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India Insider: Why Russian Oil Should Be Treated Skeptically

by with No Comment AMT MarketsCommoditiesFeatured Highlights

India Insider: Why Russian Oil Should Be Treated Skeptically

As Russian President Vladimir Putin arrives in New Delhi for a bilateral summit, the mood in India’s capital is one of profound strategic tension. The core of the problem is India’s massive appetite for discounted Russian Crude Oil, which has shielded the economy from high energy prices but is now causing significant financial and geopolitical risks. This move comes at a time when India’s most important trade surpluses lies with the West, raising anxieties about U.S sanctions and shrinking strategic space.

Trapped Rupee Problem

Since the Ukraine war, Russia’s share of India’s Crude Oil imports has surged from under 2% to nearly 40%. This has simultaneously inflated India’s trade deficit with Russia to nearly $59 billion.

The transactions are largely settled in Indian Rupees (INR). Moscow has accumulated billions of Rupees in Indian banks. However, because the Rupee is not fully convertible on the global market, Russia has very limited ways to use this huge surplus within India. These billions of Rupees are essentially ‘trapped liquidity’ – a problem neither country can easily solve.

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India – Russia Bilateral Merchandise Trade Chart from 2017 – 2024

The Kremlin, meanwhile, is shifting its financial allegiance. It is preparing to issue Yuan denominated sovereign bonds, a decisive step that deepens its reliance on Beijing’s financial system amid a cut off from the Western financial system. This financial trajectory clearly signals the next logical step: Russia will inevitably demand that India begin paying for its oil shipments in Chinese Yuan (CNY).

Structural Risk of Holding Chinese Yuan

India has never been comfortable holding Chinese Yuan or settling trades in the currency. That’s partly strategic as New Delhi wants to protect its geopolitical autonomy and position itself as the democratic anchor of the Global South while staying closely aligned with the West.

But Russia’s financial plumbing is now increasingly routed through China. As the Kremlin becomes more deeply integrated into China’s banking and payments system, its dependence on the Yuan becomes structural. Moscow needs Yuan not only to service Chinese creditors, but also to pay for its expanding list of manufactured imports from China. The Ruble, being a largely non-convertible currency, simply cannot support this scale of trade.

For now, Russia-China trade is balanced enough because Beijing still buys large quantities of Russian energy. But this equilibrium can shift quickly. As the Ukraine war drags on and Moscow’s defense spending rises, the Kremlin will be forced to rely even more heavily on Chinese financing, Chinese goods, and ultimately the Yuan itself, tightening its economic dependency on Beijing.

When that moment arrives, the Reserve Bank of India (RBI) will be forced to accumulate Yuan as part of its Forex reserves to ensure the continued flow of oil. This decision, born of necessity, introduces a structural vulnerability into India’s financial system as the adoption of Yuan as a reserve currency subject to China’s capital controls.

Risks of Holding the Yuan

China may have both the onshore (CNY) and offshore (CNH) Yuan, but the currency is ultimately controlled by the PBOC, which makes it a risky reserve asset for India. In a crisis, Beijing’s capital controls could restrict liquidity and prevent the RBI from freely converting yuan into hard currency like the USD, effectively trapping India’s capital.

Beyond this financial rigidity, large Yuan holdings also expose India to CCP driven political risk, tying its external stability to China’s domestic decisions. And unlike the Dollar which can be deployed anywhere, Yuan reserves are usable mainly for transactions with China or countries in its financial orbit, sharply limiting India’s strategic and financial flexibility.

Strategic Win for Beijing

For Beijing, this shift delivers a double strategic win, cementing the Yuan as the dominant settlement currency across Eurasia especially among countries squeezed by Western sanctions and it allows the yuan to slip into India’s financial system indirectly, not through Chinese pressure but through Russia’s growing dependence on Chinese finance and India’s reliance on discounted Russian oil.

For Moscow, this is a reluctant compromise: giving up some monetary autonomy in exchange for necessary financial support from China.

For India, however, it introduces a new long term structural risk with a slow but steady Yuan encroachment into its trade and reserve system, operating alongside the dominant U.S Dollar. The oil corridor that was meant to offer an independent strategic opportunity for India is now becoming a channel which Beijing can strengthen its monetary footprint. In this complex triangle, India risks paying a dangerous tactical long-term price for its energy security.

