Ex-SEBI Official on Falling Rupee, FIIs, and Indian Markets | ft. Ananth Narayan & Monika Halan

Added: 2026-06-01

[00:00:00]You know, one joke I heard from a very large foreign portfolio investor is that RBI has made sure that the bond market is overvalued. Your retail market has ensured that the equity market is overvalued. Now, where do you want me to bring the money in?

[00:00:10]>> Rupee is hovering near record lows >> and is one of the worst performing Asian currencies.

[00:00:16]>> I think it's a very tough 12 months ahead. Would you agree with it?

[00:00:19]>> I find very few people who are bullish India. That tells me everybody's prepared for bad news. Nobody's really prepared for good news. If you remember, in fact, we faced so much of criticism from both sides. We had some people who were former regulators who were telling us why the hell don't you just ban all weekly options.

[00:00:38]Is poly market wrong? If regulated derivatives is right, why is a betting market on the future outcome of whatever wrong?

[00:00:51]Welcome to the growing India podcast.

[00:00:53]This is a joint initiative between grow and me Monica Halen. I do these conversations because I believe the stories that shape India must be told.

[00:01:04]Today's story is about interest rates, rupee and the markets. And I have the perfect guest, somebody who made the transition from being a currency trader in the top global banks to being a regulator in India. I am delighted to welcome Mr. Anand Narayan who completed his term as whole-time member at SEBI last year. Thank you so much Anant for making time. Absolutely a delight to have you here.

[00:01:30]>> Thank you so much Monica for having me.

[00:01:32]Uh the pleasure is all mine.

[00:01:33]>> Wonderful. I actually want to start today's conversation with something that you've been writing about fairly often right now. this whole currency depreciation and that's also what my viewers would want to learn about >> because everyone is concerned about the depreciation of the rupee >> and u there is this impossible trinity that you can't manage uh exchange rates inflation and um interest rates right that's the three >> monary policy capital flows and currency market >> and currency so one is explain what this is >> and uh tell us that did RBI try to do all Sure.

[00:02:11]>> And what was the is the is the falling rupee a result of that?

[00:02:17]>> Sure.

[00:02:18]>> And then if it is, are we taking corrective steps?

[00:02:21]>> Sure. Let me try and uh weave what is fairly a large canvas together. Monica um rather than going into the theory of you know the impossible trinity which is fascinating by the way um let me try and explain to you the way I see it with the caveat that for every view there's a counter view possible which means take it as one theory don't take it as a gospel truth because there's no such gospel truth >> right no so just give your view my audience wants your view not what some five other academic people may have said yeah >> sure so the first thing I think to remember is that all markets tend to be interconnected.

[00:03:00]While we love to look at currency markets separately, interest rate markets separately, equity markets separately, commodity markets separately, there's a fair amount of interconnectedness with one impacting the other. So life is complicated.

[00:03:14]>> Let's start with the overall currency flows where you have a current account balance and then you have capital flows.

[00:03:22]Current account is what you do on trade both on goods and on services and on remittances. Capital account is things like FBI, FTI, ECBS and so on and so forth. Right now generally what we have seen in India over the years is that we run a current account deficit. Of course the the the amount of current account deficit tends to vary over time but on average it's about 2% give or take of current account deficit. Within that we have some good stories and we have some bad stories. The good story is services.

[00:03:55]It's been remarkable. So our services exports even today with all the fear around you know uh software services etc. Thanks to this global uh capability centers is doing remarkably well. It's growing at 17% in dollar terms every year for the last five six years. So that's fantastic. We've done well on remittances as well. you know our diaspora sending in money that's been growing reasonably well despite some people you know calling doomsday kind of scenario it's not happened we still getting in money where we've not done well is on the goods uh part there we have found a trade deficit particularly with countries like China which has crossed $ 110 billion we are simply not able to produce enough ourselves and we end up importing a lot of our goods which is a problem that needs to be worried that we need to worry about but overall it's been in that 2% % range of GDP.

[00:04:46]In fact, over the last couple of years, it's come down to about 6% of GDP, which is a good small number. Against this, we've had capital flows predominantly in the form of FDI, foreign direct investment and FBI, both equity and debt. That has also been plus 2%. So against minus 2% of current account deficit, you have plus 2% of FBI and FDI. And therefore, there is a kind of a balance which emerges with some leads and lags. Okay. Now, where we have really had a trouble was on the net capital flows coming into the country which used to be 2% of GDP in FY 26. For the first time, the year that just got by, we had a negative number across FBI and FDI put together. First time in 25 odd years that we've actually seen a negative number come through. Even in 2008, we didn't see a negative number.

