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India’s intervention to protect the rupee is running down currency reserves at a rate that’s poised to eclipse the drawdown during turmoil a decade ago.

While economists and the Reserve Bank of India aren’t ringing any alarm bells just yet, investors are watching closely given the rupee’s slump to an all-time low last month and the risk of a widening in the current account deficit.

Given a steady buildup in the reserves through to their peak last year, they remain at a much healthier level than during the previous period that covered part of the Eurozone crisis and the taper tantrum triggered by the Federal Reserve.

Also Read: RBI net-sold $19.05 billion in forex market in July to protect rupee

That crisis saw the rupee tumble almost 30% against the greenback between September 2011 and September 2013, making it one of the worst-performing emerging-markets currencies at the time. It’s dropped about 6.8% against the greenback in 2022, which is a much smaller loss than that of most of its peers.

Still, the central bank does need to be mindful that foreign exchange reserves have declined by $90 billion from their September 2021 peak of $641 billion -- a drop of 13.9%, according to RBI data. The drop in the two years a decade ago was 14.3%.

“Falling FX reserves, persistently-high commodity prices, limited exchange rate pass-through to inflation and elevated INR valuations will likely tilt the balance towards a less interventionist FX policy in coming months,” Madhavi Arora, lead economist at Emkay Global Financial Services Ltd., said in a note.

The drawdown has reduced the import cover these reserves provide to nine months, still above a standard benchmark of three months, but far below the 19 months at the beginning of 2021.

So far though, central bank governor Shaktikanta Das maintains that the level of reserves and the banking system are both healthy and well placed to handle any external shocks.

The RBI has said it expects the country’s current account deficit to stay within 3% of GDP, which it judges to be sustainable amid softening global fuel, food and fertilizer prices while portfolio flows and exports pick up.

A higher-than-anticipated rise in prices last month surprised analysts, much like the first-quarter GDP data had less than a fortnight ago. Headline retail inflation, 7 percent year-on-year in August, did not deviate as much from the consensus, 6.9 percent, as the 13.5 percent real GDP growth did, missing forecasts including the central bank’s, by 2.5-3 percentage points. Concerns about the growth deficit have also been compounded by July’s industrial output that rose a bare 2.4 percent year-on-year.

The latest data continue the doubt if the current inflation episode has concluded. This picked up compared to July’s 6.7 percent, while there are no convincing signs of a stabilising recovery. Which side of the equation will the central bank prioritise at its review meeting this month end is complicated by macro stability considerations. There are no easy choices.

The weaker-than-expected growth in the April-June quarter showed a sequential contraction of -1.4 percent in seasonally adjusted terms that, according to the OECD, was the second-worst amongst G20 nations (overall contraction of -0.4 percent) and lagged only China’s -2.6 percent.

Net exports pulled down the most; this drag could accentuate from a further slowing of the world economy ahead. Supply-side weaknesses showed up in sequential declines in manufacturing, construction, trade, hospitality, transport, and communication services’ segments. In fact, the shrinkage in the trade, hospitality, transport category is considerable over April-June 2019, whose level it trailed at 84.5 percent with construction rising 1.2 percent.

Progress in industrial output is also best compared to April-July 2019 due to distortions in Q1:FY21 and Q1:FY22. In this year’s first quarter, industrial production has risen 5 percent above Q1:FY20, slowing to 2.1 percent in July. The use-based production data is a good gauge of consumer demand strength. Here, signs are disappointing: Consumer durables’ output contracted -7.9 percent over April-June 2019, or at 92.1 percent of its level then; non-durables’ output, which proxies lower-end consumption demand more closely, still lagged at 98.8 percent of its size in the quarter three years ago; while capital goods contracted -4.4 percent. No visible improvements were seen in July 2022 over 2019 — durables contracted -6.8 percent, non-durables -2.5 percent, and capital goods output growth of 6.5 percent was upon a -7 percent year-on-year contraction in July 2019.

