Why The Markets Are Caught In A Perfect Storm Involving The Rupee
The rupee has hit an all-time low for the fourth consecutive session
On Episode 753 of The Core Report, financial journalist Govindraj Ethiraj talks to Dr. Ajit Ranade, Economist and Former Vice Chancellor of Gokhale Institute of Politics and Economics in Pune.
SHOW NOTES
(01:00) Why the markets are caught in a perfect storm involving the rupee
(06:23) Leading global crude indicators are pointing towards a fall in prices now. The IEW Segment
(08:06) The paradox of high growth, low inflation and a falling currency
(20:14) The US struggles with putting out critical macro data is a lesson for everyone
(23:25) Ford slams reverse gear on EVs globally, are there lessons for India?
(26:50) After Australia, Malaysia will have controls on children’s access to social media
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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.
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Good morning, it's Wednesday, the 17th of December, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, usually but in transit right now, to somewhat cooler times, actually very cool times.
Our top stories and themes…
Why the markets are caught in a perfect storm involving the rupee
The paradox of high growth, low inflation, and a falling currency.
The leading global indicators are now pointing towards a fall in crude prices, the IEW segment.
Ford slams the reverse gear on electric vehicles globally. Are there lessons for India?
The U.S. struggles with putting out critical macro data, and that's a lesson for everyone.
And finally, after Australia, Malaysia will also have controls on children's access to social media.
The Perfect Storm
Well, the Indian markets will be, how shall we put it, range-bound for some time now. While Indian exporters are clearly fighting the U.S. tariff blockade by scouring newer markets or taking a beating on margins, the absence of a trade deal or the bilateral trade agreement is obviously hurting sentiment, particularly the rupee itself, which, as we've been saying, is the somewhat sensible barometer to understand where institutional sentiment on India is.
Given that Indian markets are taking that breather, it's also a good time to keep visiting or revisiting trends and shifts in global markets, particularly on Wall Street, particularly since several fund managers are admittedly looking beyond AI at markets like India, given that the AI honeymoon plus euphoria is approaching a peak or has approached a peak, depending on who you ask. Meanwhile, the IPO market continues to sizzle with energy. ICICI Prudential Asset Management, which is the country's second largest mutual fund, saw its $1.2 billion IPO being fully subscribed on the second day of bidding on Monday.
And this is the fourth largest IPO in 2025. And that puts India on track for the second straight year of record primary market fund raising. And it looks like 2026 is also gonna have a strong lineup.
In the markets on Tuesday, the benchmark indices were down thanks to those weaker global cues and losses in metal, financial, and realty stocks, according to Business Standard. The Sensex was down 533 points to 84,679. The Nifty 50 was down 167 points to 25,860.
The broader markets were also down. The Nifty mid-cap was down 0.8%, and the small cap was down 0.9%. The rupee continues to slide. It fell to a lifetime low on Tuesday as weak risk appetite amplified lingering pressure from hedging demand and portfolio outflows.
And of course, all of this is amidst that continued uncertainty over a US trade deal, according to Reuters. The rupee fell to 91.07 rupees per dollar before ending 0.3% lower at 91.02 rupees. Now it has declined about 6% against the greenback this year and is amongst the worst performing emerging market currencies in 2025.
Now the rupee has hit an all-time low for the fourth consecutive session. And the general belief amongst traders is that the Reserve Bank will step in more actively now to curb speculative buildup against the currency. Speaking about currencies and the value of them and perhaps central bank intervention, a rising number of Chinese economists and former central bank officials are arguing that a stronger currency is needed if the countries rebalance the economy away from exports, boost tepid consumer demand, and reduce trade conflicts, according to a Bloomberg report, adding that open discussions about such sensitive subjects like currency management are notable in President Xi Jinping's China, where policy decisions are typically opaque.
The calls are also fuelling speculation that policymakers will allow broader appreciation in the managed currency, which Goldman Sachs estimates is undervalued by a quarter relative to economic fundamentals, although few expect a substantial rise. Elsewhere and back home, financials, whether banks or non-banks, continue to attract investor interest, as many analysts have been pointing out to us in recent months. After several billion dollars deal in India's banking sector, the M&A buzz is spilling over to non-bank lenders, according to Bloomberg.
