On Episode 936 of The Core Report, financial journalist Govindraj Ethiraj talks to Amit Pabari, Managing Director at CR Forex as well as Amit Mittal, Director at AeroIntellect Aviation.

SHOW NOTES

(00:00) Stories of the Day

(01:00) Why US Federal Reserve Moves Matter To India

(04:08) Mahindra To Double EV Production Capacity

(05:07) Why Gold Demand Has Fallen To Lowest In 6 Years

(06:11) Despite Some $32 Billion Of Inflows, Including NRI Deposits, Why The INR Has Barely Moved

(15:12) How 10 Individuals Control 20% Of India’s Wealth

(18:01) Indigo Has Completed 20 Years, A Look Back At The Airline And Look Ahead For The Industry

EVENT: Spotify x The Core's "Building Wealth for a Longer Life" with Saurabh Mukherjea of Marcellus Investment Managers. Register Here

—

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 Friday the 31st of July and this is Govindraj Ethiraj, usually broadcasting and streaming weekdays from Mumbai, India's financial capital, but still in transit right now.

Our top stories and themes…

Why U.S. Federal Reserve moves matter to India

Mahindra to double electric vehicle car production capacity

Why gold demand has fallen to its lowest in six years

Despite some 32 billion dollars of inflows including NRI deposits, Why the INR or the rupee has barely moved

How 10 individuals control 20% of India's wealth, and Indigo has completed 20 years, a look back at the airline and look ahead for the industry.

Markets, EVs and Gold

A series of economic developments in the United States, which will affect flows and sentiment everywhere else in the world in financial markets, are worth noting.

To start with, there is scepticism that the new U.S. Federal Reserve Chair, Kevin Walsh, is doing enough on inflation. For all of his tough talk about taming inflation, he's not rushing fast enough to deliver, a Bloomberg report said, adding that after the Fed kept interest rates unchanged for a seventh consecutive month on Wednesday, investors dumped 30-year treasury bonds, sending yields up to as much as 5.23 percent or by 14 basis points, a 19-year high. Market measures of inflation expectations also rose even as dollar and stocks fell, according to that report.

Now, these moves have suggested that investors are growing concerned or increasingly concerned that Walsh will not manage to rein in inflation that has run above the Fed's target for five years now. The Bloomberg report also explains that as a result, bondholders both pushed down yields on the most short-term treasuries, which is a reflection of how they rapidly scaled back bets on immediate increases, and demanded higher payouts on longer-term bonds to compensate for inflation risks in the years ahead. So the drop in two-year yields coupled with a rise in 30-year rates made for one of the biggest such steepenings of the yield curve after a Fed meeting since at least the mid-1990s, according to Bloomberg.

Meanwhile, U.S. economic growth has slowed in the second quarter, though a pickup in consumer spending and solid business investment signalled underlying strength. Business investment presently equals AI investment, or predominantly. U.S. inflation-adjusted GDP increased about 1.5 percent annualised for the three months through June, according to advance estimates issued on Thursday by the Bureau of Economic Analysis.

Now, this is a deceleration, as we pointed out, due to a surge in imports. Consumer spending, which represents about two-thirds of economic activity in the U.S., rose at a stronger-than-expected 3.2 percent rate. Business investment, as we said, continued to boom amidst the frenzy to invest in Speaking about AI, the markets are punishing and rewarding stocks almost on alternate days on Wall Street, more on that in a moment.

Back home, Indian markets were trying to make sense of all this. The Sensex was up 273 points to 77,928, and the Nifty 50 was up 66 points to about 24,317. In the broader markets, the Nifty mid-cap and small-cap were down about 0.3 and 0.5 percent each.

The rupee was mostly unchanged on Thursday. Likely Reserve Bank of India intervention helped hold clear of the psychologically key 96 level to a dollar, according to Reuters, adding that it closed at Rs. 95.68 per dollar, almost similar to the Rs.

