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Hello and welcome to the Macro Brief from HSBC Global Investment Research, the podcast that looks at the key drivers of financial markets.

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I'm Piers Butler in London, and today I'm joined by a special guest.

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Pranjal Bhandari, our Chief Economist for India, is here in the UK, visiting clients and has kindly found some time to drop by the studio.

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We're going to be looking at what's behind India's growth resilience, whether rate hikes are on the cards, and why improving export competitiveness is the next big priority.

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Pranjal, great to have you in person on the podcast.

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Yeah, great to be in London and great to be here at your podcast.

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So let's start with the sort of big picture first.

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How would you describe India's economy right now?

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Is it primarily a story of resilient domestic demand, policy support and services strength?

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Or are the external vulnerabilities that you talk about in your various reports becoming more important again?

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Yeah.

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Yes, as you said it, I think it's been remarkably resilient so far for many reasons.

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And I think policy support is one of them, both monetary policy and fiscal policy.

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But having said that, we have to keep an eye on oil prices, because my sense is 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.

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So we have to really keep an eye out for that.

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India has been very reactive in dealing with the oil price shock so far.

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And indeed, when we look at the June quarter GDP, it grew at 7.8% year on year.

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What's behind that resilience?

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Is that sort of policy intervention or is the economy more resilient than we had expected?

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Yeah, a couple of things.

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One, India was able to get oil supplies from various different countries.

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And also, it's a big exporter of refined oil.

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And the fact that refining margins have really gone up was very helpful for India.

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Having said that, I think, again, if oil prices remain high for long, we will start seeing growth slow.

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But so far, growth has been very strong.

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We got the June quarter data just last week and it was 7.8%, which is very strong growth.

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And I think the big driver of that was a very resilient consumer.

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Big question, why does the consumer remain so resilient?

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My sense is everybody's shielding the consumer.

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The government has been cutting taxes, GST taxes, excise taxes on oil.

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It's been doing a lot of spend, higher subsidy bill, a lot more capex than before.

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And then there's the corporates.

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They're taking all of these high input prices, but they're not really passing them on to the consumers yet.

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And that's why the consumer remains remarkably strong.

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At the same time, inflation remains a concern, obviously, because of oil prices.

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So is there a tradeoff for the policymakers between keeping inflation contained and maintaining the growth momentum?

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Is it achievable?

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And is also, let's not forget, an El Nino effect that may be coming into the equation as well?

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That's a great question.

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You know, the Central Bank of India is an inflation-targeting central bank and needs to keep inflation at 4%.

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Now, this 4% number came in very carefully.

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It's a number in which growth remains strong, but the rest of the macro economy remains resilient as well.

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So the primary mandate of the RBI is to keep inflation at 4%.

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Right now, it's getting higher than 4%.

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I think in the next six to nine months, it would be 5% and more.

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And our sense is that rate hikes are coming.

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We're expecting two rate hikes in the cycle.

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So do you think that will slow the economic momentum that we're seeing?

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Well, given that it's just so strong, even if it slows the economic momentum a little bit, I don't think that will matter very much.

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I think India will still remain amongst the fast-growing economies of the world.

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Let's bring in the external side.

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Why does the persistent trade deficit matter so much to India's story?

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Yeah, that's a great question.

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You know, India tends to grow at a faster clip than many of its trading appears.

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And that's why it tends to import more than it exports and has a trade deficit.

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Now, there are a few years when inflows are not strong enough and the trade deficit can't be fully funded.

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And the currency, the rupee, comes under pressure.

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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.

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And a lot of money has come in.

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It was very, very significant, wasn't it, in terms of the quantum?

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Yes, $127 billion.

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And today, India's foreign exchange reserves are about $740 billion.

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That's like a very high number.

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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.

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But the rupee has weakened significantly since, what, early 2025?

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Why hasn't that translated itself into a much stronger export response?

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Yeah, over the last 18 months, the rupee has depreciated, you know, 24% against the euro, 20% against the GBP.

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These are big numbers.

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Well, what's happened is that whenever the currency depreciates, the exports of the country should become competitive and they should rise.

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We have seen exports rise in India as well.

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It's just that they probably haven't risen enough.

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They could have risen more.

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So to be technical, that's what we call the J curve?

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Exactly.

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That's the J curve.

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And so we see a J curve in India, but it's just a very faint J curve.

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And the big question is, why is it so faint?

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And we tried to investigate a little more.

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And we broke down exports product by product.

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And our general sense was that India is pretty good with its high tech exports.

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Right.

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like mobile phones, drugs and pharma, automobile parts, machinery.

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And when the currency depreciates, it tends to export more of those things.

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Where it really doesn't react much is the mid-tech exports.

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This is what you call the missing middle, isn't it?

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The missing middle, yes.

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So things like textiles and footwear and furniture, all those things which Vietnam has been selling for the last five years and has been growing at about 7%.

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That's the part of India's exports that haven't really taken off.

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And even the currency depreciation hasn't really helped there.

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So why is that happening?

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Yeah, so we did look into it carefully and there are many reasons.

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But the one that really stood out for me was the tariff disadvantage that India's exports have.

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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.

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So there's been a lot of tariff disadvantage.

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But that's where the opportunity lies as well, because over the last one year,

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India has been signing many bilateral trade agreements with many countries and regions from EU to Canada, New Zealand, Oman.

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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.

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So think about it.

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Two things come together.

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This big currency depreciation.

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and this removal of tariff disadvantage.

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The two together could make India's exports a lot more competitive than actually it's been in the last many decades.

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How long will it take for that to come through?

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That's, I suppose, a big question, isn't it?

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Well, that's the trickiest question of all.

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And I'm hoping 2027 is when we are going to start seeing more visible signs of it.

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I think we've started seeing some already.

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But I say 2027 because many of these trade deals, they have been finalised, but they are still being implemented.

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So we'll see the real impact, you know, a few months down the line.

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And I think one other thing that we need to watch out for is FDI inflows.

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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.

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So stronger exports, higher FDI, great for the currency.

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As you go around talking to clients, what's their reaction to those ideas and outlook?

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Well, I can see a lot of excitement about India.

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Equity clients haven't been very active, to be honest, but they are interested and they're asking a lot of questions.

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And they're really wondering if 2027 is the right time to finally enter India after a long break.

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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.

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And there are so many dollars with the central bank that the currency could be a lot more stable than before.

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And there's a lot of liquidity in the system, which could be good for bonds.

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So I'm seeing a lot of interest across asset classes at this point of time.

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The big question is, will the investments follow?

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We'll have to see.

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20-7, I've made a note.

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We'll have you back to look at the results.

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But for now, thank you very much for joining us today.

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Yeah, it was great to be here.

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Thank you.

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Prenjan Bhandari there on India's Economic Outlook.

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If you'd like more content from us, then head to LinkedIn and search hashtag HSBC Research.

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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.

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But that's all from us this week here on The Macrobrief.

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This episode was hosted by me, Piers Butler, and produced by Tom Barton.

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We'll be back again next week.

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So until then, thanks for listening.