Many questions surface about the recovered demand strength, if the recovery is exhausting itself even before complete restoration, of an uncertain and uneven revival as substantial parts of the services’ economy lag behind, to cite some. The growth deficit in the trade, hospitality, transport category, and weak growth of construction is significant from the standpoint of aggregate demand — these are comparably informal economic segments employing large numbers of un- and semi-skilled persons; diminishment over a three-year period could reflect permanent damage or lowered potential output. In this context, the strong persistence of inflation, elevated unemployment and anecdotal evidences of K-shaped recovery, create uncertainty about the size of the output gap.

The August inflation data shows fairly broad-based price pressures, not restricted to food prices subject to much intervention and manipulation. Retail food and beverages inflation accelerated to 7.6 percent annually, that in cereals jumped to 8.6 percent from 6.8 percent in both categories in July; the impact of lower acreage, insufficient buffer stocks to influence prices, and incentives needs to be seen.

Core inflation is unmoving around 6 percent, prices of both goods and services components rose in August, the sequential momentum in different core-inflation measures was either firm or rose, services’ inflation shows signs of comeback pressures, while firms continued to pass-on costs and ease their burdened margin. Wholesale inflation data released on September 14 showed it moderating to 12.41 percent in August 2022 compared to 11.64 percent one year ago, from 13.93 percent in July and 16.23 percent in June. It remains high and in double-digit nonetheless; coupled with pipeline pressures, prospective passthroughs of costs to retail levels with the inception of festival demand this quarter and beyond cannot be ruled out.

The feeling that inflation is under a firm grip owes a lot to the passed peak of 8.3 percent in April that hasn’t resurfaced. But that does not diminish the fact that 7 percent inflation is way above target, that it looks neither low nor stable; and that inflation surprises, in both directions, cannot be ruled out. This doubts if the present inflation incident is durably over.

The trade-off is more complicated because the external environment has turned much riskier. The US central bank is expected reacting aggressively as US inflation and demand both remain strong; a 75-basis point increase is expected at the FOMC meeting on September 20-21.

Preserving macroeconomic stability at a time of extraordinary and fundamental realignments assumes importance, especially for the currency. Although supporting a recovery may have precedence, a growing divergence in monetary policy, negative real rates, would not be easy to sustain in a hazardous environment of unknown duration. Most expect the RBI, which will also revise its growth forecast the second time this year, to adjust the repo rate by 35-50 basis point this month. We should know soon.

Prime Minister Narendra Modi did not meet one-on-one with Chinese President Xi Jinping in Uzbekistan on the sidelines of the 22nd meeting of the Shanghai Cooperation Organisation’s (SCO) Council of Heads of State. At least there is no publicly shared evidence of the meeting so far. One cannot be absolutely sure, of course, for such is the nature of diplomacy.

In a media briefing on the eve of the summit, Foreign Secretary Vinay Kwatra was notably cagey about what other bilateral meetings the Prime Minister would have apart from the one with the President of the host country, Uzbekistan.

If Modi and Xi did not meet, was it the case that either side did not request for a meeting, or that one or the other side did not accept the request? What are the larger implications of this development?

From India’s perspective, the non-meeting could be seen as a necessary corrective after the informal summits between Modi and Xi in 2018, and 2019. The only real outcomes of those summits after all, were Chinese success in misleading the Indians with post-Doklam bonhomie, and showing up the lack of Indian military preparedness to tackle the large-scale Chinese transgressions across the LAC in the summer of 2020.

One, if the Prime Minister chose not to request a meeting, or turned down a request for one with Xi, then this is also a fairly explicit declaration of the direction of India’s relationship with China given that there is an extremely high likelihood Xi will return to power for a third term as General Secretary of the Communist Party of China (CPC) in October.

A third term would underline Xi’s status as China’s most powerful leader since Mao Zedong, and likely mark an even more assertive turn in Chinese foreign policy than is already evident. India, will without doubt, be one of those at the receiving end of this assertiveness.

The argument could then be that Modi did not need to go through the motions by meeting with Xi if this assertive turn is inevitable.

Two, however, if this is the Indian approach, is New Delhi also ready for the consequences of rebuffing or ignoring Xi? Yes, Indian troops remain deployed at full strength along the LAC, and a new aircraft carrier has been commissioned but crucial tasks such as the theaterisation of military commands continue to plod along, and as important a vacancy as that of the Chief of Defence Staff remains unfilled nine months after the last incumbent was killed tragically in the line of duty.