[00:05:38]That's been a real concern. So despite the fact that our current account deficit seemed manageable before Iran our capital flows suddenly were coming back coming down net capital flows because of which we had a currency imbalance. So that's one thing as far as the real flows are concerned.

[00:05:54]>> One small thing is it FDI or FBI or both?

[00:05:56]>> Both put together.

[00:05:57]>> Both put together.

[00:05:58]>> I tell you why it's important. Uh normally FDI has been the larger part.

[00:06:02]So it's been in the So 5 years ago it was about $45 billion of net inflows coming into the country.

[00:06:08]>> Last year in FI25 it was almost down to zero net FDI. It came down to about $900 million or so. Less than a billion dollars. Now we look at gross FDI numbers which are pretty high. Even today it's about for FI26 it was about $90 billion. But what you've got to look at is the net FTI including you know people taking out money including um people selling off their stakes and companies and and you know and cashaching and going out. That net FTI number which used to be about $45 billion not long ago has come down to close to zero. This year it'll probably see a small uptick but very small compared to that $45 billion of net FDI.

[00:06:46]I also think it's important to look at both FDI and FBI because this you know this theoretical kind of a distinction that we make saying FDI is good and FBI is not that good is not necessarily correct 80% of our FBI flows into equities actually comes from folks like sovereign wealth funds from insurance companies from pension funds from really long only investors who are once they get in they're there forever that's really long-term patient capital and as a capital staffed country we should be looking to get as much of patient capital as possible so I don't mind looking at FDI and FBI together as a good indication of what the capital flows look like right so that number has been struggling for the last couple of years and that is a real cause of worry the problem is therefore of course now it's got compounded with oil prices going up and we might go back to 2% of GDP as the current account deficit which accentuates the problem that we don't have you know actual capital flows coming in. So who's going to fund that hundred billion of current account deficit? That's where the problem lies.

[00:07:50]Now so much for the overall flows as far as currency markets are concerned. And now let's look at how other markets are connected with all of this. So the first proposition which I'll make to you which is contestable and we can have a debate about this is that there is financial repression in India which is a very fancy term for saying that the return that you and I get from fixed income markets in interest rate markets is lower than what it ought to be. Okay.

[00:08:18]Now that repression I think happens on two counts. One is there is regulatory policy maker RBI intervention that happens directly in the markets particularly in the government of India bond markets which keeps the interest rates low. Okay. Last year was a was a clear aberration an exceptional aberration where we saw 8.8 lakh crores of buying by the RBI. Of course they they did it not to keep yields low that was not their stated aim. It was to keep liquidity high but between 125 basis points of rate cuts between 8.8 8 lakh crores of bond buying by the RBI 5 year 10 year 15 year 20 year bonds between keeping liquidity extremely high for a long period of time rates were pressed down lower than where they would have been had there been no intervention from the RBI so that's one level of repression which happens the second level of repression which has got accentuated in the recent past is through taxation the fact is you have differential taxation across different asset classes for marginal investments.

