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00:00Let's take a look at how Indian markets are performing at the moment.
00:03Obviously, a very positive IPO there for ICICI Prudential.
00:08And the mood overall, one of optimism today.
00:11We've got the Sensex pushing higher now by about two-thirds of 1%.
00:15All of the major indexes in India higher,
00:18although we're seeing some risk on sentiment,
00:20modestly so, across the entire region today.
00:22Take a look at the rupee, though.
00:24It's back below 90.
00:25There it is, back above 90.
00:26But it has strengthened after the intervention that we've seen from the RBI this week.
00:32So it appears to have worked in the short term, at least.
00:36However, risks do remain to the currency.
00:39But the IPO right now, the Indian rupee right now, just parked above 90 there.
00:45So let's talk a little bit more about that stage back, that comeback.
00:48It has come after weeks of softness.
00:52Over the last few sessions, the currency has gained about 1% against the dollar,
00:55reversing away from that record low of 91 that we saw earlier this week.
00:59Now, the RBI is believed to have stepped in pretty aggressively,
01:03selling dollars and buying bonds worth 500 billion rupees to calm the markets.
01:08That intervention sends a clear signal to speculators betting on further weakness.
01:13Still, analysts warn, pressure is not over.
01:16Foreign outflows and trade uncertainty keep the currency vulnerable.
01:19For more on the rupees moves, let's get to Mumbai and Bloomberg News senior editor Menika Doshi.
01:25So, Menika, tell us, on the wake of that intervention we saw from the RBI,
01:30can we say that this battle is won yet, or is there potentially some further rupee weakness in store?
01:36Well, far from one, Paul.
01:39As you pointed out, that intervention earlier this week has helped, you know,
01:43sort of the rupee recover from 91 levels, which was a fresh record low,
01:47to, as you just pointed out, 90 levels.
01:50But most economists and currency experts I speak to say that that relief is going to be short-lived.
01:57Now, the fundamental problem for, or the reason for the rupee's weakness is capital outflows from the country.
02:06And then, of course, the absence of an India-U.S. trade deal has added further pressure,
02:11even if you call it sentimental pressure.
02:13Now, calls for further weakening in the rupee range from between 93 to 95 levels for the first part of 2026.
02:23And the key question, Paul, is what impact will this have on the country's growth and its economy?
02:30Now, to answer that, I'm joined this morning by Somnath Mukherjee,
02:34CIO and Senior Managing Partner at ASK Private Wealth.
02:38And also joining us is Anubhuti Sahai.
02:42She's Head of India Economic Research at Standard Chartered Bank.
02:45So, Anubhuti, Somnath, thanks very much for being on Bloomberg.
02:49Anubhuti, let's start with you.
02:50What do you make of the rupee's underperformance this year,
02:55Asia's worst-performing currency, despite the relief we've seen this week?
03:02I mean, look, I think what you highlighted at the beginning lays out what drives the rupee weakness very nicely.
03:10At the core of the problem, I would break it down in terms of three factors,
03:15which is driving rupee weakness, and probably these three factors will remain rupee weakness,
03:23you know, or will keep rupee under pressure going into 2026.
03:27Our forecast is at 93 by end of December 26.
03:32And as I mentioned, there are three factors for it.
03:34One, weakness in capital flows.
03:36If you look at last year, India's capital inflows or net capital inflows were the weakest since global financial crisis.
03:44It improved a little bit in this financial year.
03:48But again, it's one of the weakest in one and a half decades.
03:50And next year, again, we don't think it will improve to what we saw a decade back also.
03:55And that is primarily led by very, very soft FDI inflows.
04:00And till the time we really get a visibility of FDI inflows turning around in a significant manner and in a sustainable way.
04:07I think this weakness in rupee will reflect or will try to reflect the weaker external inflows.
04:17And that theme would remain very much dominant.
04:19Second, increased tolerance at the RBI level for a weaker rupee.
04:24Because they are trying to realign rupee levels with a weaker capital inflow story.
04:29They still have very healthy reserve cover or import cover, you know, close to 10 months, even if you adjust it for forward spoke.
04:36But as visibility on collecting back lost reserves or building FX reserves higher is very low,
04:43it is important that rupee is allowed to be a shock absorber while ensuring that external sector remains resilient on a medium term basis.
04:51Third, I think even if you get some inflows next year, a pullback looks very unlikely because RBI will use every single opportunity to rebuild FX reserves,
05:01especially as the global environment remains highly uncertain.