95.64 in the previous session. More on the rupee and its prospects shortly. Oil prices fell on Thursday, even as investors once again tried to find signals in the talks between Oman and Iran over the state of Hormuz, even as the U.S. and Iran continued to strike each other's military targets.

Brent futures were down about $1.5 to about $89.30 on Thursday, which is of course just under $90 per barrel. Analysts told Reuters that the fact that Oman is in talks with Iran could suggest that progress is being made on reopening the state of Hormuz. Seeking to energy and energy applications in a sign that India's electric vehicle market continues to show growth potential, automaker Mahindra and Mahindra said on Thursday it would double its EV auto production capacity over the next five years after reporting a roughly 7% rise in first-quarter profit thanks to strong demand.

Mahindra also rolled out a second round of price hikes on July 8 and said that future hikes will depend on commodity prices. Back to Wall Street, the wild swings continued. Microsoft shares were up 15% on Thursday, while Meta fell 9%, as investors obviously gave differing verdicts on the two tech majors' earnings, according to a CNBC report, adding that on Wednesday, Microsoft posted fiscal fourth-quarter revenue that beat analyst expectations and reported 43% growth in its key Azure cloud business, which was also ahead of market expectations.

Microsoft said that it has now over 30 million paid seats for its Microsoft 365 co-pilot, its AI work assistant, which is up from 20 million as of April. And to precious metals, India's gold demand has, well, unsurprisingly fallen to its lowest level in six years during the April to June quarter thanks to record high prices, a steep increase in import duties and a weak buying season, according to the World Gold Council. Net gold imports were down 23% year-on-year to about 98 tonnes in the June quarter, the lowest since September 2020, which was, of course, induced by pandemic lockdowns.

At the same time, increased smuggling and a surge in gold loans has underscored the precious metals' enduring appeal, the World Gold Council said. The government had earlier more than doubled import tariffs to 15% on May 13 to curb demand, cut trade deficit and ease pressure on the rupee, all of which may not be working as planned, though more on that shortly. World Gold Council officials said the arbitrage was huge with an 18% difference and that smears an entire industry, referring to obviously smuggling and the damage to organised players.

Meanwhile, seizures of smuggled gold have doubled between mid-May and June end, according to the government, as compared to the period between April and mid-May this year.

Why the INR or the rupee has barely moved

India's central bank sold about $7 billion to defend the rupee last Friday in what was one of its largest direct interventions in months, according to a Bloomberg report, and the Reserve Bank of India had intervened across both onshore and offshore markets as the rupee approached a record low. So the larger question for the moment is, of course, how India's strategy to bring in foreign currency via NRI deposits and foreign investments into bonds or other incentives for that has worked so far.

Some $32 billion have come in through these measures, but the rupee is not reflecting any strength as of now, including via the signalling from all these moves. The inflows have yet to bolster the central bank's or the Reserve Bank's foreign currency assets or significantly ease rupee liquidity in the banking system, according to the Bloomberg report, adding the rupee's reaction has been muted compared to 2013, when it rallied more than 10% in the first 37 days after the deposit measures were announced, which is to bring in FCNR or foreign currency non-resident deposits. This time the rupee jumped about 3% from its record low in May, but lost them quickly as oil prices jumped and uncertainty continued in West Asia.

I reached out to Amit Babari, managing director of CRForex, and I began by asking him from a broader sense why the rupee was being pushed down at this point of time and what could.

INTERVIEW TRANSCRIPT

Amit Pabari: So basically, the time when they have announced the measure at that point of time, Rupee was trading close to 96.5. And based on sentiment, Rupee went to 94.30, currently trading near 95.5 kind of a level. So basically, when the FCNRB flow comes in, into the bank, then there can be two kinds of scenario. One, the bank go and supply that, bank goes and give it to the RBI, and RBI put it into the spot market.

Or RBI might decide that they will not put it in the spot market. So probably, as RBI is sitting close to 108 billion forward short position, so RBI must have thought, let me not put the money at one go, let me intervene in a slow and gradual manner. So because of which, we have seen that when the volatility is high, RBI is coming and intervening, not using the entire flow at one go.