[00:09:26]Lot of our investments, our savings, by the way, are are pretty much going into things like PF or insurance, which are where we're not really worried about what the returns are as much, right? But the the the discretionary savings that we have, we have a choice between going into equities, going into debt, going into commodities, going overseas. There what one finds is that the return that you get from fixed income products is on a post tax basis really not attractive at least optically. So if you're getting a 6% or a 7% return on a fixed deposit and you have to pay 3540% tax because you're in the highest bracket then your net post tax returns are below 5%. And that you struggle to see as beating your definition of inflation. So given inflation expectations on a post tax basis fixed income is not seen as very attractive because of this combination of RBI keeping rates low and the fact that taxation is very high on the interest rate front. Therefore, what tends to happen in a such a financial depression kind of a atmosphere is money tends to go towards equity markets which is seen as the one market where post tax returns can beat inflation on a consistent basis right you know advisers talk about 10% 12% we can argue over those numbers but that's the way optically it looks like right I think what's happened because of that is that a lot of discretionary money has gone into equity markets far more than the fresh supply of paper leading to capital formation and we had numbers when I was in SEBI we saw the numbers we saw something like 8.8 8 lakh crores of domestic demand for equity paper largely through mutual funds 6.1 lakh crores out of that was domestic mutual funds which was the highest ever in FI25 almost twice as high as the previous high that we have seen and against that the fresh supply of paper even if I was generous enough to include OFS the offer for sale in that was just 4.5 lakh crores so or 4.6 six lakh cr. So the gap between the demand for paper and the supply of fresh paper leading to creation of new businesses was very very large. That in turn leads to pockets of overvaluation and that in turn puts off investors such as foreign investors. So I would argue that this pushing of discretionary money into equity markets far more than the absorptive capacity of the equity markets actually in a funny way deterred capital flows to come into the country which is why on FBI you find that people find it easier to exit because they see very good exit valuations. You find strategic you know owners of companies who have a subsidiary here selling their company the the stake in their subsidiary here at valuations which are seven or eight times what they would get in their home country and therefore making merry right so it's easier for them to exit than to actually justify an entry even in the unlisted space which is where our FDI typically used to come in into startups and new companies etc even there because of the growth of alternative investment funds which are channeling your money my money into you know unlisted territory again the valuations have gone up quite a bit so again combination of public markets lots of money coming in and private markets lots of domestic money coming in has meant that it's easier for foreign investors to exit including as FDI than to bring in fresh money as FDI so my point is financial repression has possibly moved the discretionary savings into equities far more than the absorptive capacity at least in the short run that has possibly pushed up valuations and made it easier for capital flows to go out rather than come in exacerbating what is a problem on the currency front which is possibly one reason why capital flows have struggled in the recent past. There are other reasons through which interest rates or other channels through which low interest rates transmit into currency markets which are a little technical.

[00:13:32]The way it works Monica is if you and I have to buy dollars in the forward market. If you want to buy one-year forward dollars, that forward rate depends upon three things. It depends on the current spot rate. So if today dollar rupee is at 94, it depends on that. It depends upon the rupee interest rates for one year and it depends upon the dollar interest rates for one year.

[00:13:53]The forward rate is actually the spot rate plus very simplistically the differential between the the forward the Indian rupee rate and the dollar interest rate. So if that differential is 3% you will find a premium of 3% over the spot rate at which you can buy forward dollars. Now during 2025 when we saw those aggressive rate cuts from the RBI because CPI was low when you saw that liquidity was being pushed up through OMOS and other other market uh you know instruments the differential between forward uh the the rupee rates and the dollar rates came down to below 2%. I have not seen it as a forward as a markets trader for a long long time 1 and a half%. Right? So what that meant was it was far cheaper optically to buy dollars in the forward market than sell dollars. So the combination of this meant that anyway people could see nervousness in the currency market. The fact that we were not getting capital flows and we were not able to fund the current account deficit. So both those who wanted to hedge by hedging against imports by buying dollars in the forward market or FBI which wanted to hedge against their investments that they're holding in rupees or those that just wanted to take a punt and bet against the rupee as and and on the depreciation found it was extremely cheap to put those bets on because the differential was so low.

[00:15:12]>> So in a funny way pushing down interest rates actually incentivized people to bet against the rupee.

[00:15:17]>> Right. Right. So all of this put together >> no it's a it's a very compelling story and I have like a million questions I had to stop myself from interrupting you like 10 times >> but so you saying financial repression >> financial repression has been what India has done post independence like it's a 70-year-old story it's not a new story so and financial repression just for the audience just means that >> the RBI manages is the public debt which means it's a it uh it manages the borrowing of the government and it is also a central bank. So there's a tension between the two roles of RBI. So as the manager of government's borrowing, its job is to keep interest rates low for the government, right? That's what it should do. But as the central bank as the as the holder of monetary policy its job is to now target inflation through its interest rate management. So the first thing is that repression isn't new.

[00:16:24]Why is it leading to this outcome and the second which we we can discuss maybe in the same segment is this tension between RBI's role as a manager of the government debt. So there's been this argument forever that you should slice RBI honestly into two where public debt management becomes a separate vertical and the it the monetary policy becomes its remmit and of course consumer protection.

