Will India Join The Global Stock Rally Party?
The MSCI All Country World Index of shares climbed for a second day and reached 950.13, an all-time high
On Episode 654 of The Core Report, financial journalist Govindraj Ethiraj talks to Puneet Gupta, Director - S&P Global Mobility, India & ASEAN. We also feature an excerpt from Puja Mehra’s recent interview with Neelkanth Mishra from our show How India’s Economy Works.
SHOW NOTES
(00:00) Stories of the Day
(01:01) Will India join the global stock rally party?
(05:45) Why you should not worry about Russian oil
(07:52) Should India raise tariff barriers in these times?
(18:04) The ethanol blending controversy
(28:33) Europe is seeing record temperatures again
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 Thursday, the 14th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital,
Our top stories and themes.
Will India join the global stock rally party?
Why should you not worry about Russian oil and Russian oil prices?
Should India raise tariff barriers in these times?
Europe is seeing record temperatures once again and the boiling ethanol blending controversy.
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And before we start off, we won't have an edition on Friday being Independence Day and the market's holiday, so we'll be back later over the weekend.
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Is India Part Of The Global Stock Party?
The reason one asks or says this is because there is one surely going on and Indian stocks are only responding partially when they can before weak cues pull them down again. And of course, we are down from our record highs seen in September last year and have recovered somewhat but not really that much. The only thing that can change is, of course, earnings over which no single person has any control.
The other thing is a nice deal with the United States which can trigger a significant sentiment change. Now, that deal, of course, looks unlikely right now and maybe a rumoured meeting between Prime Minister Narendra Modi and US President Donald Trump's state head for September might change things. But for now, nothing much.
So global stock markets hit a record or rather hit records and the dollar was subdued on Wednesday as investors piled on to mild inflation data in the US and signs of resilience in major economies. The MSCI All-Country World Index of Shares climbed for a second day and reached 950.13. That's an all-time high. Japan's Nikkei Stock Index also set a fresh peak for a second straight session and will come to Wall Street in a moment.
A quick reminder that technology stocks including artificial intelligence or AI-leaning ones are driving some of the biggest gains and benchmarks all over the world. Now, India does not have any breakout sector that could lift indices up, at least that I can see, relying instead on larger, broader shifts like earnings, valuations, views and, of course, flows of which there are plenty right now, at least the domestic ones. On Wednesday, the stock markets responded to India's retail inflation as well as measured by the Consumer Price Index which fell to 1.55 percent in July.
It was 2.1 percent in June and this is the ninth consecutive month of decline and it's also an eight-year low. This is the lowest CPI reading since we said eight years. It's June 2017.
Meanwhile, rating agency Crisil analysts said that while the fall in inflation over the past few months has benefited all income segments, the lowest ones have gained the most as food prices fell on year. So, food prices technically are in deflation right now, i.e. they are negative. Our calculations show that Crisil says that in the rural areas, the lowest income segments saw inflation rate go from 4 percent a year ago to 0.8 percent and in the urban areas, it's gone from 2.7 percent to 1 percent.
So, the sharp fall in retail inflation should help household purchasing power, particularly in the lower income segments and this trend also creates, Crisil says, room for further monetary policy easing which could benefit interest rate or other interest-sensitive consumption segments. Now, let's come to the markets. The Sensex was up 304 points to 80,539.
Nifty 50 was up 131 points to 24,619. Now, let's go back to Wall Street. All the excitement is there because after inflation numbers increased speculation that the Federal Reserve will now have room to cut rates in September and that of course caused stocks to jump and pushed short-dated bond yields lower.
All the major U.S. indices climbed more than 1 percent. The S&P 500 and the Nasdaq 100 hit all-time highs, says Bloomberg and the Russell 2000 index of smaller firms also was up 3 percent. Bloomberg also reported that while an initial rally in Treasuries faded, money markets have now priced in an about 90 percent chance of a Fred reduction in interest rates next month in the United States.