This then leads to a third major question: was the non-meeting a concession to politics at home? In other words, is the government’s China policy still driven by various domestic dynamics rather than by a clear understanding of India’s foreign policy and security interests?

Several senior retired Indian Army officers who have served in the area have noted that India’s disengagement from various points of friction along the LAC in eastern Ladakh has involved the creation of ‘buffer zones’ on the Indian side, which prevent patrolling by Indian troops to points they earlier had access to.

Konchok Stanzin, councillor from the Chushul constituency along the LAC, has amplified such concerns by claiming that grazing grounds used by local herders have in the process not only now become ‘buffer zones’ but also ‘disputed areas’, and that decisions are being taken without democratic consultation. Under the circumstances, a Modi-Xi meeting could have been poor optics domestically.

The validity of the thesis of ‘buffer zones’ can be questioned, however. Disengagement is after all only one part of the ongoing diplomatic process between the India and China, and it can also be logically expected that the Chinese too have been forced to create buffer zones on their side of the LAC.

Meanwhile, what of the Chinese if they too did not request a meeting, or if it was them that rebuffed a request?

One rationale could be to not take attention away from Xi’s meeting with Russia’s President Vladimir Putin, which also had the purpose of showcasing an anti-Western front. A meeting with Modi, seen as a close ally of the United States could have ended up confusing the message.

Two, Xi might not have wanted to meet with the Indians for fear of highlighting the sharp differences between China and India on the response to COVID-19. While India made a hash of its response to the second wave, it has overcome with efficacious vaccines and a successful vaccination programme. The Indian economy too, is largely back to normal operations. China, by contrast, is still locking down cities with millions of people. With the 20th CPC Congress round the corner, the party’s image managers would have wanted toavoid unflattering comparisons.

Three, the Chinese probably did not want to give the impression so soon after the disengagement at PP-15 that they had bowed to any kind of pressure to get a meeting with Modi. Remember that India got China to vacate the Depsang intrusion in 2013 by threatening to cancel Premier Li Keqiang’s first planned foreign visit to New Delhi.

The Modi-Xi informal summits were poorly thought through, and a mistake from the Indian perspective, but by not meeting in the current circumstances, despite the opportunity available, the two leaders have also undermined in a way the entire diplomatic process underway. Even though there is an opportunity to make up at the G-20 summit in Indonesia in November, the non-meeting at Samarkand possibly marks a significant passage in the history of Sino-Indian relations.

Indian consumers expecting retail inflation to cool in tandem with easing wholesale prices are in for disappointment.

That’s because the consumer price index, currently hovering above the central bank’s 2%-6% target band, has shown little correlation with the wholesale measure in the past decade. And if historical trends are any indication, the two indexes have had an inverse relationship for the most part of that period, which analysts attribute to the pricing power of most businesses.

Data due later Monday will probably show retail inflation quickened to 6.9% last month from a year earlier, according to a Bloomberg survey of economists as of Sept. 10. That compares with estimates for wholesale price inflation easing for a third straight month to 12.9%, in numbers scheduled for release Wednesday.

With wholesale prices galloping in double-digits since April last year, companies found themselves in a fix -- raise prices too much and hurt a nascent recovery in demand or absorb costs and take a hit to profitability.

While many consumer-goods makers including Hindustan Unilever Ltd. and ITC Ltd. and Maruti Suzuki India Ltd. raised prices during the period, the increases were probably not enough to cover elevated costs. Maruti, Tata Motors Ltd. and Larsen & Toubro Ltd. reported a hit on their income in the April-June quarter due to high input costs and supply chain constraints.

As the gap between WPI and CPI narrows, firms will be reluctant to pass on the benefits of falling global commodity prices to retail consumers because they will likely look to recoup their margins, said Rahul Bajoria, an economist with Barclays Bank Plc.

That implies retail prices could take longer to fall back within the central bank’s target band of 2%-6%, belying expectations of some consumers and keeping the Reserve Bank of India on course to tighten further when its monetary policy committee meets later this month. The RBI, which has returned borrowing costs to pre-pandemic levels with 140 basis points of hikes since May, expects inflation to average 6.7% in the year to March.

