What Could The Israel-Iran Imbroglio Mean For Us? Free Press Journal 23rd June 2025

 

The reason is that in the case of the Ukraine war, Russia was a major supplier of oil to the world and hence tilted the scales on the energy front, as several countries were dependent on oil and gas from Russia.

Just at the time when it did seem that the world economy was getting into some sort of nervous equilibrium against the background of the tariff threat held out by the USA, the war in West Asia has upset the applecart. Crude oil prices have started increasing sharply, with Brent going at $75/bbl and poised to go further, depending on the state of the war. In this context, it is worth examining how India can be affected, as the impressionist view is that there could be higher inflation and possible pressure on the budget.

The Israel-Iran war is more like the Israel-Hamas war and not the Russia-Ukraine war. The reason is that in the case of the Ukraine war, Russia was a major supplier of oil to the world and hence tilted the scales on the energy front, as several countries were dependent on oil and gas from Russia. In the case of Israel-Hamas, neither had much to do with energy resources, and the only fear was that other nations producing oil could join the war, which did not happen. However, in the present situation, Iran is a producer of oil with a share of around 4%. But, there is an embargo on buying anything formally from Iran, which has been imposed by the West. Hence, the oil exports from Iran are limited, and that too in a limited manner to China. Therefore, there is unlikely to be a demand-supply imbalance on account of this war.

This factor is critical because when a nation controls a significant supply of a product, any decline in exports can affect the demand-supply balance, as it is not possible for others to supply more given the turnaround time involved. With Iran virtually out of the supply chain, the physical impact would not be there. However, the prospect of any other country with considerable oil resources supporting Iran directly can impact these flows. Presently, it does not appear that the war is likely to spread and will be localised. Hence, the impact as such will be muted.

Coming to how India can be affected by this war getting prolonged, the following can be conjectured: First, the price of oil has gone up for sure but should mean revert once the war ends. Here it is hard to say when the battle will be done, as the Ukraine war has been on for almost 30 months. But even in that case, prices did correct after three months or so, and hence, the effect was not long-lasting. That said, India has been importing from Russia a little over 2/3 of its requirements at a discounted price. Therefore, the full cost will not have to be borne, as the imported cost will tend to be lower than the global price.

Second, even in case crude oil prices remain higher at the level of $70 or $80 plus per barrel, consumer inflation may not be affected. The reason is that the fuel prices at the retail end in the country have remained unchanged through different cycles. Higher global prices have been absorbed by both the government and oil marketing companies. At the same time, the lower price benefit has not gone to the consumer but is shared between the government and OMCs. Hence, this policy has turned out to be prudent and will buffer against any price rise.

At the wholesale level, prices will increase, and the WPI index will show an increase but will not matter from the point of view of monetary policy. The WPI includes products like motor spirit, high-speed diesel, kerosene, naphtha, and aviation turbine fuel, among others. These prices would tend to increase and can have secondary effects on users of these products other than the retail end. The ATF price can have a bearing on airfares and freight rates, provided it becomes more permanent in nature.

Third, higher crude oil prices will affect the import bill, and given that the US tariff regime will be working against the growth in exports, there will be some pressure on the trade front. On the positive side, higher prices of crude will also mean higher realisations on the export of petro products. The net result could still mean some pressure on the rupee, which will mean more oversight from the RBI to control volatility. But any impact of a weaker rupee will work in favour of pushing exports at the margin, as India competes with other Asian countries in areas such as textiles, chemicals, precious stones, and electronics, among others.

Fourth, the impact on the budget will be quite insignificant. This is so because ever since the prices of petrol and diesel were decontrolled, there is a limited subsidy being given by the government. Presently, it is largely for LPG where prices are being revised periodically. Therefore, the pressure on the subsidy bill on petro products would not be there. The fertiliser subsidy can increase if global prices go up in the case of natural gas.

Fifth, one area which would be a concern will be in the logistics space, as shipping and insurance costs could increase on this score. There are possibilities of the Strait of Hormuz being closed by Iran to some degree, which will increase the time involved as well as the cost for moving goods, especially oil. This is something that can affect the entire world and cannot be ignored.

On the whole, the direct impact of the war could be limited, though the government and the RBI need to be watchful on the economic side, as markets can be whimsical. So far, it has been business as usual, but one can never tell.

The post-policy bond market: Financial Express 20th June 2025

 A week after the credit policy was announced on June 6, the financial markets looked quite different from what was expected. Normally when the Reserve Bank of India (RBI) lowers the repo rate there is unbridled enthusiasm with bond yields going down. The talk then centres on how soon banks will transmit the repo rate cuts.

