#980 Why Indian Markets Are Getting Battered Right Now

Good morning, it's Wednesday, the 16th of September, and this is Kovindar Jagatriyar's broadcasting and streaming weekdays from Mumbai, India's financial capital, our top stories and themes why Indian markets are getting better right now, India's exports are up 26 percent in August, UPI will not be free anymore, why you will have to pay 0.4 percent on transactions above 2000 rupees when you buy something, Tata Sansa said to go to court against a reserve bank of India's move asking if to go public does it have a case and banks may see an additional cost for FCNRB deposits which brought in more than 127 billion dollars what are the options ahead is the oil crisis here before that global bond sell off once again gain steam this morning with a 10 year US treasury yield back above 5 percent after oil prices began rising again the 10 year yield went as highest 5.03 percent in early morning trade on Tuesday according to trade web the highest level since 2007 as reported in the Wall Street Journal elsewhere Japan's 10 year treasury yield also hit a new 30 year high going back above 3 percent the new trigger is the closure of a crucial crude pipeline in Saudi Arabia which has taken oil prices up again and close to 108 dollars and of course drawn world markets back to the prospect of a bleaker few months if not much more. The other question is will the Federal Reserve raise interest rates rather will they raise interest rates despite US President Donald Trump threatening them not to investors are now seeing a 92 percent chance that officials will high grades by a quarter percentage point according to CME data quoted by the Wall Street Journal which is up from 59 percent a year ago which also added that the pain now in the markets goes beyond AI trade as US stock futures opened lower on Tuesday and indices in Europe and Asia and of course in India are also in the red elsewhere the Wall Street Journal also pointed out that the fuel crisis is feeling more real amongst US oil executives commercial fuel stocks around the world have been depleting for more than six months and strategic crude reserves can't be tapped much further the shutdown of the pipeline in Saudi Arabia that effectively bypass the state of hot mass has removed at least 2.5 million barrels a day from an already tight market according to analysts all these mechanisms helped to mitigate the price and supply risk Chevron CEO Mike Worth said on Friday at an energy conference in Texas and he said that those have largely now played out and we don't have nearly the buffers in the system that we did when it began he also said in that Wall Street Journal report that I wish I could tell you that I saw some reason why things could ease but it's difficult right now to see that happen diesel prices have also hit a record 6.2 dollars a gallon and gasoline prices which had gone below $4 a gallon a month or so ago have rebounded to $4.32 in the United States with all this in the backdrop the markets had a particularly volatile day here in India with the sense ex falling almost a thousand four hundred points and closing down 777 points to 74,000 three and the nifty 50 falling 279 points to 23,118 in the broader markets the nifty mid cap and small cap are also down about 2.1 and 2.4 percent each the rupee hit its weakest level in more than a month on Tuesday but stayed above 96 rupees a dollar and closed finally at 95 rupees 95 by say which is its biggest one day fall since mid july according to writers a weaker rupee has also helped exports though economists have also argue that it's not as much as one should expect or could hope exports jumped 26% year on year to 43.8 billion dollars for August imports rose about 14% to about 70.6 billion dollars India's trade deficit was down to 26.8 billion dollars from 27.2 billion dollars a year ago and 31.9 or close to 32 billion dollars recorded in July according to data from the Department of Commerce overall goods exports are rising cumulatively between April and August they stood at about 216 billion dollars and up 18% year on year though imports were also higher by 18% in the first five months of the current financial year and more macro data India's balance of payments recorded a surplus of about 20.8 or 21 billion dollars in July compared to a surplus of 0.3 billion dollars a year earlier thanks to a jump in foreign exchange inflows following the reserve bank of India's measures to attract overseas deposits and more on that which is FCNRB deposits later in the show with Rajeshwari Sen Gupta. The current account balance for July 2026 was at a deficit of seven billion dollars compared to a deficit of 3.2 billion dollars in July 2025 net transfers which include remittances from Indian workers overseas rose to 13 billion dollars in July from about 12.6 billion dollars a year ago the capital account which includes foreign portfolio investments saw an inflow of 27.7 billion dollars in July compared to 3.5 billion dollars a year earlier. The reigning debate including through the Global Fintech Festival 2026 in Mumbai last week where we were was where the users will have to start paying for UPI transactions when buying things now that decision has been taken UPI transactions above 2000 rupees will see a merchant discount rate or MDR of 0.4% or the some merchants will have to pay while selling you something the finalized MDR framework and threshold structure will take effect from 15th of October 2026 which is a month from now so the background is this 95% or more of transactions between