And at the same point of time, you know, in last couple of weeks time, at the same point of time, the crude also bounced back towards 100 kind of a level, 10 year treasury yield also moved higher, and dollar index also moved higher. So every other currency got weaker, mainly emerging market currencies. So basically, RBI do not want to use entire flow at one go.

They are cautious, they do not know what the problem can be in future. So staying put and decreasing the volatility as and when required, not using the entire gunpowder at one go.

Govindraj Ethiraj: So that's the operational side. But from a strategic intent, obviously, the Reserve Bank of India has revealed or shown that it can intervene and that there are dollars coming into the country. But that does not seem to be affecting the rupee at all.

Why is that?

Amit Pabari: Probably, they do not want to use the entire power at one go. At the current juncture of time, when the geopolitical tension is rising every day, and as a country, we are a crude import country, we do not know whether the crude is going to settle at 90, 120 or 150. If I'm using all my reserve FCRB flow at one go, and then the crude price moved towards 120, then what do I do?

They have taken all the steps. So they have to be very cautious in coming and intervening at this point of time. They do not know whether the problem is going to end today, or it is going to last for next six months.

Govindraj Ethiraj: Right. Okay, so let me put the question a little differently. So what is the confidence level in the rupee right now, from a traders, investors, speculators point of view?

Amit Pabari: See, as a country, we are a net importer. So basically, the currency is going to get weaker as every month we are having a trade deficit close to 25-30 billion. So if we are getting weaker by 3-4% annually, it doesn't give us a negative signal to anyone.

Because at the end of the day, we know our demand for dollar is higher than the supply for dollar. So if we are getting weaker by 3-4%, technically it is good also. Getting weaker is not that bad.

If we are weakening by 3-4% in a year, it is okay. But if we are weakening by 15-20% in a year, that gives us negative signal what happened in 2013-2008. So market knows that rupee is going to get weaker.

Probably RBI also have understood that in a current scenario, when geopolitical tensions are there, rupee might get further weaker. So they are playing it very smart manner and ensuring they do not go and sell at one go 5-10 billion. They are selling at an interval of time and curbing the volatility.

Govindraj Ethiraj: And given this and since you mentioned 2013, the rupee had jumped quite sharply at that time when the dollars came in and there was a more than 10% increase. Now as to your point that this is maybe strategically the operational rollout is different because they are doing it more in small interventions rather than large interventions. I am not sure how it was done in 2013.

But the signalling itself seemed to have had an effect in 2013. But that is not working now. How are you seeing, one is of course the signalling and whether it is working or what is the Reserve Bank of India signalling?

And second is, given all of this, what is your outlook?

Amit Pabari: So basically in 2013 scenario was different. It was not a geopolitical tension. We do not know at current point of time whether the geopolitical tension is going to last for one week or three months or one year.

If it gets worse, I will be wise enough to spend my reserves in a nice and staggered manner rather than spending it at one go. So that is the difference. Secondly, at that point of time, I was not short 108 billion.

Today I am short 108 billion. So I have to keep that in mind that if I am using my reserves completely at one go and a problem comes after two months, then what is the backup plan? So RBI must have done that backward calculation and keeping the rupee volatility under control.

They are doing a great job. I will say that. Probably one thing what I will suggest to or if I would have been an RBI governor, I would say I will learn from Bank of Japan attacking when the opponent is weak.

If you see today, USDJP was trading close to 162 level and Bank of Japan intervened today when the US data came negatively. So they are doing it purposely at a time when US gives a negative data point. So probably RBI should learn from Bank of Japan and try to intervene in the market when the opponent is weak.

So sell on those days when US data is on the weaker side. Otherwise, they've been doing a fantastic job. As far as outlook of the rupee is concerned, I think we are expecting crude oil price to move back towards hundred kind of a level.