05:04So I think what we have seen over the last one, one and a half months would remain dominant going into 2026 too.
05:10A quick follow-up, Anuguthi, what level do you expect the RBI's intervention to be the most at?
05:17You're saying 93, are you expecting the rupee to achieve that in the first three, four, five, six months of the year?
05:2493 is for December 2026, Menaka.
05:27In the first quarter, that is in March quarter, we are expecting a little bit of a balance of payment surplus.
05:33This current account has a seasonality and that possibly it will turn in the positive terrain.
05:40Capital inflows might also see some respite and that should support rupee and probably RBI's intervention might not be needed as strongly.
05:47But going forward, our view is that RBI's FX intervention strategy will remain more towards smoothening the move in rupee rather than defending a particular level.
05:59It's very difficult to say at what level they will come very aggressively.
06:03But I think the broader message which we got even from RBI governor's interview that three to three and a half percent depreciation on an annual basis is trend in rupee.
06:12I think we'll need to take that as the broader guiding light going into 2026.
06:19All right. The key question is capital flows.
06:21So not just FDI, as Anupati pointed out, but FPI over $18 billion leaving the country this year.
06:27You know, what's going to change that next year? What's your outlook?
06:31Yeah. So a couple of things on that.
06:33I think between FPI and FDI and some of it is sort of fungible.
06:37The bigger reason why we've seen weaker flows this year or net outflows this year has been that the buoyant and very deep Indian capital markets.
06:47And we just saw a very large listing just before this program started has meant that it has given the opportunity to a whole range of larger strategic investors,
06:57including the largest of them being global private equity, take money off the table and return money to their LPs.
07:04And that's been an overriding theme with especially private equity globally.
07:09The LPs have been demanding DPIs or distributions rather than merely paper IRRs.
07:15Outside of the U.S., India is one of the very few markets that offers the depth and liquidity that allows large scale exits for investors.
07:23And that's something that's been taken very aggressively over the last two, three years by several types of strategic investors.
07:30But that's been the big reason.
07:32Will that reverse next year?
07:34I think to a certain extent, what will reverse is that the gross inflows are likely to be higher, driven by a couple of things.
07:42One, valuations are somewhat better than what they were 12 months ago.
07:47Second, like all cycles, we went through a bit of a down cycle into 2025.
07:53We are looking like, given all the high frequency indicators, towards a reversal of that cycle.
07:58So, there is likely to be earnings upgrades going on from the next quarter all the way.
08:04And that's going to attract more money.
08:06And last but not the least is a global coordinated easing of sorts of central banks, which should take yields down from the levels we have seen this year.
08:15But it seems to be coming to an end now, isn't it?
08:18See, it's all data dependent.
08:20But from all indicators, there is very little to show that there is merit in keeping rates high.
08:28Look at India.
08:29Our real interest rates are amongst the highest in the world.
08:33Our nominal GDP growth today, the spread between nominal growth and 10-year GSEC is one of the lowest we have seen in history.
08:42Actually, that effectively means that it is less attractive for a strategic investor to invest the money into productive assets simply because the spreads are not there.
08:55So, there is actually not a massive amount of incentive for producers or for manufacturers to set up new capacity.
09:05And that's going to drive policymaking this year.
09:08And that's where the rupee weakening actually is a good outcome today because it acts as a shock absorber.
09:15It leaves monetary and fiscal policy alone to focus on what is truly important, which is growth in jobs, which is what we expect the central bank to do for 2026, focus on reviving growth.
09:30And by reviving growth, I mean nominal growth.
09:32Right now, we have a really healthy, real growth on the macro side, but reviving growth across the board.
09:40And that should bring back the headline gross inflows from foreigners as well.
09:45All right.
09:45So, you're talking about the advantages of a weakening rupee.
09:48Anubuti, what do you see as the overall macroeconomic impact of a weakening currency, you know, both from the import side of point of view,
09:56though we've been lucky that crude has been manageable, but also from an export competitiveness point of view?
10:04So, I'll answer your second question first.
10:06From export competitiveness perspective, rupee weakness would help, no doubt about it.
10:11But I think we also have to remain cognizant of the fact that Indian exports or exporters are price takers rather than price makers.
10:22Plus, we also have this whole uncertainty around U.S.-India trade deal.
10:30So, it helps, but I would say it's an incremental support for exporters rather than a massive support.
10:37So, second part, how does it impact import?
10:41As you very rightly said, I think it is definitely not a positive from import perspective.