Back home again, the Indian rupee also gained the most in more than a month on Wednesday, thanks to those Fed rate cut hopes. The rupee gained about 0.3 percent, the highest intraday gain since July the 3rd and closed at Rs. 87.44 compared to Tuesday's close of Rs.87.71. On the other hand, Reuters also reported that investor confidence in the dollar was further dented after the White House said President Donald Trump was weighing legal action against Federal Chair Jerome Powell but nothing to do with interest rates but his handling of renovations at the central bank's headquarters. The dollar index was down 0.4 percent at 97.645 on Wednesday afternoon. Gold prices rose on Wednesday thanks to the same rate cut expectations and the weaker dollar spot gold was up slightly to $3,363 per ounce on Wednesday morning.
U.S. gold futures for December delivery were up to about $3,414.
Where could oil prices go?
A decision to stop oil imports from Russia, to India that is, might be politically sensitive as it would mean responding to a threat from the United States but there is really nothing to suggest that India's oil bill could be much affected either in the near term and particularly in the medium term. Either way, the gap between Russian and other oil per barrel has narrowed to a few dollars now or a couple of dollars unlike two years ago for instance when the gap was significant. Moreover, and this is the important part, global oil markets are on track for a record surplus next year as demand growth slows and supplies increase according to a Bloomberg report quoting the International Energy Agency.
The report says that world oil demand this year and next is growing at less than half the pace seen in 2023 and oil inventories will accumulate at the rate of 2.96 million barrels a day surpassing even the average build-up during the pandemic year of 2020 according to IEA's monthly data report. And there's more supply coming. The Organisation of Petroleum Exporting Countries plus coalition led by Saudi Arabia has fast-tracked the restart of halted production and thanks to which the IEA has increased its forecast for output outside the group in 2026 led by the Americas.
So the IEA which is based in Paris says that oil market balances look ever more bloated as forecast supply far eclipses demand towards year-end and in 2026 and it says that it's clear that something will have to give for the market to balance. Crude prices are down around 12 percent this year, trading now at about 66 dollars a barrel in London, says Bloomberg. So broadly here are the factors that are working.
There is of course the supply part which we talked about but there is still continuing though the markets are doing well. The fear of impact of the trade war that's been unleashed by the United States. World oil inventories reached a 46-month high in June and new sanctions on Russia and Iran could still change the picture according to the IEA.
The interesting thing is demand is projected to be lower in China, India and Brazil.
Should India Open Up Further?
An ongoing debate in the last three months is how India should respond to US tariffs on our exports to that country including the latest and most debilitating 50 percent tariffs proposed from the end of the month which is equivalent to a trade blockade on those products. A fairly consistent response across most economists and policymakers appears to be whether by action or statement that India needs to open up further and see the reduction of tariffs on our side as a positive and surely not fight back and of course focus on the domestic economy and domestic consumption.
The stock markets clearly also see that the strength of the domestic economy and demand acting as a counterbalance to the hit we may take on some of the exporting industries and companies being affected. The core report contributor and host of how India's economy works podcast Puja Mehra spoke with Axis Bank chief economist Neelkanth Mishra and posed the same question to him. Here is an extract from that conversation, the full episode of which will be out today.
INTERVIEW TRANSCRIPT
Puja Mehra: Sure. Yeah. Tariffs will not solve the problems they're trying to solve.
But politicians probably will not come up with the solutions that are required for these problems. And it may take, you're saying, 15 to 20 years for them to realise that they have to listen to the economists all over again. But you said some very interesting things about the dollar, about how the world will not be as open.
And therefore, India may become more inward looking or may have to be forced to become more inward looking. And also, from what you're saying, can India carry on being, you know, ambiguously non-aligned, you know, the way we have been, we call it strategically non-aligned. How are these things going to play out in the next 10, 15 years that you're saying?
Neelkanth Mishra: Yeah. So when I said India needs to rely on internal demand, I mean, I didn't say inward focus. I mean, it's not that we put up trade barriers.
I think that we need to allow more foreign competition. We need to open up our markets, make them more efficient. For example, if, say, even on something like agriculture, where, you know, cotton yields are 2x, 3x that of India abroad.