Sticky Inflation

As the wholesale price index falls, “lower input costs will be used by firms to offset the ongoing margin squeeze, thereby keeping CPI inflation sticky,” said Sonal Varma, an economist with Nomura Holdings Inc., who expects the headline print to remain above 6% until February.

Global commodities prices are seeing a moderation amid fears of a slowdown caused by a US Federal Reserve-led monetary policy tightening. As a result, wholesale inflation is seen easing to less than 5% in the next one year, falling below consumer prices gains for the first time in more than two years, according to a Bloomberg survey.

There is a risk that the pass-through of past increases in input costs could continue, partly offsetting the favorable impact of recent fall in commodity prices, rate-setter Rajiv Ranjan said in the minutes of RBI’s latest policy meet.

Keralites chugged alcohol worth Rs 624 crore in a week during the run-up to the Onam festival, setting another record for the highest liquor sale in the state, Indiatimes.com reported on September 9. In 2021, liquor worth as much as Rs 529 crore was sold.

On September 7, the day of Uthradam, a day before the big festival liquor worth Rs 117 crores was sold, the report said quoting sales figures from government-owned state beverages corporation Bevco. Last year on Uthradam, liquor worth Rs 85 crore was sold.

The reason behind record sales can be attributed to low key festivities during the past few years. In 2018 and 2019, the festive 'spirit' was dampened by the floods and later by Covid outbreak for another two years. Last year, liquor outlets and bars were closed on Onam in Kerala. It was after a hiatus of four years, that the state witnessed resumption of festivities on Onam.

The National Family Health Survey (NFHS) which was carried out during 2019-20,  found that 19.9% of men and 0.2% of women, both above the age of 15, in the state of Kerala consumed alcohol. The countrywide figures of consumption among men and women were 18.8 % and 1.3%, respectively.

According to the report by Indiatimes, taxes on alcohol are quite steep in the state — A bottle of rum produced at a cost of ₹100-150 is sold at Bevco outlets for Rs 600-800.

Reliance Petroleum Retail (under name change to ‘Reliance Polyester’), a wholly-owned subsidiary of Reliance Industries, on Saturday acquired the polyester business of Shubhalakshmi Polyesters (SPL) and Shubhlaxmi Polytex (SPTex) for Rs 1,522 crore and Rs 70 crore, respectively, in cash.

The acquisitions are subject to approval by the Competition Commission of India (CCI) and the respective lenders of SPL and SPTex.

SPL has a continuous polymerisation capacity of around 2,52,000 MT/annum and manufactures polyester fibre, yarns and textile grade chips through direct polymerisation route as well as extruder spinning with value addition through texturising. It has two manufacturing facilities located in Dahej (Gujarat) and Silvassa (Dadra and Nagar Haveli). SPTex has a texturised yarn manufacturing facility in Dahej.

The acquisitions are part of the company’s strategy to expand its downstream polyester business.

Recently, RIL backed out from the race to acquire the petrochemicals unit of JBF Induatries which is undergoing bankruptcy proceedings. RIL did not give any reasons for its exit.

"The markets have indeed turned around and are once again testing previous highs. However, we believe that there can be intermittent slides based on global macro scenarios," Ram Kalyan Medury of Jama Wealth told Moneycontrol in an interview.

With 23 years of experience in technology and financial services, the Founder-CEO of Jama Wealth believes that the long term India story is not just intact, but has become stronger. The boring mantra continues to be “stay invested”, he advised.

Ram, former CIO of the ICICI Group and former Group CIO of Poonawalla Fincorp, feels that the pandemic's impact is now down to statistical analysis, but a fresh wave with a deadlier effect can derail everything. Edited excerpts:

Do you think it is the right time to start betting on domestic cyclical sectors on expectations of strong economic recovery ahead?

We are seeing good traction in some sectors such as chemicals and manufacturing in the Indian industry. The expectations are buoyant about a strong economic recovery ahead. While we would not term it betting as such, we feel this is a good time to look at strong performers in specific sectors such as the ones we mentioned, and take a long term position in them.

