Newspaper Summary - 171225

 Russia seeks to buy more from India to beat Western sanctions

Russia has sought to significantly boost Indian imports and pursue joint ventures to deploy the growing rupee balance in its vostro accounts. This effort is a direct result of over 90 per cent of bilateral trade now being settled in local currencies following Western sanctions.

Vostro Accounts and Trade Deficit

Vostro accounts are used by trading partners to hold rupee-denominated balances resulting from trade transactions, and the rupee balance in Russian vostro accounts is likely to run into billions of dollars, though the RBI has not officially published data on this. Russian President Vladimir Putin acknowledged during his visit to India that more than 90 per cent of the bilateral trade now takes place in local currencies.

India currently runs a substantial trade deficit with Russia, as India's imports from Russia, consisting mostly of crude oil, were at $63.8 billion, compared to Indian exports of only $4.9 billion in FY25, resulting in a deficit of about $59 billion. This trade deficit means that there would be a large surplus of Indian rupee collecting in the Russian vostro accounts, which the Russian government is now using to pay for Indian exports (because of payments for Russian oil by India).

Demand for Indian Imports

Russian companies are in contact with Indian counterparts seeking to buy more goods from India, with many planning visits to India in January to advance their plans, according to Ajay Sahai of the Federation of Indian Export Organisations (FIEO). There is great interest in items such as:

• Food and agriculture
• Home textiles
• Footwear
• Engineering goods
• IT and ITES
• Logistics

The scope for growth in Indian exports is considered huge, as they currently comprise roughly only 2 per cent of Russia’s total imports. Specifically, there is optimism among exporters, and especially Micro, Small, and Medium Enterprises (MSMEs), about a sharp rise in exports of engineering products to Russia, given the high demand for all kinds of items. FIEO plans to send two delegations to Russia over the next couple of months.

Sanctions, Strategy, and Future Trade

Western countries, including the US and the EU, imposed various economic and banking sanctions on Russia due to its conflict with Ukraine. While large Indian companies may be hesitant to increase business with Russia due to fears of sanctions and their exposure to Western markets, MSMEs are eager to explore the Russian market. Small and medium exporters require government support, such as using the market access initiative scheme, to secure orders in Russia. Commerce Secretary Rajesh Agrawal noted that during Putin’s recent visit to India, the message from Russian regulators and industry was positive regarding clearing pathways for more exports from India.

Despite expectations that India’s oil imports from Russia may decline due to US sanctions on Russian oil companies, purchases from non-sanctioned companies are expected to continue. Both countries remain committed to achieving the $100 billion bilateral trade target by 2030.

The article titled, How India aims to rewrite rules for higher education, details the Central government's planned comprehensive overhaul of the higher education regulatory structure through the Viksit Bharat Shiksha Adhishthan Bill, 2025.

Key Aspects of the Proposed Overhaul:

• New Regulatory Model: The bill aims to replace the existing "regulator-centric model".
• Apex Body: The core of the bill is the creation of the Viksit Bharat Shiksha Adhishthan, which will serve as the apex strategic body for higher education.
• Split of Operational Powers: Operational powers will be distributed among three independent councils, handling:
  1. Regulation
  2. Accreditation
  3. Academic standards.
• Role of the Apex Body (Viksit Bharat Shiksha Adhishthan): This body will focus on offering long-term policy direction and coordinating the functions of the three councils. It will not act as a day-to-day regulator. Its mandate includes promoting India as an education hub, supporting research and innovation, fostering multidisciplinary universities, and integrating Bharatiya knowledge systems into the curriculum. It will also oversee funding support for the councils.
• Setting Academic Standards: The Viksit Bharat Shiksha Manak Parishad (Standards Council) is the body responsible for defining academic benchmarks. These benchmarks include setting qualification levels, expected learning outcomes, minimum academic standards, and credit transfer norms. Importantly, institutions and faculty members retain their autonomy over pedagogy, curriculum design, and assessment. The Council will also work on facilitating student mobility across disciplines and aligning vocational education with higher education.
• Impact on Existing Regulators: The regulatory functions currently carried out by existing bodies such as the All India Council for Technical Education (AICTE), the University Grants Commission (UGC), and the National Council for Teacher Education (NCTE) would be subsumed into the new council-based framework, operating under a single regulator responsible for approvals.
• Impact on Institutions: The framework mandates higher expectations for transparency and accountability for universities and colleges. Institutions that meet accreditation benchmarks will gain greater autonomy and academic flexibility. Conversely, weaker institutions will face increased compliance requirements and less room for opaque operations. To meet the new regulatory oversight, institutions will need to strengthen their internal governance systems, financial reporting, and data management, as continuous public disclosure is central to the process.