individuals to merchants are actually below rupees 2000 which means there is no cost to it all person to person UPI transactions which means if I transfer to you it will be free to give you a sense of scale the month of august saw about 24 billion UPI payments worth about 311 billion dollars the national payments corporation of India the nodal body which oversees these payments for UPI payments has argued that the annual government incentive or subsidy while helpful in accelerating early digital adoption was designed as short term bridge funding rather than a permanent measure to compensate the cost incurred by the payment industry something the core report has also argued in favor of in the past NPS is maintaining UPI payment operations server bandwidth fraud prevention systems and bank technical support costs about 20,000 crore rupees annually now this is something that banks have also been pointing out including to me and many years ago saying that they've invested in core banking solution systems which obviously take a load whenever you do a transaction whether it's a low price transaction or a low cost transaction or a high cost transaction and as you hit the core banking solution systems then obviously you need more server capacity and space apart from everything else that we've just talked about so the NPS I say is transitioning to a commercial threshold based bottle provides reliable capital for continuous technological innovation for transactions of 75,000 rupees and above the MDR will be capped at 300 rupees per transaction it's also a structure to be lower than other traditional card based transaction fees the NPS I say standard credit card MDRs are usually between 1.5 to 2.5% per transaction debit card MDRs are at about 0.9% and cap there and by setting the baseline UPI MDR at 0.4% on transactions above 2000 rupees and capping it at 300 rupees for high value purchases UPI remains the most affordable digital payment acceptance tool for commercial enterprises according to the NPCI the cost difference also helps merchants lower their payment processing expenses while accepting digital transactions the international comparison is this the much in charge in Brazil's pick ecosystem is around 0.33% while in China it's about 0.4% the reserve bank of India has preemptively approached the courts seeking to be heard in any matter filed relating to the listing or potential listing of tata sons according to writers tata sons is the group holding company for tata group and own stakes in several leading companies in the group the move follows the reserve bank's rejection of tata sons application to deregister as a non-bank financial company which obviously pushes the holding company closer to a stock market listing the reserve bank's refusal to exempt tata sons from a public listing role has got the company and tata trusts which own 66% of tata sons of God the group has been hoping to avoid an IPO for several reasons and tata sons representatives had petitioned RBI to remove it from the bucket of systemically important shadow lenders or nbfcs which are mandatory required to list Noel tata chairman of tata trusts would also stand to lose in a listing as the trusts would lose the control and power they have right now in tata sons and the listing would obviously bring tighter regulatory oversight and investors scrutiny on the group's internal dealings but also offer some of the shareholders including shapurji palo and jie a potential exit or rapart exit now there are many workarounds being discussed including shrinking tata sons balance sheet to less than the threshold that triggers the mandatory IPO requirement or even splitting tata sons into two according to a bloomberg report all of this will be discussed in a meeting on third day and some media outlets have speculated that some of the board directors may even pitch that nchanda shakran the current tata sons chairman who has indicated that he wants to step down in february may be asked to stay on a question that the court report has also posed in the past so does tata sons have a case on merit if this goes to court i reached out to ajay roti cio of tax advisory from Tax Compass and I am. him whether there was indeed any hope for TataSans to remain unlisted. Let's just take a step back from this one and why we are in the place that we are in, is because TataSans is upper layer in BFC as per the RBI and all of those have to list and that's where the whole issue started that there's a mandatory listing if you're upper layer in BFC which is a very critical important in BFC with based on size and all of it. Now what TataSans did was to approach RBI to say I will warrantfully surrender my CR which is a certificate of registration, you know NBFCs are issued CRs by RBI and that's when they become a NBFC and they said I want to voluntarily surrender and their reason from what we understand from what's in public domain is to say that I've repaid all my loans which they did in 2024. They became upper layer NBFC sometime in 2022. They should have listed by 25 which is a three a period. 