00:00Two days after the Prime Minister gave a call for austerity and tightening of belts, well,
00:04the markets are not responding well. The Sensex is down once again. In fact, for the last four
00:11consecutive days, the Sensex has lost more than 3,400 points. And today too, the Sensex was down
00:18by almost 2%, as was the nifty. We're seeing a major change, a drop in the markets. What explains
00:27it? What lies ahead? People are worried. Why is the Prime Minister's austerity message
00:32spooking the markets? Let's go and meet my next guest.
00:38So why has Prime Minister Modi's austerity appeal spooked the markets and what lies ahead?
00:45Joining me now is Nilesh Shah. He's a member of the Prime Minister's Economic Advisory Council,
00:50also Managing Director at Kotak Mahindra's Mutual Fund. Appreciate you joining us, Nilesh Shah.
00:573,400 points, the Sensex in four days. And particularly since the Prime Minister spoke
01:04of austerity and the need to tighten the belt, the market seat don't seem to have taken that kindly.
01:11What do you believe is happening? Is there panic in the market after what the Prime Minister said?
01:16I think market is more focused on emerging and developing geopolitical situation. Undoubtedly,
01:25India is vulnerable to shocks coming from geopolitical side. Oil prices have bounced back into triple
01:33digit. Rupee has depreciated. FBI selling is continuing. Put all these things together, markets have corrected.
01:47No, you're calling it a correction, but it's much more than a correction. And since the Prime Minister made that
01:53appeal,
01:54amidst the geopolitical tensions, the concerns are growing that growth could slow down, inflation could rise,
02:00we could have an oil price hike in a few days from now. All of that is adding to the
02:05uncertainty. Do you believe
02:07that the Prime Minister's appeal in a way, as I said at the outset, has spooked people?
02:13It would have spooked certain jewellery stocks, as Prime Minister appealed for avoiding unnecessary purchase of gold.
02:23But it's not as if market was unaware that there is a fiscal burden building up because of higher oil
02:30prices.
02:31My feeling is that market is more focused on what President Trump is doing.
02:38And as he mentioned, that Middle Eastern ceasefire is on life support, market had to react to triple digit oil
02:46prices.
02:51So it's interesting you're saying that the focus is on what Donald Trump does or does not do.
02:56But you just mentioned gold. And you've interestingly in the past written that you believe the gold assets
03:02could be monetized in some way. Do you believe the Prime Minister saying don't buy gold
03:08for example? Is that again sending out the wrong message? What does one do, given that Indians do have this
03:15penchant to save gold or to buy gold?
03:19So essentially, there are multiple ways in which we can monetize gold.
03:23One thing which has taken off quite nicely is financing against gold.
03:28We have seen about 6 lakh crore worth of outstanding in gold loan financing, where small businessmen pledge
03:36their gold, take short term money. And whenever business need is meet, they un-pledge the gold.
03:43Now, can we move towards gold recycling? We are one of the largest owner of gold in the world.
03:50Can gold be recycled? Can gold be like stock put into lending and borrowing mechanism?
03:58Or can there be gold monetization scheme? So apart from differing or delaying the purchase
04:05of gold, we should also focus on monetizing the existing stock of gold, which is lying in the country.
04:16You are saying we should focus on monetizing the existing stock of gold lying in the country.
04:22But when the Prime Minister says don't buy gold, trying to sort of reduce dependence on gold
04:26imports again, does it not send mixed signals that the crisis perhaps is far deeper, our foreign
04:32exchange reserves may appear on the face of it strong over 600 billion. But the feeling is that
04:41Amidst, is there something we should be worried about going into the future? Isn't there a sense that
04:47now there is a concern over what happens next?
04:52So should we be worried about rising oil prices? Answer is undoubtedly yes.