Do you expect the current risk-on sentiments to continue in the coming days despite the uncertain global environment?

With a lot of bad news factored in, and a few positive developments, the risk-on sentiment has reduced a bit. The markets moved up over the last quarter and gave investors reasons to smile.

The Ukraine-Russia war is no longer grabbing headlines, with investors more concerned about commodity prices and interest rates, rather than the end of the war.

Do we still need to worry about inflation concerns and policy tightening by global central banks?

We are clearly not out of the woods. The Russia Ukraine war has not ended and may even take a turn for the worse. While Fed interest rates are now factored in, the expectation that rate hikes will moderate may not materialise as inflation continues to be high and negative surprises can have a global impact.

Covid continues, but it looks like its impact is now down to statistical analysis, but a fresh wave with a deadlier impact can derail everything.

Do you think Indian markets' uptrend is still capped due to likely recession fears in western nations?

The markets have indeed turned around and are once again testing previous highs. However, we believe that there can be intermittent slides based on global macro scenarios. The long term India story not just remains intact, but has become stronger. The boring mantra continues to be “stay invested”.

Are you bullish on the cement space because of the expected growth in infrastructure and real estate space?

Most of the cement stocks are still down by 20 percent to 40 percent from their peaks. This is a cyclical sector and one has to be careful about entering the sector at the right time. While the long term outlook in infrastructure in India is positive, the sector's headwinds and tailwinds need to be analysed closely.

As of now we can see that the cost pressures are reducing with the decline in raw material costs such as pet-coke and crude oil. Seasonality wise, the second quarter is a weak quarter, but these trends have buffeted their stock prices. However the trend in these commodity prices is linked to global macros and may turn swiftly.

Do you think the rally in the IT space is unlikely henceforth?

The IT space, is undergoing some headwinds in terms of wage pressure and consequently growth in earnings. This is notable among the majors, where we have also seen attrition rates climb to levels much higher, than where they were a year ago.

Investors must be cautious about the larger companies given these trends. However, some smaller and agile companies with niche specialisations in areas like Cloud, Internet of Things, Embedded System, Testing services could still do well, because they might be less vulnerable to budget cuts compared to the larger players.

Finance Minister Nirmala Sitharaman on September 8 chaired a meeting on illegal lending apps, with a decision being taken that the Reserve Bank of India (RBI) will prepare a 'whitelist' of all such legal applications.

The Ministry of Electronics and Information Technology will then ensure that only these whitelisted digital lending applications are hosted on app stores, the finance ministry said in a statement on September 9.

"The finance minister expressed concern on increasing instances of Illegal Loan Apps offering loans/micro credits, especially to vulnerable and low-income group people at exorbitantly high interest rates and processing/hidden charges, and predatory recovery practices involving blackmailing and criminal intimidation," the finance ministry statement said.

Sitharaman also noted the possibility of money laundering, tax evasions, breach of data, and misuse of unregulated payment aggregators, shell companies, defunct non-bank finance companies for perpetrating such actions.

The meeting, attended by secretaries from the finance, corporate affairs, and information technology ministries along with officials from the RBI, comes in the wake of increasing concerns surrounding illigal mobile-based lending applications.

Late last month, Moneycontrol reported the RBI is working to set up a fraud registry to keep scamsters at bay.

This fraud registry, according to RBI Executive Director Anil Kumar Sharma, will capture information like IP (internet protocol) addresses and phone numbers repeatedly used to commit frauds. Once reported, these numbers and IP addresses will be blacklisted.

Some of the other decisions taken at the meeting on September 8 include:

>> RBI to monitor 'mule/rented' accounts that may be used to launder money

>> Registration of payment aggregators will be completed by the RBI within a certain period of time after which only such payment aggregators will be allowed to function

>> The corporate affairs ministry will identify shell companies and de-register them to prevent their misuse, while the RBI will do the same for dormant non-bank finance companies

The September 8 meeting also comes after the RBI said on August 10 that it had accepted certain recommendations made by its working group on digital lending. However, these would only be applicable on entities under its purview.