Mitsubishi UFJ Financial Group, or MUFJ, is close to buying a 20% stake in Sriram Finance in a deal that could be sealed as soon as this week and is potentially valued at about $3.2 billion. Japan's big banks, and that's obviously the trend here, have been steadily deepening their bets on India. Sumitomo Mitsui earlier became the largest shareholder in Yes Bank, and MUFJ's stake in Sriram underscores how there is growing interest in India's broader financial system, according to Bloomberg.
Investors expect the stock, which is already up 48% this year, to maintain that growth. Now, a quick recap of Monday's trade figures, particularly the export data, which we discussed yesterday as well. Now, shipments to the United States for November rose more than 22% from a year earlier, and it outpaced India's overall export growth of more than 19%.
And that took the total figure of goods exports to $38.1 billion. This is as per data that was released on Monday. A note from Crystal Ratings on Tuesday said that this was partly driven by a statistical low-base effect, but the rebound was broad-based, led by petroleum products, gems and jewellery, and core.
And on a sequential basis, export was strong as well. Gems and jewellery exports were up about 28% compared to 29% decline in October. Petroleum products exports were up about 11.6% versus a 10% fall in October, whereas the core sector grew about 20% versus a 10% decline in the previous month.
So there's a big change and a turnaround. And particularly to the U.S., India's exports increased 22% after falling 8.6% in October and about 12% in September. So the larger point here, obviously, is that exports to the U.S. have been more resilient or have been fairly resilient, despite those 50% tariffs, which obviously equals an economic blockade.
Exports to the rest of the world have also jumped, going up 18.7% or close to 19% compared to a contraction of 12.5% in October and a 10% growth in September. So exports are obviously diversifying, even as exporters are rushing to find other markets. However, some exporters, for example, in marine foods are pointing out that while they've been able to divert some of their exports to other countries, the margins are still higher in the U.S., which they are not able to access as such.
We'll have a detailed discussion that looks at the rupee and exports and foreign flows all together in a moment.
The India Energy Week Segment
The Middle East's Dubai oil benchmark is showing signs of worsening oversupply, adding to a slew of indicators pointing to a global glut according to Bloomberg.
The forward curve for Dubai trade, a great Asian traders and refiners price transaction against is fast weakening, says the report, which in turn has brought down futures prices lower in key pricing centres with Brent contracts nearing a return to the $50 a barrel. And elsewhere, oil has extended declines after hitting the lowest level since 2021 as traders took in the possibility of a ceasefire in Ukraine, which obviously will mean eventually more Russian crude flows into a market that's already considered oversupplied. West Texas Intermediate was below $57 a barrel after closing at a lowest in more than four years on Monday and Brent was very close to $60 a barrel according to Bloomberg.
Now there are rising concerns of a worldwide surplus after drillers, including the Organisation of Petroleum Exporting Countries plus stepped up production. The International Energy Agency or IEA has predicted that there'll be a substantial glut in 2026 and globally signs of oversupply are building physical markets in the US are flashing similar warning says Bloomberg with some key domestic indicators in Contango. Elsewhere, volumes in floating storage has also been growing with oil loaded into ships that haven't moved in at least seven days near the highest since the COVID-19 pandemic according to research firms.
The Paradox
India is going through an interesting macroeconomic paradox. GDP growth is amongst the fastest in the world, 8.2% in the last quarter. Inflation is very low and the fiscal deficit is in check.
Yet the Indian rupees, Asia's worst performing currency as we've just discussed in some detail earlier, foreign portfolio investors have pulled out $17 billion and net foreign direct investment has dropped dramatically. So why is this happening and how should we be viewing capital flows whether direct or portfolio in this context? I reached out to Dr. Ajit Zandi, an economist and former vice chancellor of Gokhale Institute of Politics and Economics in Pune who recently wrote an article on this theme in the Mint newspaper. And I began by asking him to describe where we were right now in the context of flows.