04:57Rising oil prices will impact our inflation and hence interest rates. It will widen our current
05:04account deficit and hence rupee. And if the burden is shared with corporate India and
05:10consumer India, it will slow down GDP growth and hence equity market. So overall, it will be fair to say
05:18rising oil prices does impact India's macroeconomic variable. In the past, like the early 90s, when oil prices
05:27went through sky, we had to pledge gold to borrow money and we were on our knees. Compared to that,
05:34we are in a
05:34far better situation at $690 billion of reserves. But should we stop spending unnecessarily on, let's say,
05:44foreign vacation or on purchase of excessive gold or on consumption of petrol and diesel? Answer is undoubtedly
05:53yes. Every other country which is dependent on oil import is taking corrective action. Some are declaring holidays
06:01during the week. Some are requesting their citizens to avoid unnecessarily wastage of fuel. So this is
06:09all corrective measure because there is a 10% drop in the global oil supply. And we are one of
06:17the largest
06:17buyer of oil in the world. If there is a shortage, if there is a drop in the supply, we
06:23need to take
06:24corrective action. No, but what Nilesh, you're calling corrective action, people will match that
06:34against the fact that we have at least 10 months of import cover. The reserves provide India with 10
06:39months of import cover. Then why send out these panic signals? Don't buy gold. Don't go on foreign
06:46travels. All of this, as you know, the worst thing you can do is make people panic. And that's what
06:53seems
06:53to be happening. People are now worried that the crisis could be far worse than may have been imagined.
06:59So essentially, it is our job to give data to people and facts to people and show them this is
07:06tightening the
07:07belt. This is not necessarily panic reaction. We have foreign exchange reserve. But the world is running short of
07:16almost 10 million barrels of oil a day. No matter what price we are willing to pay, that 10%
07:24shortfall
07:24in quantity will remain. So we need to take corrective action. If through efficiency and productivity, we can
07:31reduce our oil consumption by 10%, life will be as good as it was when the oil supply was higher.
07:42You see, the worry delays, and you know this better, there's been an FII outflow. FDI hasn't been coming in
07:49to the
07:50extent that it was in earlier times. It's not just about what's happening in the Gulf, even predating that there
07:57was FII outflows. The question is, is there a what explains this? Is there a lack of confidence? Is there
08:04concern? What explains the fact that it appears that there are mixed signals coming out about the health
08:11of the economy? Macroeconomic fundamentals seem strong. And yet there is this outflow.
08:17So the FPI outflow can be attributed to multiple factors. First, our valuations were running ahead of
08:25expectations. We were trading at almost 100% premium to other emerging markets, way above our historical
08:33average. Then the artificial intelligence investment trend started. Unfortunately for India, we neither had
08:41a play on AI hardware, nor we had a play on AI LLM. After that, the third thing which happened
08:48was this oil
08:49shock. We were vulnerable to oil, and the crisis came right at our vulnerability. Most importantly,
08:58FPI's were sitting on profits in India. And unlike many other countries where going in is easy and going
09:05out is difficult, in India, we provide revolving door. You can come in as well as go out. Put all
09:12these
09:12things together, we have seen major outflows from FPI for the last three years. Just one caveat over
09:19here. Rajdeep, this is not only selling by long-only FPI's. This is also profit-taking by high-frequency
09:27traders. In many parts of the world, high-frequency traders don't get as open ground as they are getting
09:34in India. So, they are also making tons of profit and taking some money out. It's a combination of
09:41long-only selling for variety of factors I mentioned, plus HFT trading.
09:50So, let me ask you in conclusion, at least in the short run, do you believe things could get worse
09:55before they get better, starting with a fuel price hike in a few days from now? Do you believe the
10:00consumer in particular is in for difficult times? And that's what the Prime Minister was almost
10:05forewarning people about?
10:08Undoubtedly, consumption will get impacted as fuel prices at pump level are likely to increase.
10:14We also need to be careful about the El Nino's impact on monsoon and potential fertilizer shortages.
10:22Now, this may not happen, but it's better to prepare for the worst. And finally, we also have to
10:28overcome this entire AI challenge. 4 crore Indians work directly or indirectly in IT-related sector.
10:37That has been the growth engine for consumption. Now, if well-paying job creation doesn't happen in
10:44that sector, there will be impact on consumption. So, we have our work cut out. We have to manage the
10:51geopolitical crisis, then the monsoon and then the AI challenge.
11:01Let me leave it there, Nilesh Shah. I think you've given us a sense of what explains the fact that
11:07investors in particular at the moment appear so concerned and how they're reading the Prime Minister's
11:13remarks. Thank you very much for joining me on the show tonight. Thank you.
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