And because of that, there will be pressure in the dollar rupee pair. 95, 95 and a half is going to act as a very strong support for rupee and probably we are heading towards 96 and a half, 97. And if the crude moves back to 100, one more round of depreciation towards 97 and a half kind of a level.

Post-September, we are expecting flows might start coming in. Once we see winding up of money from US or other market, then probably rupee will settle down and then we can see some kind of appreciation in the rupee. But for the next two months, we are expecting rupee to get weaker towards 97.

Govindraj Ethiraj: Right. Last question. You referred to the US and the data coming from the US and I referred to it earlier in the show as well, where we talked about one is decelerating growth and also a very sharp rise in bond yields because there was an expectation of the Federal Reserve addressing inflation.

But at least the market seems to be disappointed and we've seen bond yields at 19 highs. What does all this mean for the dollar, which is of course weaker right now and from an India point of view?

Amit Pabari: Structurally, if I have to give a dollar view for one year, I think 104, 105 is going to act as a very strong resistance for dollar index and probably it is again going to come down back towards 100 or 95 in FY27. That's the broader and the bigger view. And for India, if dollar is getting weaker, ideally flows should start coming in in the last quarter this year and next quarter and probably that will help rupee to get settled down.

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

Amit Pabari: It is always my pleasure.

Wealthy Indians

A new report says India is home to 3,040 individuals worth at least 425 crores each, together commanding over 10 lakh crore rupees of wealth, nearly a fifth of which is held by just 10 people, according to a joint report by 361, the wealth management firm and Crystal Intelligence. The bottom half of these individuals, about 1,520 Indians, account for about 9% of the total 10 lakh crore rupees in wealth. Women account for about 24% of these wealth creators or 738 of the 3,040.

The Ambani children, that's the two sons and a daughter, continue to hold the top three positions, each commanding wealth exceeding 275,000 crore rupees, according to the report. Nearly all the 3,040 wealth creators are entrepreneurs and more than half are first-generation entrepreneurs, representing about 1,696 individuals, while the remaining 1,290 are intergenerational entrepreneurs, according to the report quoted by Business Standard. The report said that India now boasts 12 business families with wealth exceeding a hundred thousand crore rupees each.

These include the Adanis, Mittals, Shanguis of San Farma, Mistry of Shapurji, Polanji, Nadas of HCL, Jindal of JSW, Birlas of Aditya Birla and so on. But a decade ago, this club barely existed. Meanwhile, sticking to the larger theme of wealth creation and perhaps the role of AI in it, at least globally, around 8 to 12% of India's non-agricultural jobs face the risk of substitution by generative AI, while 42 to 48% of the workforce is expected to benefit from AI-driven augmentation, according to a Goldman Sachs report quoted by Business Standard.

The report says that Gen AI could perform 9 to 17% of the tasks currently undertaken by India's non-agricultural workforce, and under its baseline scenario, about 13 to 15% of tasks are exposed to AI automation. In most occupations, it's likely to free workers from routine tasks and improve productivity rather than replace them entirely, and the impact will vary across sectors, according to that report.

20 Years of Indigo

Last month saw Indigo Airlines expand its domestic market share to about 66.3%, while Air India Group, the second largest player, fell to about 24%, according to the Director General of Civil Aviation Data.

Now, a year earlier, Indigo had about a 64.5% share, while the Air India Group, that includes Air India and Air India Express, accounted for about 27%. Now, the shift has been driven largely by capacity, according to a Business Standard report, with the Air India Group operating about 3,900 fewer domestic departures in April and May than a year ago, which is a fall of about 7%. In contrast, Indigo expanded capacity by 12%, operating more than 13,000 additional domestic departures during those two months.

Which brings us to Indigo's 20-year anniversary. The story began in June 2005, when Indigo founder Rahul Bhatia placed orders for 100 Airbus aircraft at the Paris Air Show, creating a stir in India, of course, and even globally. Bhatia's family ran a travel business before that, and he then joined hands with Rakesh Gangwal, who ran US Airways for four years as chairman and CEO to co-promote Indigo Airlines.