The proposed law stems from concerns that India’s universities are currently poorly aligned with global academic standards, uneven in quality, and overly regulated. A parliamentary panel is currently vetting the bill.

The crypto industry has gained ground, largely owing to the legal certainty given to stablecoins by the GENIUS Act passed in July. Digital pioneers view the quote often attributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you, then you win” as a popular mantra, having weathered derision, mockery, and snootiness from Wall Street’s elite.

The Threat to Banks

Despite a bountiful year for both bankers and digital-asset purveyors, tension between the old and new financial sectors is growing. The threat emanating from crypto is perceived as greater than many bankers once believed.

The immediate concern for bankers involves stablecoin regulation. The GENIUS Act, passed in July, was intended to prevent stablecoins from sapping demand for bank deposits—and thereby reducing lending—by prohibiting them from offering yields to buyers. However, stablecoin issuers like Circle (which issues the popular USDC coin) have devised a workaround to share "rewards" instead of yields. This brazen sidestepping of rules, combined with the fact that legislators who banned yields only months ago are not stepping in to end the practice, reveals the deep loss of political influence suffered by banks.

Beyond stablecoins, crypto is threatening to penetrate the federal banking system, having jammed its foot in the door on December 12th. An American bank regulator approved national bank trust charters for five digital-finance firms, including Circle and Ripple. Banks had pressed regulators not to approve these new charters. Although the designation does not qualify these institutions to take deposits or lend money, it does permit them to provide custody for assets nationally, rather than relying on a patchwork of state-level approvals. Earlier, a candidate for Federal Reserve chair, Christopher Waller, alarmed bankers in October by suggesting more firms might gain access to the central bank's payment rails, although he later clarified that holders of such Fed accounts would still need bank charters.

Loss of Political Clout

Individually, developments like regulatory workarounds, speeches, or a single banking charter could be dismissed. However, taken together, they constitute a serious threat to traditional banks. Lenders have already seen their central functions in brokering trades and making loans eroded by private credit and advanced market-makers.

The situation suggests that banks are no longer the foremost financial constituency of the Republican Party. The crypto industry has aligned itself with the countercultural, anti-elite politics of the new American right. The industry's largest political action committees have hundreds of millions of dollars prepared for deployment in the 2026 mid-term elections. Consequently, when the interests of banks clash with those of these newcomers, the outcome is no longer guaranteed or even likely to favor the banks.

In an irony of the situation, bankers who criticized the regulatory squeeze of the Biden administration now rely on a group of Democratic Party senators who are worried about money-laundering risks and the camouflaged payment of stablecoin yields. In their opposition to crypto firms obtaining banking licenses, America's largest lenders find themselves allied with trade unions and center-left politicians.

The article titled HOW THE BIG 3 RULE FINANCIAL SERVICES examines how the SBI, ICICI, and HDFC Groups—three behemoths who have driven India’s financial sector since the economic opening up in 1991—dominate banking, mutual funds, and insurance.

Overview and Market Presence

The listing of the company that runs ICICI Prudential Mutual Fund later this month will make it the fourth listed financial services business under the ICICI Group, allowing it to move ahead of its peers, the SBI Group and HDFC Group, which currently each have three listed businesses. These groups have fingers in every significant and sizable financial services sector in India.

Dominance in Mutual Funds

The top three mutual fund houses in India are SBI Mutual Fund, ICICI Mutual Fund, and HDFC Mutual Fund, collectively managing about 40% of the industry's assets.

• History: SBI Mutual Fund was established in 1987, predating liberalization; ICICI Mutual Fund began shortly after the sector opened to private players in 1993; and HDFC Mutual Fund was a later entrant in 2000.
• Performance Shift: By March 2007, when the Indian mutual fund industry was worth ₹3.5 trillion, SBI Mutual Fund ranked seventh in assets. By March 2017, ICICI Mutual Fund and HDFC Mutual Fund held the top two spots in the industry, which had grown to approximately ₹18.2 trillion. However, in recent years, the biggest mover has been SBI Mutual Fund, which leveraged its extensive network and government connections, along with solid scheme performance and the post-COVID sector expansion, to leapfrog both rivals into the top position,.

Banking Performance and Profitability

The core banking sector has witnessed consolidation, notably SBI integrating six associate banks in 2017. Both ICICI Bank and HDFC Bank have moderated growth to focus on reinforcing their balance sheets and maintaining profitability.

