#989 Liquidity Stretched Markets Take A Dive

The Core Report

The episode examines a period of significant volatility in Indian markets driven by liquidity drains, rising oil prices, and regulatory changes

Key takeaways

• Indian markets experienced a sharp decline with the Sensex dropping 1,247 points due to global cues and liquidity issues.
• The IRDAI has proposed tighter limits on insurance commissions, which may impact the income of banks and non-bank finance companies.

Main topics

• Indian Market Volatility
• US-China Geopolitics

Notable quotes

Liquidity is continuously getting drained out.

Conclusion

The episode provides a comprehensive look at how regulatory, geopoliti

Transcript preview

Speaker 4 (0:02) Good morning. It's Friday, the 25th of September. And this is Govind Raj, Ithiraj, broadcasting and streaming weekdays, usually from Mumbai, India's financial capital, but in transit right now. Our top stories and themes, liquidity, stressed markets, take a dive on bank bad news. U.S. President Donald Trump does an airport greeting for Chinese President Xi Jinping. Why the Indian markets crashed on Thursday. How India's shipbuilders are scouring the globe for orders and winning them too. The U.S. is investing $10 trillion in AI and data centers in the next six years, the largest capex in its history. Speaker 1 (0:44) This is a core report with Govind Raj at ERAJ. Speaker 4 (0:50) And before we kick off, I will be speaking with leading cardiac specialists on the 6th of October about prevention, early detection and the hidden risks we often overlook when it comes to heart health. The discussion is called Don't Miss a Beat, The Hidden Risks to Indians. This is happening on Tuesday, the 6th of October at 8.30am at the Quorum in Mumbai. And if you'd like to join us, you'll find the registration link in the show notes. Speaker 4 (1:15) The good news is that your banks are working hard and may open their doors on Sunday in anticipation of a three-day union-led strike that starts potentially on Monday. The bad news is that their incomes could shrink with the insurance regulator cracking down on commissions on insurance policies, thanks to which bank and non-bank finance stocks took a beating on Thursday, contributing to the crash. So they will have to work harder than just a Sunday special shift and more on that in a moment. On Wednesday evening, Chinese President Xi Jinping and his wife Peng Liyuan, a well-known soprano, landed at Andrews Air Force Base outside Washington. Donald Trump welcomed the couple, becoming the first U.S. president in six decades to receive a foreign counterpart at that airport, excluding visits by the Pope. This is Jinping's first visit to the United States in 11 years, and the U.S. and China have already sealed a two-month extension to their trade truce going into 2027, according to Treasury Secretary Scott Besson, quoted by Bloomberg. Xi Jinping has said he is confident the trip would produce fruitful results. Meanwhile, U.S. Secretary of State Mark Rubio and India's External Affairs Minister S.J. Shankar held talks in New York to discuss the potential implications of sanctions targeting Russia, which, of course, is a key source of energy and crude for India. Under the Sanctioning Russia and Iran Act signed into law last week, President Trump is able to and has the power to impose tariffs on countries that purchase Russian crude, a Bloomberg report summed up. Jayashankar reiterated India's interests and concerns with regard to this act, according to a social media post after that meeting, while Rubio emphasized that the United States remains well-positioned to help regional partners address their energy security challenges. So will Trump actually use these powers he has now to slap tariffs or has India's pushback worked? Well, it seems to be tilting towards the latter, but there could be other gives for this take. Speaker 3 (3:04) All eyes continue Speaker 4 (3:04) to be on New York and whether the United Nations General Assembly or the meetings held on its sidelines will provide any fresh impetus to end the war in West Asia or for that matter between Russia and Ukraine. At least the Iranians and Americans are talking right now, but not enough it seems and nothing concrete has yet emerged at least to give the market some consolation and rent crude prices are now around $105 a barrel. On Wall Street, the nervousness is increasing as U.S. government bond yields are also rising. The 30-year U.S. Treasury yield is now over 5.4%, putting it on track for its highest low since 2004. Benchmark 10-year yields also continue to rise after hitting their highest level in 19 years on Wednesday and are about 5.11%. borrowing costs are surging in Asia and continuing to rise in Europe, the Wall Street Journal said. Back home, the much-awaited National Stock Exchange IPO opened on Thursday with the stock closing 1.8 % higher on its trading debut. The NSE had launched its $2.3 billion IPO, which was an offer for sale or exit for existing investors and was also India's second biggest IPO after Hyundai Motors' IPO two years ago. The NSE has taken almost 10 years to list and has now become one of the world's 10 most valuable publicly traded exchanges with a value of 450,000 crore rupees or about $47 billion. NSE has a 93 % share of cash trading and nearly 75 % of options, derivatives. Transaction charges accounted for about 68 % of operating revenue in the June quarter, a Reuters report revealed, adding that derivatives activity has, however, slowed since 2024 thanks to tighter regulation, higher taxes and concerns over the closing auction, which raises questions about NSE's reliance on that segment for earnings growth. The BSE, or the Bombay Stock Exchange, earlier listed in 2017 and trades at a valuation of Rs 130,000 or about $13.5 billion. With all this in the backdrop, that is global bond yields rising, oil prices up again and the liquidity stretched domestic market, the Indian markets took a nosedive. On Thursday, the Sensex closed 1,247 points down to 73,580 and the Nifty 50 was down 383 points to close at 23,631. In the broader markets, the Nifty mid cap and small cap were also down 2.25 % and 1.5 % each. The rupee hit a one-week low on Thursday for roughly the same reasons, which is mostly the global factors. Dollar sales by state-run banks, mostly on behalf of the Reserve Bank of India, limited losses and kept the rupee above 96 per dollar, a Reuters report said, adding it ended at 95 rupees 95 paisa per dollar. Speaker 4 (5:55) Buying insurance could become cheaper over time, but the people selling those policies may have to earn less. However, that is if the insurance regulators' latest suggestions go through. The Insurance Regulatory and Development Authority of India, or IRDAI, has proposed tighter limits on commissions paid to banks, brokers and agents, along with curbs on digital practices that can push customers towards buying a policy. The proposals are essentially aimed at reducing the cost of distributing insurance and also reducing mis-selling. Shares of insurance distributors and companies with large insurance incomes fell on Thursday. The interesting thing is that banks and insurance stocks were thrashed alike on Thursday, apart from, of course, non-bank finance companies. But these are proposals and not the final rules, though with the IRDAI issuing them as a consultation paper, it is seeking comments and will wait till the 25th of October. The number to note is this. Life insurers paid about 61,000 crores in commissions in 2024-25, an 18 % increase, while premium growth was only about 7%, according to IRDAI data quoted by the Economic Times. So why did the markets crash on Thursday and what does it reflect? I put that question to Jeet Chokhalingam, founder of Equinomics Research. Speaker 2 (7:05) It is not just one, I would say a combination. You know, last night you saw US market falling around 1.6%, which was quite substantial. And second, oil price last couple of days again firmed up. Third, in the morning, Asian market, European markets also, majority of the markets corrected sharply. So apart from global cues from the international