Now, that relationship started bitterly much later and more recently, but that's a different story. 20 years on, Indigo has a roughly 430-strong fleet, which is about one and a half times the size of Air India, and the OAG has ranked it among the 10 largest airlines in the world in terms of frequency of flights. In June, the research agency also said that Indigo was the world's third most punctual airline with an on-time performance of 86.6%, according to that Business Standard Report.

And a few days ago, Indigo signed an order for 1,000 engines, which is the largest in the world, with CFM International, which will partly power about 510 new Airbus aircraft ordered in 2023. So, looking back at these 20 years of Indigo, what are some of the prominent lessons, do's and don'ts for not just Indigo, but Indian aviation overall? I reached out to Amit Mittal, director of AeroIntellect Aviation, an aviation consultant and an expert in aircraft leasing and financing, and I began by asking him what were his key takeaways on Indigo's journey so far, and the outlook for aviation as a whole.

INTERVIEW TRANSCRIPT

Amit Mittal: So I've been in the industry for 21 years and I have been since the time when Air Sahara was there. Air Deccan was there after that and the first thing I would say is that IndiGo kind of democratised air travel. Earlier it was like a premium net worth heavy kind of a model.

Now air travel has grown beyond the metro cities. So that is one of the biggest contribution of IndiGo as an airline and having a 66 percent market share. So they've really grown the market in such a way that now middle class and people are travelling not because of like once in a while or it is mainly like becoming like a habit.

So that is one of the thing which is the contribution of IndiGo and second thing is that in terms of the overall growth of the aviation market. Now we have got around 850 aircraft commercial aircraft and the order book is around 1700 aircraft and bulk of that is around 1300 aircraft are IndiGo aircraft and IndiGo is our largest operator for A320neo with 180 aircraft and that has got 235 more A320neo coming up as per this order book. So one of the largest operator for the single family type.

What they have done is this basically they have standardised their fleet and they've given massive bulk orders. So in a way they have kind of done execution at scale. That is the right word I would put it and that is exactly they have kind of low fields operational efficiency turnaround time, high utilisation of the aircraft, sale and leaseback as a model for financing of the aircraft and low cost for our CIS part CSK for the available seat kilometres and as well as gradually capacity led growth.

It is not that they have grown the fleet just to capture a market. They've gradually synchronised that with capacity. Today they are flying more than 2,000 flights in a day and they have gradually now becoming gradually moving on to international operations as well.

So that is my take on IndiGo as such.

Govindraj Ethiraj: Okay so of course at this point of time when one looks back one cannot overlook what happened in December last year when the entire system sort of collapsed and there was obviously much an inconvenience which also led to let's say concern in the government and the desire to have more airlines flying particularly at scale. So how would you look at what went wrong and what are the lessons from that?

Amit Mittal: See mainly the reason for that was the mismatch on the implementation of the FDTL regulations flight duty and time regulation for the pilots. Initially there was a hiccup and IndiGo obviously took some time to catch up with that and they had taken a kind of waiver from DGCA for certain point of time till 10th of February and I was also interviewed at that time in the media on this topic and basically later on IndiGo has caught up with the FDTL requirements. Obviously at that point of time and now also people think that India being a big country and aspirations are growing and air travel is becoming more of a norm rather than an exception.

So three airlines IndiGo, Air India and Akasa there is a need to have more airlines more competitive environment.

Govindraj Ethiraj: Right from an operational point of view I mean so let's say for airlines who are trying to grow today I mean Air India is still smaller and they're growing they've also had their own hiccups including the crash that happened in June. So what would you say are some of the let's say broader lessons of running an airline in India or the sort of don'ts I mean the do's I think we've talked about what are the don'ts?

Amit Mittal: See the don'ts is like over capacity I have seen those times of Sahara, Kingfisher, Jet Airways and Go Air. So there was a time earlier in the industry when all these low cost carriers came in the market. Everybody was trying and expanding.