INTERVIEW TRANSCRIPT
Ajit Ranade: Foreign direct investment has four components, that is, foreign money coming into India, foreign money going out of India, Indian money going out of India, and Indian money coming into India. So this is, I think, broadly the way to think about foreign direct investment. So what has been happening is, for the last four or five years, the net foreign direct investment into India, that is, the net inflows of dollars, has been going down quite dramatically.
So roughly, it used to be around $40 billion net of four numbers I mentioned, and it's down to almost zero, like $0.3 billion during this last fiscal year, which means that compared to last year, it's sharply down by almost 98%. The net flow was something like $10 billion, I think, last year. So that's the big thing to note, that net FDI into India used to be roughly almost two or 3% of GDP.
It peaked in 2009, I think, at 2.9% of GDP. And today, we are at 0%, and there is some danger that we may go negative. And it has been spurred by two factors.
One is that outbound FDI, either Indians investing in foreign assets or foreign FDI encashing and exiting India, this has grown faster than the growth of inbound FDI. So for example, last year, I believe, we got a pretty healthy inflow. I mean, the fact that it went up by around 11%.
But the outbound money was grew even more dramatically. That's why we have a net of zero this year.
Govindraj Ethiraj: Right. And you've linked this to the rupee. And obviously, we are speaking at a time on a day, actually, when the rupee has hit a fresh low and has been falling for consecutive sessions now, more than three consecutive sessions.
So how are you drawing this linkage? And why is this important?
Ajit Ranade: Well, as you know, India is possibly the only country, only large country in the world, at least in this part of the world, which has consistently run a trade deficit, which means we import more than we export, which means that we are always short of dollars. Since we don't have enough dollars to pay for our imports, there's always a shortage of dollars. And those dollars have to come from abroad in the form of either borrowing or in the form of foreign direct investment.
Those are called capital flows. Now, despite this trade deficit for a very long time, India actually has managed to consistently get these capital flows, positive capital flows in the world. And cumulatively, we have actually received something like a trillion dollars of FDI net positive into India for the last 30 years.
And as you know, the value of the rupee, the exchange rate is ultimately about supply and demand for dollars. So if the supply and demand is somewhat balanced, you'll have a stable exchange rate. Not to forget that in the medium to long term, the exchange rate between the US dollar and the Indian currency, rupee, will depend on the difference in the relative inflation rates.
So for example, if the dollar is losing purchasing power in their domestic market, that is if the inflation rate in the US is let's say 2%, but if the domestic inflation rate in the rupee that's in India is say 6%, then the rupee is losing value at the rate of net 4% relative to the dollar. That is in domestic purchasing power. So you cannot have domestic purchasing power going down and external purchasing power going up.
So there is some parity, that's called the long term parity between purchasing power parity exchange rate, which basically equates the difference in the inflation rates, that is the domestic and the foreign purchasing power. But in the short run and short to medium run, it's obviously driven by supply and demand for dollars. So if we receive a huge influx of capital flows, that is likely to put an upward pressure on the rupee.
And conversely, if we have outward flows, we will have weakness. Now this year in 2025, we have this both capital inflows, net FDI has gone down to zero nearly, and portfolio flows, that is the capital flows which come into the stock market or the bond market are minus 17. So $17 billion have gone out of India.
So this has been a very tough year. And obviously, that's affecting the value of the rupee. And that's why we have seen the exchange rate, the rupee value has gone down by five or 6% against the US dollar in nominal terms and 9% in real effective terms.
In a year when the dollar index was losing power, remember that the DXY, the dollar index has been losing against major currencies of the world. And despite that, the rupee has weakened against the US dollar. So it's quite a remarkable phenomenon.
Govindraj Ethiraj: Right, and I'll come to the trade part in a moment, which you are also arguing about. But before I do that, why or to what extent should we be concerned about the rupee being where it is right now?
Ajit Ranade: Well, I mean, of course, there's a larger debate of what should be the appropriate or the optimal or ideal value of the exchange rate. I believe that the exchange rate, along with the interest rate and inflation rate, the exchange rate, according to me, is one of the most important variables which determines economic well-being, growth, and competitiveness. Now, what it should be, of course, is something is a much broader discussion.