• Profitability: A key metric is the Net Interest Margin (NIM), which is the difference between the average interest earned on loans and the interest paid on deposits. ICICI Bank boasts a net interest margin (4.3%) that is higher than HDFC Bank's (3.5%) and more than a percentage point higher than SBI's (3.1%),. HDFC Bank's NIM has seen a drop following its merger with its parent entity.
• Valuation: The superior profitability of ICICI and HDFC leads them to command higher price-to-earnings (P/E) ratios (17 and 21, respectively) compared to SBI’s P/E of 11.
• Assets: Following the widespread economic reforms of 1991, SBI's position as India's largest bank was threatened by the aggressive expansion of ICICI Bank, which was incorporated in 1994 (SBI has existed since 1955). By 2007, ICICI Bank's asset base reached about 60% of SBI's. However, ICICI Bank faced challenges with bad loans, and SBI improved its position, largely leveraging its scale and network. Currently, a bank has bridged the asset gap with SBI only because HDFC Bank merged with its parent HDFC.

Leadership in Insurance

The life insurance business was opened up starting in December 1999, and all three groups entered the sector over the next two years.

• Life Insurance: ICICI was initially the early leader, driven by investment-cum-insurance plans. However, after regulatory clampdowns on such plans, growth for both ICICI Prudential Life and SBI Life slowed down. While all three were roughly the same size by 2012–13, SBI Life has surpassed its rivals in terms of total premiums in the last five years.
• Non-Life Insurance: SBI General has also demonstrated faster growth in the non-life insurance sector, although it started from a smaller base.

Stock Performance

Stock returns over the long term are used as key performance indicators for these groups.

• Recent Performance: Over the past five years, only three of the nine listed group businesses—SBI, SBI Life Insurance, and ICICI Bank—have outperformed the bellwether BSE Sensex,.
• Long-Term Banking: Over the long span of 10 and 15 years, all three banks exceeded the Sensex's returns. However, over 20 and 25 years, only HDFC Bank outperformed the Sensex, while SBI and ICICI Bank trailed it. Of the 12 stocks continuously part of the Sensex for 20 years or more, only HDFC Bank and Maruti Suzuki have bettered the index's compounded annual return of 16.7% during this period.

The article is titled: Rare earth crisis brings Germans to India.

Germany's offshore wind industry is looking beyond Beijing towards India as a possible alternative supplier due to China’s grip over rare earth magnets. As supply chains are strained and geopolitical risks increase, German companies are investigating whether India can assist in diversifying the sourcing of this crucial input for Europe’s clean energy efforts.

The current interest remains at an early, exploratory stage. Last month, during a visit by a German delegation led by Johann Saathoff, parliamentary state secretary to Germany’s federal minister for economic cooperation and development, the possibility of collaborating with India on rare earth magnet manufacturing was discussed with the Indian government. Currently, the talks are largely occurring at the government-to-government (G2G) level, involving industry bodies,.

The Importance of Rare Earths and India's Potential

Rare earth magnets are vital for offshore wind turbines and are a critical input necessary for the global energy transition,. Supply concerns were triggered across dependent industries after China decided in April to curb exports of these magnets. China controls approximately 90% of the global processing capacity for these magnets, leaving Europe highly dependent on a single supplier,. Any extended disruption could significantly impact Europe’s energy transition.

Since Germany is entirely reliant on China for the supply of rare earth magnets, offshore wind players are seeking to diversify their supply chain and explore if India could meet their demand. India holds one of the world's largest rare earth reserves. India is also building local magnet-making capacity which might eventually exceed its own demand, positioning the country as a likely alternative supplier.

The German Offshore Wind Energy Foundation (Stiftung Offshore Windenergie) is considering sponsoring a study to assess how India could cater to the German offshore wind sector’s demand for permanent magnets and examine potential collaboration.

Germany is among the world’s leaders in offshore wind installations, having installed 9.2 GW of capacity by the end of 2024. The country plans to scale this capacity significantly, targeting 30 GW by 2030 and 40 GW by 2035. Major offshore wind companies in Germany include Deutsche Windtechnik, Global Tech Offshore Wind Gmbh, and WINDEA Offshore.

The article titled, ‘More rate cuts unlikely as headline inflation will rise’, focuses on the outlook for interest rates in India, according to Neelkanth Mishra, chief economist at Axis Bank and head of global research at Axis Capital, who is also a part-time member of the Economic Advisory Council to the Prime Minister of India.