24 they went themselves and said you know I'm surrendering this because I have repaid all my loans therefore I've not borrowed money to invest which is one of the basic commercial understanding of NBFC that either you are lending or you're borrowed and investing. They said I'm not borrowed to invest and I have repaid all my loans. What I'm doing right now is a typical holding company, investment company, core investment company which is my core activities and therefore I'm not commercially as you understand to be a NBFC and therefore cancel my NBFC registration but they are technically as per the NBFC definition still NBFC because they have a lot of financial assets which is investments. So what I understand now again based on public documents is that RBI is responded with a two three paragraph response to that that application was kept ending for a while. Even the latest RBI disclosure said with the asterix of all the upper layer NBFC it said asterix. Tata Sun's application is under consideration. Now they have rejected it saying you know considering all the facts you still we don't accept your surrender and therefore you comply with all the conditions which is listing. Now can they go to the court and say that I should not be treated as an upper layer NBFC I think they will argue that. To say that I'm not raising public deposits there's nothing that I'm doing which would constitute a lending or borrowing activity. It is pure investment and all of my subsidiaries are also listed. Therefore you know direct the RBI to accept my surrender of the certificate of association. They might as well do that and that's the only argument in my view that they can advance to say that I need to get out of NBFC because if they are an upper layer NBFC the law is very clear that they have to list. Right and Reserve Bank has already asked some 15 such companies including piramal finance and others to list and they've all done it as well. So would you say that Tata Sun has any legitimate ground here considering this thing or is it RBI in a way being more strict than necessary. I think RBI is just enforcing the law as it stands which is to say if you're an upper layer NBFC or to list what makes it complex is the Tata's holding structure because Tata Sun is predominantly held by you know charitable trust and philanthropists more than almost close to 60% and the rest is with the Shapuri is with Shapuri family and some are with other Tata group companies. If you see what has happened to Tata chemicals which is on the upper circuit is because Tata chemicals holds 1/2% in Tata Sun. So a lot of Tata companies hold and the family holds some really minuscule percentage. Now with more than 2/3 of the holding or close to 2/3 of the holding with being with charitable trust then you know in terms of disclosures what you need to do once you're listed shareholder approvals for further investment etc. becomes a little complex. If you apply the law as it stands today maybe becomes a little difficult and may see for the Tata's and the structure. There is no curve out in the RBI legislation in terms of an upper layer NBFC which specific patterns to be exempted from it. So I wouldn't say RBI is being sort of more strict or whatever that's the law and if they don't want Tata Sun to get listed because of these specific facts it's more of a policy decision rather than reading of the law in my view. Right and if you were to look at let's say cases where either the Reserve Bank or maybe even Sebi has intervened in such situations or similar situations what do courts usually do I mean to what point do they also try and adjudicate or do they bounce it back and this is a very general sense question. Of course we'll look at the law and say what needs to be done they won't get into you know policies to say you need to do it. The courts at most can say you know consider their surrender of certificate of registration light of these facts and treat them reconsider the application of the RBI says okay I accept your surrender of CR than everything follows because then you are not an FC you don't need to list. Courts I don't think can say that whether they have to list or not list they can only say how RBI has to consider its application they can probably adjudicate on whether RBI is considered the surrender request in all fairness or not. Courts cannot get into you know the policy what has to be followed they can only see whether the law has been fairly applied in this case or not but you know there's no coverout for a court to come in to say that this is what they were eligible for and you denied it. It's a executive policy matter the court may likely say that we consider it and they may send it back if there are some facts. I don't know if they will be able to grant an exemption from listing that may not be possible. Right and finally I mean could this also then for example be in injunction mode could which also in a way solves some of the problems that maybe Tata Sons has right now. Yeah so there are multiple other aspects and moving pieces here and most of it is linked to this whole thing whether they need to go in for a mandatory listing or not. There's also this piece that the Shah Pudi Pallaji family has been wanting to monetize some of this everybody knows this so therefore what happens if this entity is listed and then the shares are technically freely tradable. Now none of the Tata Tata will be able to sell you know they are hooding it for a particular purpose. It's not that they can sell those shares and do anything. The Tata company is selling it will have their own you know board decisions. The boards are again Tata Sons controlled boards in a lot of cases so it does become a little messy in terms of what it does to solving the other problems around the issue but again you know interesting space we'll have to see what happens in the court. I personally was almost convinced that this would end up in the courts. What has surprised me is the fact that RBI has filed a caveat here which just the way I look at it is to say that RBI is also ready to defend