But I think, you know, if it depreciates too fast or if it depreciates too much, we import weakness or we import inflation. Because all our traded goods domestically are going to be at exchange rate value. We are an open economy.
We trade goods with the rest of the world. So if, let's say, the rupee depreciates against the US dollar and the international price of steel is, let's say, $600 a tonne, it's going to become expensive in rupee terms for Indian buyers on Indian soil. Similarly, the import of crude oil.
So it puts pressure. On the other hand, if the rupee is too strong, then it starts affecting our export prospects. So especially goods where we have relative advantage, like labour-intensive goods or exports of, say, garments or footwear.
So we can't let the exchange rate be so strong in favour of rupee that it starts hurting our exporting competitiveness. So it's always a balance between these two. But we can sense that there is something that the RBI calculates as something called the real effective exchange rate, which is adjusted for inflation differentials with other countries and for trade weights.
So we want it to be somewhat stable, non-volatile, and should not drastically depreciate too fast. So that's a concern.
Govindraj Ethiraj: Right. And, you know, of course, there are always, I mean, there is a question on why are we seeing this at a time when we are in the midst of high growth and low inflation? I'll come to that in a second.
But you're also saying that basically there is a new phase of industrial policy realignment, which is what is fundamentally affecting us right now.
Ajit Ranade: Walk us through that. We used to be comfortable with 2 or even 2.5% of GDP as our current account deficit, which means something like 70, $80 billion was not something that we worried about because we were confident that capital flows would come in to offset that balance. Now, this year, we are struggling even with a $40 billion deficit.
So we are not able to attract the kind of net FDI, which will offset that balance. And that is happening for several reasons. Number one, U.S. and many European countries are now running an aggressive industrial policy, which means providing subsidies to their domestic industry. And these subsidies are making those destinations very attractive for FDI. So that is something India has to contend with. Secondly, because of geopolitics and uncertainties, the risk premium on countries like India has increased.
So it's harder to attract capital flows. Thirdly, as far as the stock market is concerned, our valuations, I believe, are still very expensive. Perhaps that is one of the reasons we have seen a $17 billion outflow on FDI.
So there are all these factors. And added to all these three are perhaps regulatory uncertainties, certain developments in domestic situations, sometimes abrupt changes in policies, or going back a few years, the retrospective amendments, which punished some of the foreign investors. Those are additional factors.
So the net result is that FDI has become much more cautious and is harder to attract.
Govindraj Ethiraj: Right. Okay. So let's come to trade now.
So one way out of all of this is to say that, okay, can we export more than we import, build a surplus like China has done with a $1 trillion surplus? One is, of course, that that's easier said. And secondly, how could that be a strategy if in any case, we are fighting to do precisely that, including, let's say, exporting to countries like the United States, where there is an economic blockade on?
Ajit Ranade: Yeah, so it's not so simple, but I don't think we have too many other choices. We had a structural vulnerability in the sense that our consistent trade deficit, and we were able to meet that deficit with capital flows. Now, if capital flows are harder to get, or not as easy to attract, and by the way, capital flows can also mean not just foreign direct investment, but also external commercial borrowings.
But we can't allow unlimited borrowing by Indian corporates, because that has other implications. You know, debt servicing, vulnerability, ratings, whole thing about ratings, country ratings. So the options are not too many.
So we have to strive very hard to balance our external account. I'm not saying we need to necessarily be a trade surplus country, but at least the current account surplus should be close to zero, or at least, you know, say, half a percent of GDP. Now, what that means is that we need to be diversifying our export destinations.
So decrease our excessive dependence on USA. The US is the only large country with whom we have a large trade surplus. All of the major trading destinations, for example, the UAE, the Middle East, the UAE, or rather the GCC countries, ASEAN countries, European Union.
So we need to find ways to increase our exports, or at least bring our trade to somewhat of a balance set. I'm not mentioning China, because with China, we have a huge asymmetric trade relationship. But I'm happy to say, at least this month in November, the trade data is showing somewhat, you know, optimistic data.