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USD/INR: Elevated Range as Questions about Values Persists

by with No Comment AMT MarketsCentral BanksFeatured Highlights

USD/INR: Elevated Range as Questions about Values Persists

The USD/INR has traded the past week approximately between the 82.2200 and 82.7000 ratios. Plenty of discussion regarding what the Reserve Bank of India has been doing as they battle the strong USD has been whispered openly, and is being questioned from financial institutions and speculators. Day traders who have been trying to wager on the value of the Indian Rupee have likely found the waters difficult to swim. As of this writing the USD/INR is near 82.5200.

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USD/INR Three Month Chart as of 8th June 2023

Last Wednesday’s sudden rhetoric, from two U.S Federal Reserve officials caused mayhem briefly within the USD/INR. The currency pair got hit after India’s official trading hours closed, and essentially moved in overseas accounts based on the spoken words from the two Fed members stating the U.S central bank should not raise the Federal Funds Rate on the 14th of June. These sudden Forex moves hurt many USD/INR speculators. After this rhetoric from the two well-regarded FOMC members, like clockwork U.S economic data provided a counter punch last Friday with better than anticipated Non-Farm Employment Change numbers, this while inflation results also remained persistent.

Three Month View of the USD/INR offers Sentiment Insights and perhaps Clues

The past three months of trading in the USD/INR have produced a rather rocky price trend. A low of nearly 81.5200 was seen on the 14th of April, which turned into a high of approximately 82.9000 on the 19th of May. Intriguingly while many USD/INR speculators may be looking at the U.S Federal Reserve and casting blame, questioning the potential interventions by the Reserve Bank of India remains relevant. The Reserve Bank of India has actually been rather tranquil regarding its use of interest rate hikes; it has not raised the key lending rate aggressively in India like many of its major global counterparts. Why is this?

Is there a potential the Reserve Bank of India and the government has wanted the Indian Rupee to get weaker? Deflating the Indian Rupee’s value in order to potentially create an unseen tax is considered an old trick by economists. This because some believe inflation is a way to tax people without actually raising interest rates, the deflated value of a currency makes it easier for governments to sometimes repay debt, based on the notion the money they are now using is cheaper compared to when the Indian Rupee’s value was better.

Where is the USD/INR Going to Go Next?

I am no economist; my specialty tends to be risk analysis. There is an old joke, ‘why did god create economists? To make weathermen look good.’ The point is that economists often get their outlooks wrong, but we cannot blame only economists for getting their outlooks wrong, many of us do. The USD/INR has a tough few days ahead, it must deal with nervous market sentiment generated from a lack of clarity via the U.S Federal Reserve. Looking for correlations in the Forex market is proving difficult for the moment for all short-term speculators. Choppy trading in the USD/INR has been noticeable the past few days, this Monday’s upwards trend has turned into near-term consolidated day trading. Other major currency pairs are turning in rather turbulent results also without a firm technical stance.

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Gold Three Month Chart as of 8th of June 2023

After speaking with many associates in the financial sector the past week, it appears many people believe the Fed should stop raising interest rates for the time being. Some financial institutions seem to be leaning in this direction, but there are caution signs all over that warn about potential surprises from the U.S Federal Reserve.

Yesterday the Bank of Canada raised its Overnight Rate by another 0.25%, when most analysts believed they would pause. Another interesting sign is the current price of Gold near 1950.00. The recent lower price could indicate some financial houses believe the Federal Reserve may actually remain active regarding further interest rate hikes, this because the price of Gold has tended to rise when the perception existed the Federal Reserve is going to be dovish. Gold’s downward price action should raise suspicious eyebrows.

But then again, I am not an economist; I am merely a risk analyst. So my words to you are, be careful if you are wagering on the USD/INR before the U.S Federal Reserve’s pronouncements next Wednesday on the 14th of June.

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India’s Speculative Real Estate Bubble and Values: Part One

by with No Comment AMT MarketsAssetsFeatured Highlights

India’s Speculative Real Estate Bubble and Values: Part One

India’s Real Estate Sector is a Well Known Affair to its own Citizens and to Global Asset Management Companies

India’s major cities like Mumbai, the financial capital of India, Gurgaon, Delhi, Bengaluru and Hyderabad, the tech hub of the nation, serve as major attractions for local players and international corporate giants who want to participate in the real estate sector. While transparency still remains a challenge that needs to be addressed in Tier 2 and Tier 3 cities of India, underlying demand continues to expand throughout the nation. The Real Estate Regulatory Authority, passed a bill known as the RERA Act, by the serving government in March of 2016, to create transparency and fairness between buyers and sellers in the residential real estate market, however these measures do not always help circumstances as hoped.