It led to a situation when there was a over capacity in the market. Market was not developing in pace with the aircraft available. One was that so now it has kind of caught up and now earlier there was a time I have seen time wherein 15 percent year on year growth on passenger traffic has happened and now it has gradually come down.

It is a kind of reaching a stage where growth is happening as per the passenger requirements. One is the matching of the capacity in terms of the deployment of the aircraft, number of seats available and the city pairs or sectors you're flying. One is that lesson the Indian aviation has learned over a period of time.

Second is that Indian aviation has also learned that India is a very price sensitive market. Unlike the track routes you talk about Delhi-Mumbai, Delhi-Bangalore or Bangalore-Mumbai just to give an example. The city pairs which are in the hinterland or the Udaan routes, they are still price sensitive and that is precisely the reason the government has given the come out with the Udaan 2.0 also. And the inflexion point in the regional routes comes after two three years of operations when the Udaan subsidy goes away. And that is where we need to see airlines which are flying in the regional routes and even Indigo for that matter having 45 aircraft 80 or 72 aircraft which they fly on the regional routes. How will that pan out?

Because the next growth story is going to happen between the regional airlines and the regional routes. One is that part of the spectrum and the other part is the international operations.

Govindraj Ethiraj: Got it and I'll come to that in a second. So I mean my larger question really is that if you look at the airline from within, in this case Indigo, I mean we know that airlines or running airlines is a tough business. I mean in the last few years we've seen enough examples of that and the latest of course being the war and aviation fuel or overall fuel prices going up and uncertainty, routes being changed constantly.

So given all that, what does it take to run an efficient airline from within? I mean in a broad sense.

Amit Mittal: So in a broad sense within the airline is that high utilisation of the aircraft, operational efficiency, cost control. Cost control is a very big factor in an airline because you need to understand that at the end of the day airline is a transport business and because it is a transport business, first thing is on-time performance, having the right frequency at the right price. Once these three objectives are met and they have to be added in verbatim, price, frequency, operational efficiency, these are the three things which need to be there.

After that the pre-modernisation comes like meals and other and of course airlines also have realised that ancillary revenues play a big role in the overall earning of the airline because there's a limit up to which you can increase the base fare and ancillary gives the airline flexibility as well as the passenger the flexibility to pick and choose.

Govindraj Ethiraj: Okay so and that sort of answers my question partly about how do you view this from a passenger point of view and what they expect and what would they expect from a good airline at least in the context of India? So I think you've clearly emphasised the value point of view or the price to value ratio that Indian consumers look at. Is there anything else?

Amit Mittal: From the business point of view one of the things which I very much advocating in the industry is that aircraft financing. Now because all the aircraft leases are in US dollars and primarily led out of Ireland and although we have Gift City, Indigo Airlines, Air India, Air Kasa, everyone has got their own leasing company as well there but primarily most of the aircraft leases which are dry operating lease or sale and leaseback happening in the Indian aviation industry are dollar denominated. I've been a veteran on this topic for so many years and dollar being 95 96 today typically the lease is for 7 8 9 10 years.

That is one thing which Indian banking fraternity and maybe as some kind of fund can be created to look at how we can do either a rupee based financing or make some ways to cushion this effect of exchange rate depreciation.

Govindraj Ethiraj: Right, you touched upon international so is success defined as being visible and present on international or from an India airline point of view or is a domestic operation or an efficient domestic operation good enough?

Amit Mittal: No, I would say that India is geographically very well placed to have a transit passenger from east to west and west to east and we miss the bus of being a global hub. The middle east carriers have efficiently made themselves as the global hub so given the size economy and the travel of domestic as well as the international travel India needs to grow up into foreign markets as well and that is the next round of challenge when Air India, Indigo, Akasa, our airlines go out and compete with established foreign big airlines.

Govindraj Ethiraj: Got it. Amit, thank you so much for joining me.

Amit Mittal: Thanks a lot.