[00:16:54]>> Sure. So repression first like what is new and also despite this we are seeing and I just have some data that people are still uh pouring money into ppf all the small savings programs which is uh still giving you I mean the real returns there are fantastic >> sure >> so it's gone up like 20 23% over the last year >> so let's it's a great set of questions Monica and the right kind of push back so let's you know break it up into pieces as you mentioned >> first off I think By and large, RBI has done I'm not saying this to make RBI happy. I think they've done a fantastic job of ensuring there is a a healthy cleavage between what has happens as on their role as a debt manager and moni managing monetary policy. I don't I think they have enough checks and balances internally to ensure that there is no conflict of interest that permeates one department versus the other and I think it's fairly independent and I think history bears out that fact as well. Now does that preclude you from eventually making a separate entity as was NVIS I think under FSLRC as well that you should have a separate debt management office etc. I think it's a it's a healthy debate to continue with personally I think eventually you can get there but I wouldn't call it a tearing requirement right now where there is a definite problem happening where there are signs that something is going wrong and therefore something has to happen today.

[00:18:15]I don't think it's a high priority for me at least personally. Okay. So let's keep that aside. Now you you make a good point that financial repression has happened for since time immemorial. Let me qualify that a little bit. Okay. Now there are two parts to financial repression in my in my uh estimation.

[00:18:33]One as I mentioned to you is the RBI intervention which happens periodically.

[00:18:38]Remember now that RBI does not intervene to fund the government. It intervenes under the monetary policy framework. And you have an inflation targeting monetary policy framework where if inflation was to go up because of demand being on the higher side and supply side being on the lower side, you would expect the RBI to hike interest rates saying that you know what inflation demands that I curb aggregate demand and therefore put interest rates up. So it's a very independent function which determines where interest rates ought to be. They have a flexible inflation targeting which um has arguably worked very well since it was introduced and therefore that's what allows them to do what they have to do in the interest rate front.

[00:19:18]Last year we had a funny situation where CPI actually was very low. Inflation was averaging around 2%. And under that um you know instigation they said listen we've got to keep interest rates low.

[00:19:31]That's why you had 125 basis points of rate cuts since January of 2025. That's why they decided to keep liquidity high which they did by buying bonds 8.8 lakh crores of bonds in the last fiscal year.

[00:19:42]So it was not for actually funding the government but it was done with a monetary policy in back in the background. What I think I would find as a problem with our monetary policy framework is that it uses this to use a harsh word a blinkered approach where it looks at inflation and interest rates.

[00:20:01]This is where the impossible trinity that I spoke of comes into the picture that what you do on interest rates also impacts the currency markets. Now MPC the monetary policy committee is required to concentrate purely on inflation and of course operate within the 2 to 6% range. My simple point is at a time when your currency markets are looking queasy. Even if the CPI rate is low at 2%, you have to be very careful about cutting rates precisely for the reasons that I mentioned that you could be exacerbating the problems on the currency market front by actually increasing the valuation of your equity markets making it difficult for people to bring in money both into bond markets as well as into into equity markets. You know, one joke I heard from a very large foreign portfolio investor is that RBI has made sure that the bond market is overvalued. your retail market has ensured that the equity market is overvalued. Now, where do you want me to bring the money in right now? It's a it's a tongue-in-cheek kind of a statement. We'll take it with a pinch of salt. Yeah. But the reality is that interest rate when you set interest rates, you have to think about what it could do to the external balance.

[00:21:09]>> And currently our MPC framework does not allow for that debate to happen. I'm not saying that that should be the the the point that overrides everything else but at least in the discourse that we have in the MPC statements in the MPC minutes in the dialogue that we have with with people like Sajid who was on your chat as well there should be a consideration of all three together and at times I would argue you could make the point that even if CPI allows for rates to go down it might not be a great idea to let rates go down because your differential with other currencies has come down dramatically. It's a it's a judgmental call to be taken eventually. Now that's one part. Okay. On the interest rate front itself. The second part is on taxation. Repression is also passed on through taxation. Now one of the changes which happened recently Monica was some of the advantages which were given to debt funds particularly you remember the fixed maturity plans which used to be there and pretty ubiquitous >> ensured that you had a lot of money flowing into debt markets discretionary money. We'll come to the point about P PPF etc. Okay. The discretionary markets which are dependent on rates that used to go to FMPs as well that used to go to debt funds as well.