its decision. The Tata's would go to the court was known but what happens there now is what we will have to see. At least the RBI reconsidering it without the courts intervening is almost ruled out the fact that they have filed a caveat. Right Ajay thank you so much for joining me. Thank you Boobin. Costs on foreign currency non-resident deposits are likely to rise by 15 to 20 basis points for Indian banks over and above the interest cost committed to depositors as banks have to separately hedge the dollar liability arising from interest payments on these deposits according to bankers who spoke to business standard. The cost of managing this exposure depends on currency forward premiums and interest rate differentials between the two currencies. The reserve bank is absorbing the hedging costs on the principal amount but not on the interest payable. The central bank had clarified in an FAQ released in June that it would provide a forex swap for the deposits received. Banks have mobilized as we've been saying about $127 billion through FCNRB deposits under the concessional swap window introduced to attract those dollar deposits and it was closed on August 31st a month before the reserve bank had originally scheduled. A senior banker at a state-owned bank told business standard that banks will have to bear the hedging cost on the interest component themselves and that's why while some banks were very aggressive they did not go beyond a point and did not pursue additional deposits. Now the debate of course continues I spoke with Rajeshwari Sanghukta associate professor of economics at the Indira Gandhi Institute of Development Research or IGIDR in Mumbai and I began by asking her how she was seeing the cost of FCNR deposits at this point and what could be the potential moves or path ahead for the reserve bank of India now that the deposits are in. So this is a very very important topic and I know there's a lot of noise happening a lot of celebration that FCNR scheme has brought in a huge amount of dollars which has showed up RBI's foreign exchange reserves which have gone to around $740 billion. So the way I look at it is my first question to ask is why was this necessary to begin with? The answer is presume maybe RBI needed to accumulate more reserves so that they had greater ammunition to manage the rupee volatility but then I will come back and ask that at a time when the scheme was announced around June 5th 2026 RBI already had about 680 billion dollar reserves. So you know it's not like RBI was running out of reserves and it had fallen to such low levels. For example you know in 1991 we did an India development bond that was the first time we tried to get money from the enterprise. Back then we really did not have reserves so there was a need for getting NRI money. Now we are not even nearly close to running out of reserves so I don't understand what was the pressing need to do that. Secondly if 730 billion dollars is all that they needed you know there is no optimal amount of reserve holding. So what is saying that 680 billion was not enough and 740 billion dollars is enough is there a psychological level economists don't understand that because we don't think in those terms. So therefore if at all the objective was to show our reserves then why do you withdraw the scheme prematurely? Just keep going and keep getting more and more and you maybe go up to 800 billion dollars. So if reserve accumulation to manage the rupee was the objective then premature withdrawal of the scheme doesn't make any sense and I don't even understand why it was necessary at this point of time. Now given that they did it and given that I think they have a buyer's remorse now because they got so much of money that they did not anticipate more than 140 whatever billion dollars that came in. The problem now is Hey, this is something that many people have. are talking about and I agree that this also means that the surplus rupee liquidity in the banking system today is more than 11 lakh crore and that is a massive amount of surplus that the banks are dealing with which is a big problem because A as you know our inflation is already increasing it's more than 4% and RBI's forecast is going to cross 5%. So at a time when your inflation is already increasing if your money supply goes up by so much that further aggravates inflationary pressure. So in a way it's a little bit counter to RBI's inflation targeting objective because now RBI will have to do a lot of effort to mop up this liquidity before they can consider any kind of evaporate hike either in October or in December right. Now mopping up this liquidity is costly because they are trying some V triple R operations which are very short term either a 3 day or a 30 day and most of the V triple R auctions that they have announced have not been successful because banks don't want to return the money they don't want to lock up the liquidity for 30 days they now need the flexibility to lend it out whenever they can because banks are also having a deposit growth slowdown so this is sort of helping their deposit so they want to let me tell so that mop up strategy is not working so then the only thing RBI can do which is what economists call a sterilization is that RBI basically issue government bonds and you mop up the surplus rupee liquidity but that means that the government has to pay interest rate on these bonds the sterilization cost can be pretty big because 5 year government bond deals are more than 6.5% 3 year yields are more than 6% average maturity of these deposits are 3 to 5 years so any