Key Points on Rate Outlook:

• No Further Rate Cuts Expected: Mishra believes the Reserve Bank of India (RBI) is unlikely to implement further interest rate cuts in the current cycle "because headline inflation will start rising".
• "Lower for Longer" Scenario: While immediate cuts are not anticipated, he described keeping rates "lower for longer" as a reasonable scenario to consider.
• Inflation Projection: Mishra expects headline inflation to average around 4% in FY27.
• Prior Cuts: In 2025, the RBI's monetary policy committee (MPC) had already cut the repo rate by a cumulative 125 basis points (bps) to help support economic growth amidst benign inflation.
• Underlying Price Stability: Despite the economy experiencing above-trend growth, Mishra argues that inflationary pressures remain constrained due to the existing output gap (the difference between actual production and the economy's potential output). He noted that core inflation, excluding precious metals, has been below 3%, and median inflation, a better measure of underlying price pressures, has been stable near 3% for 18 months, indicating persistent slack in the economy.
• Policy Tightening Unlikely: The economist said that despite above-trend growth, "we do not expect inflation to really reach a point where it requires policy tightening".

Economic Context (from Axis Bank on December 10):

• Ongoing regulatory reforms are expected to support upward revisions to trend-growth assumptions.
• Given the economic slack, the economy has the potential to sustain above-trend growth for a few years before inflationary pressures emerge.

The article titled, ‘More rate cuts unlikely as headline inflation will rise’, focuses on the outlook for interest rates in India, according to Neelkanth Mishra, chief economist at Axis Bank and head of global research at Axis Capital, who is also a part-time member of the Economic Advisory Council to the Prime Minister of India.

Key Points on Rate Outlook:

• No Further Rate Cuts Expected: Mishra believes the Reserve Bank of India (RBI) is unlikely to implement further interest rate cuts in the current cycle "because headline inflation will start rising".
• "Lower for Longer" Scenario: While immediate cuts are not anticipated, he described keeping rates "lower for longer" as a reasonable scenario to consider.
• Inflation Projection: Mishra expects headline inflation to average around 4% in FY27.
• Prior Cuts: In 2025, the RBI's monetary policy committee (MPC) had already cut the repo rate by a cumulative 125 basis points (bps) to help support economic growth amidst benign inflation.
• Underlying Price Stability: Despite the economy experiencing above-trend growth, Mishra argues that inflationary pressures remain constrained due to the existing output gap (the difference between actual production and the economy's potential output). He noted that core inflation, excluding precious metals, has been below 3%, and median inflation, a better measure of underlying price pressures, has been stable near 3% for 18 months, indicating persistent slack in the economy.
• Policy Tightening Unlikely: The economist said that despite above-trend growth, "we do not expect inflation to really reach a point where it requires policy tightening".

Economic Context (from Axis Bank on December 10):

• Ongoing regulatory reforms are expected to support upward revisions to trend-growth assumptions.
• Given the economic slack, the economy has the potential to sustain above-trend growth for a few years before inflationary pressures emerge.

Indian currency in a bear grip

The rupee hit an all-time low of 91.08 against the dollar on Tuesday before closing the session at 91.03. The local currency has been under pressure despite the dollar declining.

The major factor weighing on the rupee is capital outflows. Data from the National Securities Depository Ltd (NSDL) shows that net foreign portfolio investor (FPI) outflows amounted to approximately $1.3 billion over the past week, bringing the total net outflows for December thus far to $2.8 billion. Since the local equity market has been trading with a bearish bias this month, foreign players have been offloading Indian shares. As a result, the rupee experienced pressure even though the dollar was depreciating and crude oil prices were softening.

Although the trade balance for November stood at $24.53 billion (compared to $41.68 billion in the previous month), a positive sign particularly given the uncertainty surrounding the trade deal, the rupee failed to capitalize because the FPI selling pressure remained high.

Technical Analysis and Outlook

Technically, the rupee's downtrend remains strong. The rupee slipped below the 90.25 support level toward the end of last week, resulting in a continuous decline that led to a record low of 91.08 on Tuesday. The current position at 91.03 suggests potential for further weakness.

While a minor appreciation, possibly to 90.50 or 90.25, might occur, the rupee is likely to resume the downtrend and fall toward 91.50 in the near-term. The downtrend could extend to 92. Conversely, if the currency breaks past 90.25, the uptrend could extend toward the resistance level of 89.75, followed by 89.60.

Regarding the dollar index, which is currently at 98.20, it has been depreciating for the past three weeks, suggesting that further decline is likely. Support levels for the dollar index are near 97.50 and 96.50. The outlook for the dollar index will only turn positive if there is a decisive breakout above 100, meaning that bears currently hold the advantage.

Overall, the rupee might see a slight increase to 90.50 before dipping to 91.50 in the near-term.