[00:22:19]>> Today the way in which the normal Indian is investing into debt markets is through balanced funds or through you know hybrid funds which >> savings funds >> equity savings funds where you are trying to address for the taxation issue. Right? So I would argue that actually taxation changes in the recent past have accentuated the level of financial repression because you and I will generally not see enough returns on a post tax basis from pure fixed income products whether it's fixed deposits or whether it's corporate bonds etc right and therefore that becomes an additional reason why we move to equity markets the third thing which I want you to remember look it's re it's it's very real that over the last six years we've had a fantastic growth in equity mutual fund culture, right? The reality is you know and I keep used to say this in when I was in SEBI we had 4 crore unique investors in the equity market as of March 2020. Today that number has crossed 14 crores. This mutual fund sah which you are part of that journey thanks to your membership of the mutual fund advisory council uh committee. Um that has had a spectacular success.

[00:23:25]mutual fund sah is a ubiquitous slogan which everybody has kind of agreed in this SIP numbers bears testimony to that. So when you see this growth of this equity culture accentuated with what happens on the financial depression side both with RBI keeping rates low and with taxation seemingly you know uh preferring equity over over debt. I'm saying you're you're exacerbating the situation. Now coming to your last point, you make an excellent point that even with all the so-called financial repression, there is no shortage of demand for government securities. In fact, the way I see it, about 85% of the demand for government bonds comes from banks, comes from insurance companies, comes from pension funds, comes from the provident fund, comes from entities which are not necessarily looking at interest rates. Banks have to buy bonds because they have LCR, liquidity coverage ratio, NSFR, net stable funding ratio, these ratios to manage. So they have to have government securities to manage that particular limits. PPF is or you know provident fund or EPFO is not really looking at rates as much because they have they have a mandate that they have to invest in so much. If you ask me that's part of the financial repression that you have so much of assured savings which is going into buying bonds irrespective of what the price is. Now what I'm referring to is the discretionary portion of our savings. Of course, it makes sense to put into PPF because guess what? Irrespective of what the yield is, if the EPA 4 is declaring 8 and a quarter% as your return where you're practically on a defined contribution and a defined uh you know return basis, then of course you'll put money out there, right? So my point is look, let me give you a philosophy I try and follow. um having been a regulator for 3 years and a market participant for many years, I think the regulatory system and the policy ecosystem should by and large try and stay away from markets as much as possible. The less you intervene, the better for the ecosystem. You have to think very carefully before you get in and do anything whether it is stopping something, starting something etc. Right? And the broad reason is the following. Free markets generally decide correctly what needs to be done. My only argument is in the bond markets the level of inter intervention is quite high and it's insidious and it comes through so many routes including through PF EPA4 PFRDA through IRDA through banks and RBI that it's quite insidious and we've gone got used to it that this is the way life is. I would argue that one of the reasons why our equity markets are doing so well compared to our our debt markets is because neither the government nor sebi nor any you know controller of capital issues nobody decides what the pricing is. It's a pretty much even though people will say that SEBI does a lot and interferes too much in many things reality is at least as far as the demand supply and pricing is concerned we don't get involved. Now I'll give you one more statistic just to embellish this whole thing. If you look at I I I like to look at the the the size of our credit markets in relation to the size of our equity markets and I try and compare it globally as to how we stand. So our credit market which includes the I'm keeping the government out of it. So money going to non-government entities including to public sector units that's about 65% of our overall market capitalization of equity markets it's the lowest in the world Monica in the US which has this ubiquitous equity culture it's 95%.

[00:26:49]In countries like Japan, Korea, Germany which are industrialized albeit it's between 125 and 175%. In China it's a ridiculous 310%. and India 65%. Now I would argue that our again I'm using a harsh word our paternalistic attitude towards debt markets saying that we shall determine where the rates are and the best way to grow markets are by keeping rates low >> is achieving just the opposite. And if you allowed the markets to determine, you know, in a free and fair man manner what the demand and supply is and where it equalizes, you will probably see the credit market do much better just as equity markets have done much better.