This time the RBI had provided not just a rate cut of 50 basis points (bps) — generally more than what was expected — but also lowered the cash reserve ratio (CRR) at a time when the system was in a surplus of almost `2.5-3 lakh crore on a daily basis. At first sight, this would sound odd as providing liquidity when it was already in surplus would not have made any sense.

However, on deeper thought, the RBI has added certainty in the market by announcing the cut over four tranches post-September. This would also be the beginning of the busy season when demand for credit picks up. Therefore, the rate cut and the reduction in CRR are to be viewed more as a set of measures to tell the markets that the RBI would be providing full support to the system. In fact, it also signalled that the focus would be on growth from now on as inflation is well under control with the annual rate expected to be 3.7%.

This was probably a new approach taken by the RBI, which is refreshing as it blended certainty with surprise. The surprise element was the big-bang impetus of a dual boost through repo rate and CRR cuts. The market should ideally have applauded with bond yields going down. In fact, the 10-year bond should have gone to the 6.15-6.20% level but instead has now gotten into the 6.30%-plus range (going by both the new and old benchmarks). Why should this be so?

A clue to this development is the commentary used in the policy alongside as well as the post-policy interactions with the media. Firstly, the stance which was changed to neutral. While there is nothing sacrosanct in this change given that it can always be altered when circumstances so warrant, a change from accommodative to neutral combined with a large liberal CRR and repo rate cut sent mixed signals. The takeaway was that we should not be expecting any more rate cuts during the year. Second, this view was buttressed by the statement that the committee believed there was less scope for interest rate cuts to push the economy further, meaning thereby that there were limits to which repo rate can influence growth; and this limit may have been attained. This sounds logical because interest rates on their own cannot keep economies running and other factors such as consumption, employment, private enterprise investment, among others, also have to come together.

The bond market has been affected by this decision and articulation. With no signs of further rate cuts in future, the 10-year bond has stiffened even while the T-Bill rates have softened. In the past too, it has been observed that the bond yields tend to be influenced more by what the market thinks the RBI will do rather than what has been done. Often when the repo rate is lowered, and it is fully expected, the bond yields tend to be fairly intransigent even though they would have moved down in advance in anticipation. This is what is meant when it is said that the rate changes have already been buffered by the market.

Another factor coming in the way of bond yields is the state of US markets. While the RBI is clear that it does not take decisions based on what the Fed does, the same does not hold for the market. The market looks at what the Fed says and how the US treasuries are moving. Now, the US 10-year bond is hovering in the range of 4.30-4.50% and moves based on developments on the tariff front.

The Fed has held back rate cuts even though inflation is more or less within acceptable limits. The reason is that the steep tariffs announced are likely to increase inflation which would require the Fed to react. In fact, the balance will be delicate because in the worst-case situation where growth also slows down (though not turn negative to become stagflationary), a more nuanced view will have to be taken. But as of now a long pause till September is expected.

Interestingly, historically the difference between the Indian and US 10-year bond has been in the range of 250-300 bps. Right now the variation is 180-190 bps, which is quite low. This may not have mattered except to academics but for the fact that this differential is important when it comes to investment flows, especially in debt markets. Debt investors normally benchmark returns with the US yields and then make adjustments for currency fluctuations. The rupee has definitely been one of the better performing currencies in the last few years notwithstanding the turmoil witnessed since 2022, which got exacerbated after the US elections and the announcement of the tariff policies.

This differential becomes important in the context of the interest of foreign portfolio investors in Indian debt. The inclusion of Indian bonds in global bond indices was a big positive that was to usher in larger investment flows. One of the factors driving such flows would be the returns and their differential with alternatives. The present differential may not be considered too favourable.

It is normally believed that the debt market reacts with alacrity to policy changes while banks take time to adjust rates. This is so as banks need to evaluate how the lending rates go down as loans linked to the external benchmark get repriced immediately. The marginal cost of funds-based lending rates need to also change, which can come down only if deposit rates are lowered. This is why transmission through the banking system is always with a lag as banks need to evaluate these matrices. The debt market this time has also been relatively less responsive as future actions on the policy front could be uncertain.