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Well known companies like Blackstone which is based in New York, and Brookfield Asset Management of Toronto have vast operations in the commercial real estate sector of India. Their estimated investments are significant. Amounts spent are believed respectively to be nearly 50 billion USD by Blackstone, and the Brookfield figure is likely around 22 billion USD. The companies concentrate money for real estate, and infrastructure like telecommunications, roads and other spheres crucial to create value.

The reason why private equity giants allocate massive investments into India commercial real estate is due to the remarkable advantages of the locations available for property, and the capability to turn a profit. The land purchased and developed is usually situated close to burgeoning information technology companies. It is easily understood these IT companies have expansive needs to function properly which include plenty of area for employees to work. This is relevant in the north of India where Brookfield has invested in places like Mumbai and Gurgaon. Apart from the commercial demand for property, the employees who work in these type of companies also drive residential apartment sales in these cities.

The real estate market in Gurgaon has seen remarkable growth in the recent years where prices have experienced double digit appreciation. Readers need to understand that Gurgaon, is a city near India’s capital of New Delhi in northern

India. It’s known as a financial and technology hub. The rise of e-commerce players like Amazon and the Walmart owned Flipkart are important. Walmart spent around 16 USD billion to buy about 77% of Flipkart in 2018 and their vast operations also have sparked demand for huge amounts of property, including warehouses. This activity has certainly attracted the attention and desire of global players to invest in commercial real estate operations.

The residential real estate market has grown fast, and continues to achieve huge growth even after the coronavirus pandemic. An extremely rapid pace is fueled because low interest rates have appealed to new home buyers to initiate purchases of apartments and condominiums in metropolitan cities like Chennai, Mumbai, Hyderabad, and Bengaluru. Many affluent families in India from these major cities continue to own and rent residential homes in the areas, taking advantage of demand. According to a survey conducted by the global property consultancy firm Savills, now 70% of families in the metropolitan cities mentioned previously from the north and south of India have answered positively when asked if they would like to buy a second home in the next couple of years.

Residential real estate sales have been rising after the pandemic, especially for double bedroom apartments averaging 1200 square feet of housing, usually within a category that is priced in a range above 5,000,000 Rupees (around 60,000 USD). India’s benchmark mortgage rate is in the 8.7% to 9.7% range as of this writing, this is higher than it was one year ago. But Indian home buyers haven’t yet stepped back from buying, this because interest rates in India have not increased too much in percentage terms. The average time to pay a loan for residential mortgages ranges from 10 to 20 years in India. This allowable time frame makes it affordable for employees to pay via Monthly EMI, Equated Monthly Installments. The mortgages come with a floating rate meaning the buyers can reset their rates when the local interest rate falls. Yes, floating rates certainly do contain dangers if interest rates climb too high.

A Speculative Roulette Game: The Least Known and Unequal Affair

But there is another reality and a very different story in certain areas of India where data misses critical elements of the real estate business. Speculative participation in property is done by the most affluent who are the dominant buyers and sellers; speculative buying and selling is too expensive for most citizens. Real estate has frequently been used as a tool to hide wealth and avoid taxes by many within certain segments of India. The real estate speculative bubble creates vast distortions in the costs of rents, and affects employment opportunities for the masses. Government offices may sometimes turn a blind eye to these circumstances, because as long as cities and regions can collect money from the speculative frenzy there is little reason to turn off the revenue streams.

Frequently there is someone who is capable of bidding higher for lands in most of the Tier 2 and Tier 3 cities discussed, compared to those who actually need the property to live there and function properly. It is important to mention Tier 2 and Tier 3 cities and what is taking place in these areas, because these locations frequently lack substantial income generation opportunities for people and don’t have massive infrastructure or enough office space to employ people where wages have stagnated for many years. Take for example the Tamil Nadu, a state in southern India where I live, the average price of a double bedroom 1200 sq’ft residential apartment in the capital city of Chennai is around 6,000,000 Rupees (around $73,000 USD).

Readers need to note that the Indian ‘middle class’ prefers to have 2 bedroom 1200 sq’ft residential houses and apartments on average, thus builders construct houses and units based on land availability. Market prices for the property equals the costs of building materials and labor along with the speculative factors worked into the total value.

A look at the town of Madurai where the same apartment is available at a comparable price tag like Chennai is important to critique. Because wages in Madurai are a quarter, and sometimes less than half of what one could earn in Chennai, the disparities in the income distribution and the property prices in India become evident and need to be recognized.