cost with the government pays on these government bonds is going to be costly for them now somebody can say so what RBI can use this money to buy US treasury and US treasury yield today is almost close to 5% so you are going to on some return out of it but then if you are paying a sterilization cost of 6.5% or more on government securities here and you are only earning 4.5 to 4.9% there is a cost that you are still net cost you are still paying out on a very big amount of money so any sterilization the RBI will be forced to do now is going to be a cost on the fiscal on the budget so that's one cost and I'm happy to talk about some other very serious cost of the scheme right okay so I'll come back to that in a second but if you were to look back at the scheme and why it was announced so how would you answer the question that you posed as to what was the real need to even float the scheme correct so as I said if showing up reserve was the main concern I really don't think that this cuts it because RBI was not really running so low on reserves they do have a very big net dollar short forward book which is also about 135 billion dollars or so maybe even more so it is possible that they needed this dollar inflow now to help them settle the forward book to some extent which again goes back to the same logic of using dollar reserves from settle forward positions which will further help them to manage the route so maybe that was one argument but I think what fundamentally people like us understood is they are doing it in order to buy time that the route was depreciating steady by close to 5 6% foreign investors as you know are taking out more than 20 25 billion dollars from the equity market this was a buying time strategy for about 3 months during which some kind of measures or reforms or initiatives would have been announced to further encourage foreign investors to come in and put money into the market but the problem is I don't see any such structural measures that were taken in this 3 months period in order to workshop either foreign direct investment or foreign portfolio investment so the buying time argument which is what I thought was the reason for doing this doesn't really work because in the end all that happened was they floated the scheme the money came in and now they have a buyer's remorse and the struggling come up of the liquidity they didn't really use the interim period for doing any kind of structural measures to make the balance of payment situation better or get more foreign investment so that didn't happen so again at this point I am actually at a loss to understand why they did this and you're saying this because you're not seeing the subsequent moves including what you just pointed out so you're saying that even if it was thought of it was not thought through yeah I mean first of all I don't know whether it was thought of because the objective of this scheme was not made very clear and transparent second of all even if they said that you know we are doing this scheme to get dollars in order to help manage the rupee sure temporarily you stocked the rupee depreciation but now the rupee is back for falling again because oil prices have gone beyond $100 a barrel it will keep getting worse and the rupee will keep depreciating so what really happened in this 3 month period by temporarily stopping a depreciation for just 3 months when effectively rbi has actually taken a very big bet and the cost to the rbi it's not just on the budget for sterilization and I'm happy to talk about the cost to rbi it has basically taken a very big bet in the future so in my mind the cost of this scheme is much greater than the benefit because the benefit being just a temporary 3 month period of stopping depreciation which is inevitable it's already started again and rbi just has a few billion dollar more reserves to stop it which is also start going to get eroded because they're already actively intervening so I don't really for long term or medium term benefit of this scheme okay so let's say maybe the expectation was that the war in West Asia will cool off and surely there no one expected oil to go back to over $105 per barrel and that has put additional pressure so let's say it's a bet gone wrong so two quick questions so one is you said there are other problems that this is triggered so one second is now that we've got the money here what's the best way to resolve this problem so before I come to these two questions go with one thing is also important to remember and I talked about this in my earlier episode with you that the rupee depreciation is not just a function of the war there is an underlying pressure on the rupee to depreciate now because foreign investors don't seem to be that interested in India the growth prospects of the Indian economy do not seem lucrative enough to attract foreign investors on a sustainable basis so financing even a less than 1% of GDP current account deficit is proving to be a bit of a struggle for us irrespective of the war so even if the RBI thought the war was going to end even then this move is not justified because the rupee was going to keep depreciating now on to the cost of RBI see what the RBI has done is let's say today whatever dollars have come in RBI has taken the dollars entirely and given rupees to the banks so that they can lend it out so assuming an exchange rate of let's say 93 94 so for every dollar that the RBI has gotten the RBI has given 94 rupees to the banks and this is what the banks are now lending or that's the surplus rupee liquidity now the ITS three years later