Contextualizing Stanley Fisher: Business Line 11th June 2025

 

The Rate Cut Is Praiseworthy But The Challenges Persist" Free Press Journal 7th June 2025

 

What does this mean going forward? The first is that there may not be any more cuts in future, as this has been frontloaded. With the RBI targeting an inflation rate of 3.7% (with Q4 being 4.4%), for a real rate of 1.5% to be preserved, a repo rate of 5.5% looks reasonable.

The RBI has quite aggressively lowered the repo rate by 50 bps and reduced the CRR (cash reserve ratio) by 100 bps to lower overall interest rates in the economy and provide durable liquidity to the system. The CRR cut will release around Rs 2.5 lakh crore in 4 instalments. These were surprises for the market, as it was widely believed that there would be a 25 bps cut in the repo rate and not 50 bps. Further, with the liquidity framework in place, the CRR was not considered a possible measure, as liquidity was induced through the VRR (variable rate repos), OMOs (open market operations), and forex swaps.What does this mean going forward? The first is that there may not be any more cuts in future, as this has been frontloaded. With the RBI targeting an inflation rate of 3.7% (with Q4 being 4.4%), for a real rate of 1.5% to be preserved, a repo rate of 5.5% looks reasonable. While the inflation rate will remain in the 3% range for longer, it must be pointed out that the inflation rate has been low largely due to the base effect and would tend to get reversed towards the latter part of the year.

But given that interest rates will move down in the coming months based on a repo rate of 5.5% (which will probably not go down further), the following could be the implications. Individuals who have taken home loans will see their interest costs come down even further, more or less on an automatic basis. Therefore, this is the right time for individuals to take loans to buy a house or a vehicle. As these loans are based on an external benchmark, which is normally the repo rate, there will be an automatic transmission of interest rates to the borrower.

The same will hold for an MSME, where loans are fixed to the external benchmark. In fact, this particular segment is one of the main beneficiaries of a declining interest rate regime, as their cost of credit comes down. Their interest rates normally tend to be higher than that of corporates, and hence the reduction of 50 bps in the repo rate gets transmitted with alacrity.

What about corporates? Companies borrow on the basis of the MCLR, which is formula driven. The major component is the cost of deposits. For the MCLR to come down, the deposit rates need to come down. Banks here do have a challenge. In FY25, there was a case of banks not being able to retain deposits as funds moved to the capital markets where returns were better. While the repo rate was at a peak of 6.5%, the banks could at best offer 8-8.25% for a certain bucket of deposits last year. Mutual funds have historically delivered returns of 10-12%, while direct equity could be in the 12-14% range. In such a situation, lowering deposit rates across the board will always be a challenge for banks. This will mean that companies borrowing on MCLR could get a lower advantage compared with MSMEs and retail loans, as the full 50 bps reduction will not be passed to all deposits.

However, the better-rated corporates have been able to access the bond market for funds where the transmission has been smoother. Typically, the corporate bond yields tend to get benchmarked with Gsec yields with a spread being maintained of 40-200 bps, depending on the rating. The Gsec yields, as well as those on treasury bills, have been declining since February, and hence, the bigger corporates have already drawn this benefit on the borrowing front.

However, from the point of view of the deposit holder, rates have already peaked in FY25, and the returns will tend to move downwards. Therefore, there is a choice which savers have to make. Either they have to continue with safe deposits or take a chance with mutual funds. While they deliver returns in the longer term, the same cannot be said in the short term, where the risk factor is high. In fact, bank deposits tend to concentrate in the less than 1 year or 2-3 years buckets, which typically give safe returns that cannot be matched for sure by the capital market when risk is adjusted. This is a call that has to be taken by the saver.

The RBI continues to be positive on growth, which is important. Post the announcement of the GDP numbers for FY25, the ministry of finance reiterated its growth forecast range of 6.3-6.8%. It does look like that, given the measures taken by the government and the RBI, there will be an upward movement of consumption and investment which will aid in maintaining the GDP growth in the 6.5% range. The challenge, however, will be to push it past the 7% mark.

The RBI has lowered its inflation forecast for the year to 3.7%, which was expected as the inflation rates have tended to be, surprisingly, on the downside. This tendency would continue due to the base effect, which is caused by prices being very high last year.

This has been a hat trick of rate cuts in an era where several central banks have been lowering rates to bolster their economies. The Fed has been the outlier so far, and logically so too. The current state of the USA is quite uncertain, given the tariff issues that are pending. This is one reason why the Fed has been more gradual with rate cuts, as the threat of inflation is real. This also has tended to keep the dollar volatile, which is tending to weaken presently. This uncertainty will persist for some more time.