In some rural towns where wages have not grown more than 5% per year,

India has seen real estate prices doubling every 4 years. For example, the rural town called Ponnamaravathy near to Madurai, which is my hometown, speculation in the real estate sector has seen frenzied pricing in an unprecedented manner for land and newly built houses. There is a great divergence between real per capita income versus the escalating real estate prices and rents in the interiors of India in towns such as Ponnamaravathy.

According to real estate analysts, most land parcels and their inventory of projects within metropolitan cities that are under construction has been bought by speculators. When units in new projects are sold to speculators, these generally change hands multiple times during the construction period, which generally lasts three to four years. Such heavy ‘churning’ means fast price increases. Also, the builders who market their own projects as investments raise list prices frequently to keep existing investors happy with notional gains, so they can point to the ‘attractiveness’ of potential speculation.

While it may not matter to some citizens in the larger cities, the problem of speculative influences do matter in the small towns where community wages have not grown properly. Inflation and speculative investments in these towns do not create sufficient job growth either. Surplus cash profits earned by many businesses, and foreign remittances, which were close to 108 billion USD in 2022, goes back into real estate speculation causing higher rents and forcing lower income households to struggle.

Rural Wages Haven’t Grown but Prices are Increasing for Homes

According to economists data, Average Nominal Wages in rural India is approximately 15,000 Rupees per month for men and 8,000 Rupees per month for women.There is an ample real estate supply in the rural market, but speculative demand has created steep pricing, typically initiated by large ‘investors’ willing to pay top money for any asset irrespective of its location, affordability or current market price based on the assumption values will continue to increase.

The difference between rural wages and costs for homes creates heavy disparities and inequalities for households living within the lower thresholds of society. For example, a double bedroom 1200 sq’ft residential apartment in Ponnamaravathy can be selling at a whopping 7,000,000 Rupees (approximately 85,365 USD). This is 20% more than what we have seen before on average in Chennai, and Madurai, a Tier 2 city, in Tamil Nadu state. The wages in the rural town of Ponnamaravathy are just 10% compared to what one could earn in Chennai annually, making the purchase of a residence priced at these higher values difficult for most residents and making many people renters for life.

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USDINR: 83/$ & Above is a Possibility

by with No Comment DataForexWorld

USDINR: 83/$ & Above is a Possibility

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The Indian Rupee continues to remain under pressure as volatility in the global market triggers capital outflows amid investors concerns over the stress levels in banks worldwide especially in the U.S and in Europe.

RBI Governor Das yesterday, said in a conference that India today has a well regulated and well supervised banking sector.

Not to forget, India has past issues with some private banks that have been lending to corporations that defaulted on their debt . Yes Bank and Lakshmi Villas Bank are some of these examples, and today these banks are well capitalized and their loan books are diversified as the RBI has tightened its grip on regulatory frameworks.

Also, the loan books of Indian banks are being more diversified, and Government Bonds portfolios are comprising only 18-22% of the total assets, meaning banks are not at greater risk than their western counterparts.

The central bank of India holds Forex reserves of over $560 billion USD and has been actively intervening in the Spot & Forward markets since 2022 as the U.S Federal Reserve started to raise rates to tackle higher inflation. Governor Das also cautioned, ”the worst of inflation is behind us,” but pointed out that with the Russia – Ukrainian war, along with monetary tightening by major central banks, that there is still stress for nations that have high external debt and more capital outflows, which can put pressure on their currencies and trigger imported inflation.

India also has sticker inflation of around 6.4% down from 6.52% in January, this while the RBI is expected to raise rates by 25 bps in the April monetary policy meeting . The Indian Rupee was among the worst-performing currencies among emerging Asian peers last year, counter weighed by a stronger dollar and outflows from local assets. 

As a net importer of oil from Russia which grew 4 times in 2022, and less exposure to external debt means headwinds from shocks will be minimal which will help the Indian Rupee. However, as growth slows down in the West, this means more capital outflows and a flight to safer assets possibly taking place.

The RBI stance is very different than a month ago, where it didn’t allow markets to take the Indian Rupee above 83/$, but now it’s significant that the central bank could let to the USD/INR depreciate above 83 to save foreign exchange reserves.

The RBI’s equation is very simple as the Federal Reserve reduced its rates to zero back in 2020 because of Covid19, more money chased speculative assets especially in the emerging markets. And the RBI accumulated a lot of Forex reserves. Now the tables have changed. In addition to this, India also is not keen to add its bonds to global indexes due to concerns over potential ensuing market volatility not supporting capital inflows, and thus perhaps damaging the Rupee.

With current account deficits widening to 4.4% of India GDP in Q2, this means India needs to work hard to achieve better capital flows, particularly as tensions on some important global banks continue to be demonstrated.