five years later when these deposits mature RBI will have to do the exact swap so RBI will then have to take 24 rupees back from the banks and give them back one dollar this is great it can work perfectly well if the rupee between now and then now and five years later remains exactly at 94 but even I both know that that will not that's not going to happen assuming the rupee depreciates to 100 now imagine what the RBI is doing five years later the RBI is giving one dollar back and getting only 94 rupees when that one dollar is actually worth 100 rupees so the RBI is taking a very big loss of six rupees for every dollar that is giving back on a very big amount of more than hundred thirty hundred forty billion dollars so that is a cost that RBI has postponed and kicked the can down the road which will be something that they have to incur when the deposits mature and the cost will depend upon the extent of the rupee depreciation but there is also the chance that the rupee would appreciate isn't it? I don't think between now and the next three four years or three five years unless something very structural changes in the Indian economy in terms of massive growth engines of exports investment AI, FDI etc happening I don't really think the rupee is one of appreciate between now and then because the global economy is quite unfavorable and so far there is not a lot of substantial interest of foreign investors to put in a lot of money into India for the rupee to appreciate if it does then that's great but if it doesn't then the RBI has taken a very big bet on the future and also mind you what's going on is and this is a very interesting point you're essentially transferring resources from the government to very rich people because these are ultra high net worth individuals were able to take the leverage and they are getting more than ten thirteen percent interested on this but the cost is being borne by the government on its budget how is it ten to thirty percent? So let's see you keep a deposit of hundred dollars and you get a six percent interest rate on it right that's the pain of failure but then you're a very very rich individual you can actually leverage this which means that you can take this hundred dollars and against this let's say you are depositing an ICI say I ban then against this HSBC is going to give you a loan of nine hundred dollars and let's at five and a half percent then you can take this loan and again deposit at six percent so by that you can just end up getting more than ten percent of returns so it's a leverage that is basically becomes so attractive which is why all the money has come in and a good part of it is through the leverage route exactly I think most of it is through the leverage route but that means your transferring resources from the government to the rich people balance sheets okay so when you say transferring from the government to rich people I mean one of the arguments deal is that it's the banks who would pick up the bill so why is it the government that is picking up the bill because when you do sterilization of 11 lakh crore using government security the government has to pay interest on that that means that is a fiscal cost being borne by the government and B when the RBI has to do eventually when you have to return all the money and if the rupee depreciates as I just explained RBI will have to bear the cost this way impinge on the amount of dividend the RBI can pay the government which is another fiscal cost for the government which means both fiscal costs means that government has that much less revenue to spend on the common people so to speak so it is a transfer of resources from government to the rich people balance sheets All right. So now that all of this is here, what's the way out from your vantage point? Well, as I said, there's a BIOS remorse. RBI will have to figure out a way to mop up this entire liquidity before they can consider potentially a reparate hike to deal with inflation. And then once the sterilization has happened, the government will have to bear the cost. Eventually, we can only hope the rupee will appreciate. Also, remember what this does go in this. This also messes up with RBI's incentive of preventing the rupee from depreciating. Because if the rupee keeps falling over the next two to three years, RBI's cost goes up more and more because of the mechanism that I described. So in a very weird way, it is in the central bank's interest now to not let the rupee depreciate. Otherwise, they will incur a loss and they will be able to pay less dividend to the government. And that's not a right thing at all because the central bank should not have any skin in the game when it comes to managing the currency. But that is exactly what has happened. So now what happens going forward is this cycle will have to be put in force. I mean, you mop up liquidity and you just hope the rupee doesn't depreciate. Or you will do everything in your power to ensure the rupee doesn't depreciate because otherwise you are going to incur a loss. But fundamentally, I would have hoped the government or RBI would have taken this time to announce more structural measures to strengthen the balance of payments of the economy. And that is something that still needs to be done. These kind of temporary bandages will not really work for a very long time. Got it. I just want to thank you so much for joining me. Thank you so much. That was the core report with me, Govindrach Ethi Raj. Do stay connected with more of our coverage at the core. 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