Frankly, when I read about how Iran is supplying fruits and vegetables to all of the UAE through greenhouses. Imagine what, you know, some amount of investments. We are 12% of the global arable area.
We have massive amounts of rainfall, very conducive weather. Most tracts of India can, farming tracts can do two crops, even three crops a year. And we are undershooting.
So there are many things that we need to do, open up so that our productivity goes up. So inward looking is all I was saying was that we may have to rely a lot more on domestic demand than, say, the Asian tigers that we relied on. But we have to be open.
Otherwise, you know, the productivity improvement doesn't happen. On what tactics India may have to apply, is that the question?
Puja Mehra: Yes, one that sort of, we may have to do some sort of psychological and policy realignment, but also on the dollar, what you said on the dollar, both things.
Neelkanth Mishra: So, you see, if there was any doubt that being allied with one power is more productive, you know, in the last couple of weeks, I think those doubts have been put to rest. So it's very clear now that and frankly, while sitting in India, we have this habit of getting more insulted. But it's not that President Trump is singling India out.
So the Taiwan president has been told on an official visit, don't come to Washington, don't come to New York. The Koreans are upset. The Japanese are upset.
Of course, the European, the NATO president, NATO Secretary General, I don't know why he did so, but the Big Daddy message and it was publicly tweeted. So Kyle Starmer is picking up stuff that Trump had dropped. So I think that those kinds of humiliations are being dispensed to everyone.
It is not just India and therefore the fact that even the US is not really interested in being the policeman of the world, at least till the time it has sorted out its own problems, is a reality. And so, therefore, you have to kind of fend for yourself and therefore have multiple alliances. And this is what diplomats call the absence of binaries.
No country will be a permanent friend or a permanent enemy. And therefore, you have to be absolutely pragmatic in terms of dealing with various nations. So take China, for example.
So people sort of whipsaw or I would say swing between absolute animosity and the other extreme. Oh, China has so much cheap capital, a lot of technology and shortage of labour. Why can't we help them?
Or not help them, meaning partner with them. See, the truth will be somewhere in the middle. And the parallel I give is if you take China and Japan, if we are still upset about the 1962 war, think about all the things that China and Japan have been through.
You know, from the time even before that, of course, before that, China was a dominant power. But after the major restoration, they had some humiliating wars for China where the Japanese business people in Shanghai were actually acting as spies for the Japanese army. And so you can imagine the distrust the Chinese would have against Japanese businesses.
Then there was, of course, the rape of Nanjing and all the atrocities of the Second World War through, you know, the Japanese prime ministers visiting the Yasoguni shrine to just needle the Chinese politicians and of course, get them more support locally. And then in response, China threw missiles into the Sea of Japan. The trade between China and Japan has gone from $1 billion in 1970 to $400 billion in 2020.
Before COVID, there were 20,000 people flying between China and Japan every day. So as we think about uplifting our country, growing our economy, I think we have to be absolutely pragmatic about what we need, our people need, and then accordingly choose our friends and enemies. So I think appreciating that it is good to be a multipolar world order now, because the Americans aren't even pretending to be interested in being the one pole.
So if there's not just one pole, then you have to engage with everyone. So that is going to happen. Now on the dollar itself, see the reason why the dollar could fall as much as it did after 1971 and 1985 was that the only relevant economies, large economies in the world at that time were Germany and Japan.
And in both places, as I mentioned earlier, the US has armed bases. So it wasn't much of a negotiation. Now, if the dollar has to fall now, who does it fall against?
Because the Japanese have had such a terrible experience after the Plaza Accord, that they're not going to willingly accept it. The Europeans, a number of people are now saying the only recourse they have is to let the Euro weaken. But does the Euro weaken against whom?
And the Chinese are, of course, the real effective exchange rate keeps dropping. So it becomes, I would say, a 1930s like scenario, where successively countries were breaking the peg to gold. So there is no such peg today, but there was competitive devaluation.