The era of Swadeshi: Financial Express 1st June 2025

 

Discover India Before the Ambanis by Lakshmi Subramanian — a compelling journey through India’s business evolution from the 19th century to pre-liberalisation. Explore the legacy of pioneers like Tata, Godrej, and Kirloskar who laid the foundation for India Inc. A must-read on Indian economic history.

Lakshmi Subramanian looks at a unique aspect of India’s economic history —evolution of business—in her book, India Before the Ambanis. She traces how Indians took to business actively, roughly from the middle of the 19th century till the time economic reforms were introduced.

Quite befittingly, the book has been called India before the Ambanis, as Dhirubhai Ambani stands as a symbol of new Indian enterprise. Coming from a non-business family, the stupendous climb to the top exemplifies his entrepreneurial spirit. Building an empire covering the entire upstream and downstream products make his story fascinating.

The book starts with the pre-modern era and brings its story to more contemporary times. Business was conducted even in the Mughal period, though was rudimentary in nature. It gained momentum and came to the fore with the entry of the British through the East India Company. Merchants, she points out, followed money all the way and hence were able to bring scale to business. Thus the so-called merchant capitalist existed for several centuries, though they metamorphosed to something significant only during the past two centuries or so.

The two hotbeds of business were evidently Calcutta and Bombay (going by the original names). The entry of the East India Company through Bengal probably gave it the advantage, while Bombay benefited from being a port in the early colonial times. The Anglo-Parsi collaboration started with Jamsetjee Jeejeebhoy and was concentrated more in export trade and shipping where opium played an integral part. The Parsi tilt was then best exemplified by the rise of families such as the Tatas and Godrejs. If one juxtaposes the history of Birlas and Bajajs, the story gets even stronger.

The founder of Tata Empire, JN Tata, started with cloth and then went to steel and the creation of Jamshedpur city. Ardeshir Godrej had started with surgical instruments, which did not quite succeed. But the move to making locks, which seemed a low value product, became the main line of business. The call for swadeshi at that time helped to gain traction, which expanded to safes and cupboards, which still have a strong brand name. There was close alignment with the political landscape that was the Nehru vision of modern India. The author gives the example of the Madhya Pradesh State Electricity Board offices that were designed with Godrej products and became quite iconic in being minimalistic and modern. In the decades after independence, Godrej became a story of objects, notably storwel, office chairs, and the now extinct typewriter.

At a different level, the author also takes us through the concept of market or bazaar, taking a deeper look at the concept of money and its evolution. This is a critical part of trade. Here she talks a lot of the concept of the traditional bill called ‘hundi’. Its evolution was critical to the development of the money market and systems of payments that are in the most sophisticated form today. This concept also gave birth to the concept of negotiable instruments, which even today is the nucleus of the payments system.

On the engineering side she looks at two major enterprises that were set up. One is the Kirloskar family in Pune and the other was the TVS group. These stories are quite fascinating as they trace their beginnings several decades back. The engineering business goes ahead to encompass power and transport. Alongside there is the story of the Bajaj family with different businesses, though today it is synonymous with automobiles.

A question that the reader may pose is why is it that several other businesses have been excluded? This can be a fair point given that the title talks of India before the Ambanis and there are admittedly several other industrial groups that have made significant contributions. This book is probably not meant to be an omnibus as it picks up some stark stories that lay the foundations of India Inc. Hence it should be read keeping this in mind as all stories cannot possible be included.

What the author tries to bring out is that while each story is about eccentric drive and impulse, there are certain patterns that evolve, which probably is the main thrust of the narrative. In each case, the protagonist was focused on the production of a public good essential for the country.

Therefore, all examples given during the pre-independence time sought to make India self-sufficient. There was also a commitment to disseminate these core values down the ladder to successors who turned out to be effective captains of industry. They worked keeping in mind the independence of India and their vision was to partner with the government in making India great.

Interestingly, the author points out that it was only with the successor generation that there was some angst against licence raj and the plethora of controls that were imposed by the government under the banner of being socialistic. This new generation also put a lot of focus on education and technical expertise. A blend of paternalism and professionalism created this new entrepreneurial culture that helped survive family feuds and wrangles, and, more importantly, protect their reputation. This can be seen even today for family-owned businesses, which do not carry the vestiges of what they were decades or centuries back.

This book is a quick read on the history of Indian business and should resonate with the reader. It is written well and keeps the reader engaged, which is the USP of the narrative.

