The Macro Brief - India in focus

0:00Hello and welcome to the MacroBreef from HSBC Global Investment Research. The podcast that looks at the key drivers of financial markets. I'm PS Butler in Nullin and today I'm joined by a special guest. Prangil Bandari, our chief economist for India, is here in the UK visiting clients and has kindly found some time to drop by the studio. We're going to be looking at what's behind India's growth resilience, where the rate heights are on the cards, and why improving export competitiveness is the next big priority. Prangil, great to have you in person on the podcast. Yeah, great to be in London and great to be here at your podcast. So let's start with a sort of big picture first. How would you describe India's economy right now? Is it primarily a story of resilient domestic demand, policy support and services strength, or are the external vulnerabilities that you talk about in your various reports becoming more important again?

1:02Yes, as you said, I think it's been remarkably resilient so far for many reasons, and I think policy support is one of them, both monetary policy and fiscal policy. But having said that, we have to keep an eye on oil prices, because my senses, if oil prices remain higher than $95 a barrel for a prolonged period, then all parts of the Indian economy will get impacted at some point. So we have to really keep an eye out for that. India has been very reactive in dealing with the oil price shock so far. And indeed, when we look at the June quarter GDP, it grew at 7.8% year on year. What's behind that resilience? Is that sort of policy intervention or is the economy more resilient than we had expected? Yeah, a couple of things. One, India was able to get oil supplies from various different countries. And also, it's a big exporter of refined oil. And the fact that refining margins have really gone up, was very helpful for India. Having said that, I think again, if oil prices remain high for long,

2:04we will start seeing growth slow. But so far, growth has been very strong. We got the June quarter data just last week, and it was 7.8%, which is very strong growth. And I think the big driver of that was a very resilient consumer. Big question, why does the consumer remain so resilient? My sense is everybody is shielding the consumer. The government has been cutting taxes, GST taxes, Xi's taxes on oil. It's been doing a lot of spend, higher subsidy bill, a lot more capex than before. And then there's the corporates. They're taking all of these high input prices, but they're not really passing them on to the consumers yet. And that's why the consumer remains remarkably strong. At the same time, inflation remains a concern, obviously, because of all prices. So is there a trade-off for the policy makers between keeping inflation contained and maintaining the growth momentum? Is it achievable? And is also, let's not forget an El Nino effect that may be coming into the equation as well. That's a great question.

3:05The central bank of India is an inflation targeting central bank and needs to keep inflation at 4%. Now, this 4% number came in very carefully. It's a number in which growth remains strong, but the rest of the macroeconomy remains resilient as well. So the primary mandate of the RBI is to keep inflation at 4%. Right now, it's getting higher than 4%. I think in the next six to nine months, it would be 5% and more. And our senses that rate hikes are coming. We're expecting two rate hikes in the cycle. So do you think that will slow the economic momentum that we're seeing? Well, given that it's just so strong, even if it slows the economic momentum a little bit, I don't think that'll matter very much. I think India will still remain amongst the fast-growing economies of the world. Let's bring in the external side. Why does the persistent trade deficit matter so much to India's story? Yeah, that's a great question. India tends to grow at a faster clip than many of its trading appears. And that's why it tends to import more than it exports

4:06and has a trade deficit. Now, there are a few years when Infos are not strong enough and the trade deficit can't be fully funded. And the currency, the rupee, comes under pressure. A couple of months back, I think we were in that situation and a big scheme by the central bank had to be started to attract a lot of money from non-resident Indians, which by the way did very well and a lot of money has come in. It was very, very significant, wasn't in terms of the quantum. Yes, $127 billion. And today, India's foreign exchange reserves are about $740 billion. That's like a very high number. And what we've had on the back of that is a currency that is a lot more stable now and a central bank, which has a lot of ammunition in case the currency comes under pressure again. But the rupee has weakened significantly since what, the early 2025, why hasn't that translated itself into a much stronger export response? Yeah, over the last 18 months, the rupee has depreciated 24% against the euro, 20% against the GBP.

5:08These are big numbers. Well, what's happened is that whenever the currency depreciates, the exports of the country should become competitive and they should rise, we have seen exports rise in India as well. It's just that they probably haven't risen enough. They could have risen more. So to be technical, that's what we call the Jacob. Exactly. That's the Jacob. And so we see a Jacob in India, but it's just a very faint Jacob. And the big question is why is it so faint and we try to investigate a little more and we broke down exports product by product. And our general sense was that India is pretty good with its high tech exports, like mobile phones, drugs and pharma, automobile parts, machinery. And when the currency depreciates, it tends to export more of those things, where it really doesn't react much is the mid-tech exports. This is what you call the missing middle, isn't it? The missing middle, yes. So things like textiles and footwear and furniture, all those things which Vietnam has been selling

6:08for the last five years and has been growing at about 7%. That's the part of India's exports that haven't really taken off. And even the currency depreciation hasn't really helped there. So why is that happening? Yeah, so we did look into it carefully and there are many reasons, but the one that really stood out for me was the tariff disadvantage that India's exports have. So when India is selling a t-shirt to say Europe, it charges a tariff rate, which is probably three times of what is charged for a Vietnamese t-shirt. So there's been a lot of tariff disadvantage, but that's where the opportunity lies as well. Because over the last one year, India has been signing many bilateral trade agreements with many countries and regions from EU, to Canada, New Zealand, Oman. And once many of these get activated and the one with UK is already activated, then a lot of these import tariffs will actually come down and then India's exports will get a fairer price when it's sold abroad.

7:09So think about it. Two things come together. This big currency depreciation and this removal of tariff disadvantage. The two together could make India's exports a lot more competitive than actually it's been in the last many decades. How long will it take for that to come through? That's, that's for the big question, isn't it? Well, that's the trickiest question of all. And I'm hoping 2027 is when we're going to start seeing more visible signs of it. I think we've started seeing some already. But I say 2027 because many of these trade deals, they have been finalized, but they are still being implemented. So we'll see the real impact, you know, a few months down the line. And I think one other thing that we need to watch out for is FDI inflows. Once manufacturers globally start thinking of India as a place from where they can manufacture and export, then a lot of FDI could come into India as well. So stronger exports, higher FDI, great for the currency. As you go around talking to clients, what's their reaction to, to those ideas and an outlook?

8:12Well, I can see a lot of excitement about India. Equity clients haven't been very active, to be honest, but they are interested and they're asking a lot of questions. And they're really wondering if 2027 is the right time to finally enter India after a long break. And then when I talk to many of the fixed income clients, I think there is a lot of excitement because of the NRI package that did so well and there are so many dollars with the central bank that the currency could be a lot more stable than before. And there's a lot of liquidity in the system, which could be good for bonds. So I'm seeing a lot of interest across asset classes at this point of time. The big question is, will the investments follow? We'll have to see 2027. I've made a note. We'll have you back to look at the results. But for now, thank you very much for joining us today. Yeah, it was great to be here. Thank you. Brenton Bandari there on India's economic outlook. If you'd like more content from us,

9:13then head to LinkedIn and search hashtag HSBC Research. And if you haven't done so already, please check out our Asia-focused sister podcast under the Banyan Tree, available wherever you get your podcasts. But that's all from us this week, here on the macro brief. This episode was hosted by me, Piers Bundler, and produced by Tom Botten. We'll be back again next week, so until then, thanks for listening.