Our exports have jumped up sharply, and even exports to the USA despite the Trump tariffs, and export to China has jumped up. It's not only the trade balance, but we should also look at attracting FDI from other sources. For example, if China is sitting on a $1 trillion export surplus, it means cumulatively their foreign exchange stock is perhaps very high, $4 trillion.
And they will also be looking for investment destinations. So I know that there's a long list of Chinese companies knocking on the door to get approval to underpress Node 3 to come into India. Now imagine, suppose a company like BYD wants to invest $1 billion in Indian auto sector.
Something like that, this is, you know, we need to seriously look at these kind of options.
Govindraj Ethiraj: Right. And last question. I know these things are staggered and take time, but in the last month, we've seen announcements of investment intention worth something like $67 billion by Google and Microsoft and Amazon.
How do you see these flowing in? I mean, if the numbers in themselves seem to be strong enough.
Ajit Ranade: That's right. So, I mean, I hope these materialise very quickly because these are the kinds of flows that we need to attract. And remember, we're talking about net FDI.
So these are gross inflows. For example, I mentioned in my article that a lot of high profile exits have happened from foreign companies, from Citibank, BAT, and Hyundai. So we also need to see that we should be able to retain the foreign investment when it comes here, Greenfield or Brownfield.
We have to find what does it take to retain it and not have too many exits. But you're right. If these AI and data centre and these kind of investments, it's going to be a big positive for us.
Govindraj Ethiraj: Ajay, thank you so much for joining me.
Ajit Ranade: Thank you, Govind.
US Jobs Data
Now high quality macro data is critical for policy markets and financial markets on which they can base their decisions. The United States is now seeing an unusual problem, not of unreliable data, but no data at all.
Now this in turn is leading to questions on as the Wall Street Journal says, what really is going on in the labour market, which is an important gauge with which to understand what's happening in the economy. Well, some of those answers are beginning to come in as they did on Tuesday, but the labour department just to look back after pausing its data collection for weeks during the government shutdown was gonna publish a report on Tuesday with not one, but two months of data. The report would reveal the unemployment rate for November and some data on hiring in October.
Now the information at this point looks backward, but could obviously help people understand things better, but it does not include the unemployment rate for October. Now this will mark the first time in nearly 80 years that the labour department is unable to calculate the jobless rate. Now the US job market has been in what the Wall Street Journal calls an uneasy balance.
One thing to remember is that the uncertainty around labour markets can be also felt elsewhere or put differently. Some of the reasons for labour market uncertainty in the US will apply to India as well, because remember, this is a global trade market. So hiring has fallen beneath the pre-COVID levels, a consequence of cooling demand for workers, but also slower growth in the number of people seeking jobs because of government restrictions on immigrants, according to the Wall Street Journal, which says more importantly that changing tariff policies and increased costs are amongst the reasons why companies don't want to load up on new workers.
On the other hand, many company executives feel that artificial intelligence can handle more work and that has even led to some white collar layoffs. Now there are varying opinions on this. AI is leading to job losses.
All companies are using the excuse of AI to cut jobs or AI washing as it's called. US economists are leaning on other private sector indicators to gauge the labour market and those signals point to patchy hiring and the labour market that continues to cool, but not collapse. The Federal Reserve Chair Jerome Powell said last week that official statistics could be overestimating job creation by up to 60,000 jobs, meaning the US could have lost 20,000 jobs a month since April.
Private Sector Slowdown
India's private sector activity expanded at its weakest pace in 10 months in December as a slowdown in new orders took the steam out of both manufacturing and services sectors according to a survey reported by Reuters, which added that while the economy remains an expansionary territory, the deceleration coupled with a near stagnant job market indicates domestic demand is cooling, dragging overall momentum down from the highest seen in 2025 or other early 2025. So HSBC's Flash India Composite Purchasing Manager's Index, PMI compiled by S&P Global was down to 58.9 this month from 59.7 in November.
And this is the softest activity since February and came despite new export business accelerating to a three-month high on demand from key markets like the US, UK, and the Middle East. The moderation was particularly acute in the goods producing sector where the industry's health improved at its lowest rate in two years and manufacturing PMI was down to 55.7 from 56.6.