So part of the reason that in 1945, in the Bretton Woods Agreement, everyone accepted pegged exchange rates was that they had a terrible experience with countries devaluing their currencies repeatedly and causing massive volatility and churn in the global currency markets. In fact, again, to use the same FDR example. So Hoover had accepted a global conference on currency and finance in London in June of 1933.
And, of course, FDR honoured that because the US had committed to it. And Raymond Molley was his speechwriter slash confidant slash advisor who represented him. And so he effectively accepted that the French and the British wanted pegged exchange rates.
Let's say exchange rate stability, even at that time, that these competitive devaluations were hurting everyone. And Raymond Molley apparently accepted that. And he thought that, you know, FDR would be supporting him.
But at the last minute, FDR switched his stance. So he was still in the US. Of course, Raymond Molley was in London.
And the reason was America first. He felt that if he pegged the exchange rates at that time, the flexibility he would have in pushing up corn prices would be constrained. Now, throughout that decade, countries were busy devaluing their currencies and finding mechanisms to do that.
So that's going to be the scenario, I think, in the next couple of years. Till the time that hopefully without a war, some agreement is reached on what the best mechanism is going to be. But till then, the fact that our balance of payments remains a bit stretched in the near term.
I think in the medium term, we're quite balanced. Our current account deficit is nowhere as close to as large as it used to be. We are not as dependent on foreign capital just for the stability of the currency.
Of course, to grow faster, we need a lot more capital. What may actually happen is that as countries try to devalue their currencies. They may be forced to send capital out.
So remember that what China is doing is allowing more Chinese to buy foreign assets. Because, see, their trade surplus is not going to fall. It is not going to fall. Maybe too strong a statement is unlikely to fall because they still have overcapacity.
They're still building capacity in heavy machinery and equipment like, you know, ships and cars and heavy machinery. They're still investing and exporting and dominating the world. So their trade surplus may remain quite wide, in which case then there would be a pressure on the RMB to appreciate.
So to counter that, they're opening up. So allowing more capital to go out. So an environment where most currencies, most economies are wanting their currencies to depreciate.
I think access to capital should become slightly less of an issue. So if you can provide reasonable returns, which I think India can, given the amount of growth that we can deliver. I think access to capital will be slightly less of an issue.
But we have to be very careful in calibrating to the right basket and not letting the currency appreciate too much whenever that happens.
The Ethanol Blending Controversy
So the petrol you and I use in our two wheelers and four wheelers is blended with ethanol to the extent of 20 percent. An official statement from the government says that during the last 11 years until last month ethanol blending in petrol by public sector oil companies has resulted in savings and conservation of more than 144,000 crore rupees of foreign exchange crude oil substitution of about 245 lakh metric tonnes and all of this has led to crucial energy security and a co2 emission reduction of about 736 lakh metric tonnes.
So it's worked very well in terms of the carbon footprint. It also says that I'm talking about the report that was put out by the government just two days ago that at 20 percent blending it's expected that payment to farmers alone will be about 40,000 crore rupees and forex savings will be around 43,000 crore rupees. So that's all the good news.
On the other hand social media has been rife in recent weeks with complaints from users saying mileage has dropped and some of the parts of their engines have been affected. Now all of this the government has soundly and resoundingly denied saying studies were done five years ago on performance and mileage and the conclusion was that e20 gives better acceleration right quality and more importantly of course lowered carbon emissions by approximately 30 percent compared to e10 fuel which is more standard. The government also says that vehicles tuned for e20 deliver better acceleration which is a very important factor in city driving conditions and ethanol's higher heat of vaporisation reduces intake manifold temperatures increasing air fuel mixture density and boosting volumetric efficiency.
The government has also pointed out that ethanol is actually not cheaper anymore so blending it is expensive but the benefits of course are larger like the carbon footprint we refer to. So where do we stand in all of this right now? I caught up with Puneet Gupta, director S&P global mobility India and ASEAN and I began by asking him to define for us what ethanol really was in the context of its blending with petrol.
