steady right now, around $70 a barrel, but there is turmoil, most of it because of the repeated pressure by the United States on countries like India to shift purchases around and away from Russia. Now, the same pressure, of course, has not been applied on countries like China and Turkey, also buyers of Russian oil, and also exporters, for example, Turkey.
Now, be that as it may, what does the basket of buyers and sellers globally look like, and how could things evolve here on, and how could India approach it strategically? On the Core Report's weekend edition, I spoke with Dr. Anas Halhaji, noted energy economics expert based out of Dallas, Texas, and I asked him to walk us through the global oil market and the options, particularly for countries like India.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: I mean, of course, we know it's China and India. And what could potentially change if some of these things, some of these geopolitical moves pan out, including, let's say, somehow managing to control or suppress Russia from supplying more crude?
Anas Al Hajji: So the largest oil producer in the world is the United States of America. So the U.S. is the largest oil producer. And they are among the largest exporters in the world.
There is a very important point here related to India when we talk about the United States and India. India cannot import much from the United States. They can add probably one tanker a month or two tankers a month.
And that's it to replace Russian oil. And the reason why, because the complexity of the Indian refineries, basically, is geared toward medium sour and heavy sour crude, while most of U.S. exports are light sweet because U.S. shale produces light sweet crude. So here we have a technical issue.
It's the crude quality that determines this. So if Trump talks to Prime Minister Modi and says, you have to buy more from us, it's not up to Prime Minister Modi because it's a technical issue. We cannot get your oil simply because it's light sweet.
And our refineries, basically, are geared more toward medium sour. So that's an issue. However, historically, the primary suppliers to India, in particular, were the Gulf states and Iraq.
So you are talking about Saudi Arabia, you are talking about UAE and Oman, and simply because of the proximity to the Indian ports. We've seen at certain times, we've seen some diversity where India imported some from West Africa and Brazil, and some from Mexico or Latin or South American countries. But when Russian crude was embargoed by the Europeans and the G7, Russia had to find other markets and they had to sell at discount.
So India started importing the Russian crude at discount, and that Russian crude has to come at the expense of someone else. Of course, we have a growth in demand. So the Russian crude basically kind of met the growth in demand and replaced some of the imports from other countries.
Logically speaking, and that's confirmed by the data, you are going to replace the most expensive crude. And the most expensive crude coming to India is mostly because of the distance. So if you look at the replacement, India first replaced the South American crude, then the US crude, then West African crude, just based on the distance.
And now if we have any problems in Russia, then we go backwards. So you will see the first replacement for Russian crude is going to come from West Africa, and then the United States and then Latin America. So the issue here for India is, what is the replacement for Russian crude if we have a crisis in Russia?
Of course, we do have large spare capacity in the Gulf. And they are the countries that can basically provide those additions as a replacement. The question is, will they do it?
And how much are they going to increase production to compensate? This is, no one can answer that at this stage. But what we've seen historically is that the major producers are the OPEC members, the OPEC Plus members, the United States, and Norway.
Basically, most of the exports of Norway goes to Europe. And we've seen Brazil, Guyana exporting large quantities to Asia and Europe. So those are the major suppliers.
When it comes to consumption and import, this is kind of a very interesting kind of thing to study. The largest importer in the world is China. But China is now changing its policy.
It's focussing its strategy on reducing seaborne energy imports. This is a strategic decision, and has nothing to do with markets. And the reduction in seaborne imports requires them to do several things.
One of them is to build massive inventories. And at the same time, increase imports from land, which means pipelines from Russia that will bring natural gas and more coal imports from Mongolia. Now, on the India part, India is a large importer and might become the second largest importer in the coming years until China basically kind of loses that position.
But the idea here is, if you look at the largest importers, we have a new phenomenon in the market that we've never seen before. This started in 2016, so it's been there about 10 years. For China to be a big or a large importer of oil, China played a very important role as a very powerful buyer in the market.
I don't want to get technical on this one here, but the oil market is never competitive. Never being competitive. So any analysis of the market based on competitive ideas is wrong.
The market is some sort, and there are no cartels, by the way. There is some sort of oligopoly, that's an economic term, in the market. So we have, when you talk about oligopoly, you are talking about a few large sellers or a few large exporters.
But China changed that game in 2016 by being a very influential buyer. And that changed the market from oligopoly to something we call oligopsony. And that oligopsony basically prevents oil prices from going up substantially.
So in a sense, it's beneficial to consumers on several sides. But what that does is China will buy low, store the oil, and when oil prices go up, start dumping oil from storage on the market. This is a new behaviour in the market, and it became extremely influential, as influential as the OPEC members or OPEC Plus members in the market.
India cannot play that role. And I've been talking about this for several years now. India's problem right now when it comes to the oil market is its inventories are very low.
And India needs to play the Chinese game. They need to enlarge those inventories to kind of be more energy secured on one side and not to be affected by this sudden increase in prices because of various political issues around the world. So the question for India right now rests on two issues here.
The first one is the Russian imports. The second one is inventories. India's inventories are about 100 million.
This is for the size of the economy of India. This is very low. And they need to go to at least 350 or 400 million.
Govindraj Ethiraj: Right, and there are investments that have been outlined or announced for building more strategic reserves. So I don't know if that number is a comfortable number, but I can sense that the inventory buildup is definitely happening. But let me, I had a question about the refinery.
So my understanding so far was that most Indian refineries are able to process both light sweet and medium sour simultaneously, or maybe not all refineries, but many of them. But you're saying that that's not enough.
Anas Al Hajji: Well, for the Indian refineries, for the capacity and everything else, they are fine. There is no problem. And India exports refined products to the rest of the world.
And so there is no problem with that at all. The issue for the Indian refiners right now is they have to juggle the crude quality around the world based on all the changes that we are seeing. We've seen changes when the Europeans imposed sanctions on Russia.
We've seen Russian oil coming through the Mediterranean and the Red Sea to India. Now if the Ukraine war stops and the sanctions are reduced or lifted, then some of that Russian oil will go to Europe again. So what would India do?
So we have this game of musical chairs they have to play, and which means that they have to stay on their toes all the time to make sure that they are still making money and they don't lose money, or they are not going to experience any shortages out of those games. Luckily for now, we do have enough spare capacity in the Gulf. But what if that spare capacity declines substantially in the future?
How that musical chairs game is going to be played. The other issue that might pose a problem is that people are talking about electric vehicles and the impact of electric vehicles on oil demand. And those who are supporting electric vehicles, they think that oil demand is going to decrease.
Of course, I don't believe it at all. But they believe that oil demand is going to decrease, which means that the demand for gasoline is going to decline. And if that happens, then refineries will be forced to change the configuration of those refineries.
So this is another threat that those refineries have to look at. Although, again, I don't believe it's going to happen, but a lot of people are raising that question. So the India refineries are facing several issues, including the fact that if you look at the Middle East right now, we are seeing a major competition.
So we've seen new refineries in Kuwait, UAE, Oman, and Saudi Arabia. And these are mega refineries. What that means is that the Indian refineries have to be extremely competitive, again, on their toes 24-7, to make sure that they are competitive with everyone else.