10:47But at the same time, given that commodity prices across the world remains extremely low, our sense is that the impact is likely to be limited.
10:58You spoke about crude oil prices and it's very interesting to see that even though crude oil prices have corrected by $10 to $12,
11:05if we compare it to the start of the financial year, our oil deficit has remained pretty strong.
11:12I mean, deficit is actually marginally higher than what we saw last year at the same time.
11:17And that's because we are importing a lot more.
11:20So, I think there are a lot of factors which are at play.
11:23One, that we are growing at a faster pace than the rest of the world.
11:27Second, that select commodities like gold are going through very, very high prices.
11:33So, you know, barring gold, I think for the rest of the commodity space,
11:37low prices should help to counter off any large impact from a weaker rupee.
11:43All right. So, how does this set us up, let's say, for the government's key agenda points in, you know,
11:512026 or FY27, you know, combining both years?
11:56So, I'm not assuming no deal is signed because we've been hoping for this to happen over the last several weeks.
12:01It hasn't. Assuming no deal is signed, what will be the key priorities next year?
12:06We're just a month away from the union budget.
12:09Right. No, actually, it seems that the Cetrus Paribus condition, you know,
12:13the use that expression used by economists too often,
12:16it doesn't look like either government is in a hurry to do a deal,
12:21whether it's the U.S. or India.
12:23We've seen very bullish statements,
12:25but none of those look like that either side is bending over backwards to get a deal done.
12:30I think we should take it as a positive news when it comes rather than trying to price in the fact that it will come in a short period of time,
12:40which is where the depreciation of the rupee is actually a good portend because, albeit imperfect,
12:46it's still a defense against losing competitiveness in the export market.
12:50Our trade-weighted tariff today is 2x that of any other relevant peer country on the export side that we have.
12:58And hence, the government can therefore focus very sharply on ensuring that domestic levers of growth,
13:07which would primarily be the engines of growth because exports are tough,
13:14do come into play and they focus on that.
13:17Very quickly, when you say domestic levers of growth, what does that mean?
13:20It has to be consumption. Consumption is 60%, 65%.
13:23We've already done the tax cuts this year.
13:24We've done the tax cuts. More needs to be done.
13:26So, whether it is in terms of…
13:29We're a country consolidating its FISC.
13:32We've done the tax cuts.
13:33We have limited spending power.
13:35What can they do?
13:36First of all, I think while we have done a great job in terms of consolidating the FISC,
13:41ideally, it will be great if the government let it lose a little bit in 2026
13:48because we've seen the impact of a tightening FISC for a good three, four years, you know, since the COVID peak.
13:57And it's, at this current moment, doesn't seem to be the most obvious policy choice to boost growth.
14:03Let the currency weaken.
14:05Let that be the shock absorber while inflation is still low.
14:08So, let the FISC loosen a little bit.
14:10Well, that's the CIO speaking.
14:11Let's ask the economist.
14:12Anubhuti, what do you make of a potential shift in fiscal consolidation that the government has offered no evidence of that so far?
14:20And then quickly, your key things to watch for in 2026.
14:24Sure.
14:26So, I think I have a disagreement here with Somnath when it comes to loosening the fiscal policy.
14:32I completely agree that fiscal policy has been consolidating since COVID years.
14:40But COVID was a crisis period.
14:41And we really cannot, as a country, run a double-digit fiscal deficit on a year-on-year basis.
14:46At 7%, even today, we are running a fiscal deficit of 7% of GDP, combined, central and state put together.
14:54And that's high by any standards.
14:58And the second point is that the government, as well as the RBI, have pushed a lot of counter-cyclical measures in a very short span of time.
15:06I think the time is now to focus more on structural issues if India wants to avoid running in circles again and again.
15:15It's important that structural issues, whether it is about ease of doing business, whether it is about tax consistency, those are addressed.
15:23Because if you look at the overall growth inflation dynamics, they make India look like in a sweet spot.
15:33But have they really resulted in job creation?
15:35Have they really resulted in attracting massive amount of FDI inflow?
15:40So, there is far more structural issue rather than just focusing on counter-cyclical measures.
15:45Counter-cyclical measures can complement but cannot be a remedy for what India has been going through over the last couple of years.
15:53So, let's look at this.
15:55As an以上.
15:55Slide here.
15:55What I would like to say is that...
15:56...
16:08...
16:09So, if I will give you cevosには, if I look at this, there will be a vull.
16:12And if I look at this.
16:14I hope I have just zrob veio.
16:14So, I will also encourage you to make your catchers.
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