INTERVIEW TRANSCRIPT
Puneet Gupta: If you see today India, we are a very unique market. So clearly we are a diverse market with diverse customer needs and most important is diverse pocket size. So clearly, you know, if you see the next 5 years, 10 years or even, you know, decarbonisation plan till 2070, so India is clearly following the fuel mosaic, which is a mix of all the fuel types, mix of all the powertrains.
And that is why I said, you know, India is very different from the world, you know, India is very unique, you know. So if you see the western world, clearly there is focus on PHEVs or EVs, right? But in India, you know, we have a customer with different needs and that's why in India we need different fuel types.
And I think there comes the importance of flex fuels or maybe to be precise, you know, where we have started mixing ethanol, you know, when E20 recently was announced. So clearly, you know, there the need is obviously, you know, the move is perfect. The move is very good in terms of, you know, supporting the environment and supporting energy security.
Govindraj Ethiraj: Got it. So, I mean, I know that we've been blending for some time. So are we at peak 20% right now across the country?
Puneet Gupta: No, no. So this is just the beginning, right? Because as I said, you know, because if we actually go and do a little deep dive, right?
So why does India need ethanol? Obviously, one of the reasons is that this is a pretty environment-friendly fuel, right? And second is, obviously, today we see, you know, almost we import 88% of the oil, we import almost 44% of the CNG.
So clearly, you know, I think if we reduce our imports of energy, that's a boon for our economy. And that's why, you know, we are banking on ethanol, which is primarily where the output goes to our agri sector. You know, today you see in the agri sector, which is almost 14%.
So I think there is a good potential to grow, you know, the agri sector in India. So I think one thing is very clear that, you know, ethanol is the need. And this is just the beginning.
So the government, primarily what we feel, is thinking of, you know, mega plants around ethanol. And maybe, you know, it's possible that in India also, you may see a lot of vehicles running on E85 or E100. And we can discuss it in detail.
Govindraj Ethiraj: Right. So you're saying that at this point, not all fuel that is sold in India, petrol, is blended with ethanol. The reason, I mean, obviously, this issue has cropped up is because there's been a lot of comments on social media by people saying that they're seeing a loss in mileage, or they're seeing some damage to some parts in their internal combustion engines, mostly maybe two wheelers.
So that's what triggered it off. So you're saying that actually, there's not that much ethanol blending right now across the country, or only in some places?
Puneet Gupta: Clearly, if you see the entire fuel mix across the country, I think that is what our Ministry of Energy is claiming that E20 is the fuel that is going right now. But then it is normal fuel. Obviously, if it is 95 octane, then it depends on the oil marketing company, it can be 10%.
You know, if it is 100 octane, then it can be a little less. But overall, I'm talking about a normal fuel that's all E20 today.
Govindraj Ethiraj: Right. And what is your understanding of what it's doing to engines? I mean, is there any, I know the government is saying that they've got enough research to suggest that there is no real damage to engines or vehicles.
But they've also said that there needs to be some calibration or recalibration, maybe for older vehicles. But what's your sense? Is there any damage that's being caused?
Or is the problem somewhere else?
Puneet Gupta: So if you see ethanol is hygroscopic, primarily, it has the capacity to absorb water. So clearly, if you see fuel dispensing stations today in India, you know, I'm not sure how many audits are being done, you know, for water contamination. So if your vehicle is filled up with fuel, which has moisture, then it can definitely lead to corrosion of for example, fuel pipes, for example, fuel systems.
And also, if there is moisture, it can obviously lead to damage of sockets, gaskets or seals, or rubber parts or hoses, you know, which are there in your car. And clearly today, you know, the vehicles which are coming are E20 compatible. So today vehicles, there won't be any issue because obviously, they have been tested for that kind of fuel type, but the vehicles which are running on the road, they are not compliant to E20 fuel.
So in those vehicles, the probability of damage is more. And it doesn't mean that every vehicle will have problems. Because obviously, every vehicle manufacturer works at some tolerance, you know, which is always above the limit, right?
So which is okay. So in every car, we may not find the problem and in few cars, definitely this issue will arise at some or other point.