The EV About Turn
Not long ago, automakers were touting electric cars as the future.
Well, now they seem to be slamming the brakes hard on that future as market reality, according to the Wall Street Journal, has hit them like a 16-wheeler. Ford Motor revealed on Monday it'll take a $19.5 billion charge on its electric vehicle business. But before we come back to Ford, the Indian market is not the runaway success either, and for some similar reasons.
Instead of ploughing billions into the future knowing these large EVs will never make money, we are pivoting, Ford CEO Jim Farley said, as he explained the company's plan to boost its lineup of gas-powered cars and hybrids. Surprisingly, Ford will also scrap its all-electric F-150 Lightning pickup, which has been a favourite of the EV-loving press, says the Wall Street Journal. Now, Ford has lost about $13 billion on its EV business in the last two years, with bigger losses expected ahead.
Last year, it lost about $50,000 for each EV sold. Now, let's see what's happening in India. The government's long-awaited GST overall has actually turbocharged demand, but for internal combustion engine cars, or petrol and diesel cars, leaving EVs with building inventory and the steepest discounts for the segment this year, according to an article written by my colleague Shubhangi Bhatia for the Core and the Core Daily newsletter.
Top volume drivers like Tata Motors, JSW, MG, and Mahindra, Mahindra, and their dealers are discounting aggressively with offers on popular models exceeding one lakh rupees, and dealers are also reporting a widening gap between the modest model-specific discounts on ICE vehicles and the across-the-board markdowns now hitting EVs. Now, December is always a deal season, but this year, the scale and spread of electric car incentives stand out sharply, according to analysts who spoke to my colleague, who added that December discounts on electric cars are significantly higher than last year. All of this started on September 22nd, when GST on sub-four-metre petrol, hybrid, and CNG cars dropped from 28% to 18%, and the compensation CESS was scrapped.
As a result, conventional cars became more affordable, while EVs remained at the 5% GST, widening the price gap between EVs and ICE vehicles. The festive season did keep overall demand strong, but the EVs failed to deliver the usual seasonal spike, unlike ICE models, which surged. So, back in the US, the Wall Street Journal says that the truth is that the business case for EVs has always rested largely on government subsidies and mandates, and now that this combination is going away, most carmakers have much less reason to make EVs, according to the Wall Street Journal.
It also says the Biden administration sought to force-feed the EV transition with ramped-up fuel economy and greenhouse gas emissions rules, and carmakers were required to produce increasing numbers of EVs, which they had to sell at a loss because demand was weak, and the Inflation Reduction Act's $7,500 EV tax credit boosted demand, but not enough to make the cars profitable, and this year's GOP tax bill eliminated that in October, and that led to demand falling off the cliff, as the Wall Street Journal says, pointing to Ford, whose EV sales fell by about 60% in November compared to the previous year. General Motors this fall also rolled back its EV plans and took a $1.6 billion charge, and the Wall Street Journal says the American car industry would be stronger today had its CEOs not embarked on the EV joyride with politicians promising subsidies. Now, it can be argued, as we return to India, that GM and Ford are quicker to pull back from bigger bets, though for varying reasons, remember, both of them pulled out of India at a time when the auto market was still growing and all major car brands were actually building or strengthening their India presence.
After Australia, Now Malaysia
Malaysia also plans to ban social media accounts for children under 16 starting next year, following a similar move by Australia. Policymakers across the world, including in Indonesia, Denmark, and Brazil, are also thinking about similar moves.
TikTok, Instagram, and major social media platforms will automatically come under Malaysia's laws starting Jan 1st. Part of a government push to shield children from online harms and strengthen platform accountability, according to a Bloomberg report. All internet messaging and social media service providers with 8 million or more users in Malaysia are subject to the country's licencing framework and will be deemed registered as licensees under the Communications and Multimedia Act of 1998.
The Malaysian Communications and Multimedia Commission said that the move ensures that large-scale internet messaging and social media service providers comply with the country's legal and regulatory framework in an orderly, consistent, and effective manner, which will also ensure that platforms involved bear clearer responsibility for user safety, particularly in safeguarding children and families.