Madan Sabnavis is chief economist, Bank of Baroda

Book details:

Title: India Before the Ambanis: A History of Indian Business, Money and Economy

Author: Lakshmi Subramanian

Publisher: Penguin Random House

Number of pages: 320

Price: Rs 699

GDP numbers augur well: Financial Express 31st May 2025

 The National Statistics Office’s (NSO) estimates on GDP for FY25, at 6.5%, are the same as the second advance estimates and hence does credit to its forecasting skills. Thus, there are no surprises for the market, and it will be business as usual. The NSO’s accuracy in forecasts need to be commended given that the exercise is quite mammoth due to the considerably large unorganised sector in the economy.

The internals for the year as well as the fourth quarter are quite impressive, especially as the last quarter has posited growth of 7.4%. All through the year, various high-frequency indicators such as goods and services tax collections, e-way bill issuances, purchasing managers’ index, and export of services have been sending very positive signals. The high base effect of 9.2% growth in FY24 was supposed to bring down the rate, so 6.5% is an impressive number.

Agriculture has been the big winner with growth of 4.6%, which suggests a good monsoon resulting in a stable kharif crop followed by a similar rabi crop can keep the rural economy ticking. In fact, this is a necessary condition for attaining sustainable growth over a longer period. As the monsoon forecast for FY26 is positive, indications are that rural consumption should continue to tick this year. This would be the supply side of the sector, and given the increase in minimum support price across the board for the kharif season — it will probably be replicated for rabi crops — higher output should result in higher income for farmers.

Manufacturing, however, has been the only segment that has registered relatively much lower growth than the previous year. Growth at 4.5% comes over 12.3%, so there is a big base effect. But it is also known that corporate profits have been under pressure this year due to demand-side factors. In fact, the manufacturing story is quite skewed with infra-oriented industries like steel, cement, engineering, and energy faring well while consumer-oriented ones delivered a mixed performance. High inflation has been the main factor militating against demand. With households spending more on food items, there is less money left for discretionary spending. Thus, the fast-moving consumer goods sector has been particularly affected. This will need monitoring in FY26. Revival of consumption is expected with the government’s fiscal incentives on the tax front.

Related to the slower growth in manufacturing is the slight decline in the gross fixed capital formation rate at current prices from 30.4% to 29.9%. Here too, investments made by companies have been rather narrow-based with industries like power, steel, and cement showing an increase in the face of good demand. Thus, both manufacturing growth and capital formation will be inexorably linked in FY26.

The construction sector has been one of the drivers of growth — it reflects both the contribution of housing as well as the government push on capex. The housing sector has gone through difficult times with interest rates being high over the last two years. There was an uptick in premium houses while the middle class stayed away. Government spending on roads, bridges, and irrigation works has been the major drivers of construction, which has kept growth ticking. Given the spare capacity, there is immense potential to expand construction in India. This trend may be expected to prevail in FY26.

The services sector has registered growth of 7.2% against 9% last year. The trade, transport, hotels, and communication segment has grown by 6.1%, which does not adequately capture the high level of spending by people on “services experience”. There has been a spike in spending on travel tourism and experiences, which should have resulted in higher growth in the segment. Financial services and real estate also registered lower growth of 7.2% on a high 10.3%, mainly due to the slow growth in deposits and credit in FY25. The movement of savings to the capital markets did come in the way of deposit growth. Public administration and other services maintained 8.9% growth with both the Centre and states meeting revenue budgets.

The fact that the Indian economy clocked growth of 6.5% over 9.2% (FY24) reflects a rather strong foundation. This would provide sufficient buffers to counter the global uncertainty building up periodically. Being a largely domestic-oriented economy, maintaining growth in the region of 6.5% would not be a problem. The challenge would be to move to the 7%-plus territory.

For that to happen, the demand side must be worked out. So far, the focus has been on the supply side, where the Reserve Bank of India has been lowering rates to push up investment. But investment is a result of higher capacity utilisation rates that can be achieved only when consumption increases and companies need to infuse fresh capital. This process normally takes at least one or two years. It can be hoped that FY26 will provide this initial push to consumption.

The heartening fact is that official data hints at the creation of more jobs. But they need to be in high-value production and services where income is typically higher. Right now, the jobs are concentrated in construction, logistics, retail, etc. which do not provide the wherewithal for high discretionary consumption. As the economy keeps growing, this matrix will change. It can be hoped that overall growth will be more broad-based with the manufacturing sector providing a major push.

Swipe right for shaadi business: Economic Times 31st May 2025