Govindraj Ethiraj: And you're saying that vehicles that are running today, so is there a cutoff year after which let's say manufacturers were ensuring full compliance with E20 and before that maybe not?
Puneet Gupta: So from 1st April 2023, SIAM, which is the Society of Indian Automotive Manufacturers, announced along with Arai that all the OEMs have to comply with E20 fuel, with E20 compatible fuel vehicles. But some of the OEMs, most of the OEMs have been doing that, who are present in that segment. But some of the OEMs, yes, may not be putting up vehicles which are compatible.
But from 1st April 2025, every vehicle which is rolled out will be E20 compliant for sure.
Govindraj Ethiraj: Right, so the policy aspect of this is a longer discussion and I should come back to it at a later point. But what should people do today? I mean, if they feel that their fuel efficiency is not good or they suspect some other problem, including, let's say, pickup and acceleration and so on, what can they do today?
Puneet Gupta: So first thing is don't panic, right? I mean, obviously, you know, this is a national initiative and obviously it is good for the government, good for the country, right? And good for the people of India.
So first thing is don't panic. You need to be careful. For example, you know, E20 ethanol has a higher octane value.
So it means that you can actually fine-tune your engine, that if you actually fine-tune your engine or, you know, fine-tune your ECU, then there is a possibility that you get better power or performance, you know, from the same fuel that you are using. But in case if you are seeing some leakages around during maintenance and if workshops are recommending you to get your hoses changed, you know, or your gasket changed at some point in time, then take it seriously, right? Because if you don't do that, then damage can be much more than even what you may be expecting right now.
Today we are seeing all the OEMs are becoming proactive, you know, in their workshop standards, service standards, they will be checking all these points, you know, if there are any leakages around gaskets or seals or hoses and, you know, there will be some recommendations from the service shop. So please take those recommendations and if you have any concern, you know, then please raise it formally with the respective OEM and then I think they will be the best people because they are or they may also follow a soft approach in terms of managing such claims because it's not like that every vehicle will, as I said earlier, right, every vehicle may not have such problem but few of the vehicles may definitely, will definitely have such problems and I think you should approach OEM formally if you feel anything, you know, has happened to your vehicle and I think they will obviously get back to you. But finally, maybe going forward, you know, we may see some kind of kits coming which can be a kind of advisory from OEMs in future.
So I think get those kits replaced if you are feeling that maybe the government gives separate flex fuel stations, you know, then that can be a different thing. But I think this is what we have to use too because at the end of the day, you can live with lower efficiency but you can't live with higher pollution, you know, because I think cities like Delhi may not be every part of this country but cities like Delhi have become unlivable because of high pollution. Clearly, if we are using anything which is environmentally friendly, I think that is good for the nation, good for the people of this country.
Govindraj Ethiraj: Right, Puneet, we've run out of time. Thank you so much for joining me.
Puneet Gupta: Thank you very much. It was great talking to you.
Record Weather In Europe
Europe is reeling under record temperatures mercury has crossed 40 degrees celsius in some parts of Europe in turn triggering wildfires. In France temperature records were broken in many parts including Bordeaux and Saint-Giron on Monday afternoon according to an update from weather forecaster Meteo France quoted by CNBC. Meteo France also said often remarkable even unprecedented maximum temperatures 12 degrees above normal levels were touched on Monday.
In Croatia temperatures climbed to 39.5 degrees celsius in the Adriatic coast city of Sibenik and about 38.9 degrees celsius in the popular tourist destination of Dubrovnik. Earlier in the week many Indians do visit Dubrovnik and of course Croatia in general and also in these times. Europe is known to be warming faster than any other continent at twice the speed of the global average since the 1980s according to the European Union's Copernicus climate change service and this has been attributed to changing weather patterns reduced air pollution and the region's geography noting that parts of Europe extend into the arctic the fastest warming region on earth.
The CNBC report also says that it's not just Europe suffering from record heat; temperature records also have been broken in Canada off late and temperatures soared about 50 degrees celsius in Iraq plunging it into darkness on Monday because of a nationwide power outage.