[00:27:30]>> Right. Right. And just on the point that you made on the debt funds being taxed similar to fixed deposit, I have to tell you that it was really lobbying by the banks before that budget where it happened and I actually never understood that and this is a point that you have made and you're the only person who sort of didn't you know when you said that I said okay I'm not crazy because I used to say but look it's finally going into a bank no matter even if I'm putting it in a mutual fund finally it's going into a bank right >> it's it So why is it that you are saying that you need to gut the debt fund so that people will buy more FDS people who are not buying fixed deposits because they were being channeled into insurance but that's separate story but I want >> but just on that Monica look um I won't blame anybody for pushing whatever they're pushing right everybody responds to incentives um I have been on the buy side myself for a long time enough to know that I would push whatever made sense to me that's that's reality also let's also Remember there are no clearcut black and white answers here.

[00:28:33]This is a complicated matter. You know whenever somebody stands up and says that I know for a fact that this is exactly what you have to do. I would say either you don't know enough and therefore you're being overconfident >> or you know incredibly a lot which I'm saying is a is a very very tiny portion of >> you know a lot you wouldn't say that because >> correct there's something called the Dunning Cruiser effect which actually encapsulates this. But just on this point, in fact, you've been a champion for things like asset allocation and for sensible planning when you're doing your financial planning, right? Don't put all your eggs into one basket. Make sure there's diversification. Harry Marco and the, you know, portfolio management theory, all of those things. We all know how an ideal portfolio is supposed to be created, right? And constructed. First, you should know what your risk appetite is. Depending on your risk appetite, you should be creating this diversified portfolio across asset classes, across equity, across fixed income, across commodities, across global currencies, across real estate, all put together in a mix which achieves that particular risk appetite that you're comfortable with and there and maximizes the return for that risk appetite. Right now, currently what's happening I think is that unfortunately tax becomes a huge determinant to our asset allocation across these various asset classes. To me that's interfering with what should be the real criteria for asset allocation which is risk appetite. I should not I've seen many is retired officers who suddenly get this money from you know NPS or whatever putting 70 80% of the money in equity because their advisers are telling them that's the only way you beat inflation but that might not tally with their risk appetite their risk appetite might be for 30% on on equity right >> right no so I want to then still uh open a little bit about this so for years we have encouraged people to do SIPs you know we markets are safe if you invest like this. So this 3,000 rupee SIP by Mr. Jen or Mr. whoever misses something you're saying is now causing overvaluation of the Indian market. So the overvaluation is being caused because there isn't enough paper to support the supply of money which is I think India has a very unique problem that the Indian retail and mutual fund investor is so sensible that she continues to buy.

[00:30:54]>> Yeah. So, and and this is now circling back to the other problem. Why aren't companies raising more money? Is this a symptom of the lack of private investment that we see say that we are still seeing? Has this messaging been wrong? Like I'm really afraid to say that did we say the wrong things to them?

[00:31:13]>> No, I I don't think Monica you've said the wrong thing. Um reality is historically we've had much less investments in equity markets compared to other markets particularly gold and real estate etc which you were the traditional places where you would put your savings in and this this was required equity culture is good after all if you want solid capital formation you want patient capital going into capital markets to be raised by entrepreneurs and value creators so that they create new businesses and equity is the purest form of risk that they can raise let's come back to what's happening first. You know, yes, there is a mismatch today in my opinion. It's my opinion. It's very rare, Monica, that you'll have perfect demand and supply uh kind of meeting at all points in time.

[00:31:59]You'll always have this leads and lags.

[00:32:00]Okay? So, it's not unnatural to have some situations where there is more demand and then eventually it'll all catch up, right? There are a few things that we have to be careful about though, right? One is when we advise our investors, as I'm sure you do, right?

[00:32:15]You've got to tell them there's a life beyond equity and fixed income. There is after all multiple asset classes including real estate, including commodities, including foreign assets etc. which you should be looking to diversify across everything.

[00:32:29]Unfortunately, a lot of our discourse right now is centered only around diversification within equity. Midcap versus small cap versus large cap versus micro cap etc. So there is a life beyond equities and you have to diversify across that. That's point number one.

[00:32:44]The second thing to remember is currently we don't have entire freedom of being invest able to invest in across all asset classes. As I mentioned to you first of all we don't have an asset agnostic tax framework. A lot of our money goes into equities simply because the tax tells us that the best chance of beating inflation is in equities. Right?

[00:33:05]So I would argue that there is a requirement to make life easier on the taxation front where you make it a lot more asset agnostic so that decisions around asset allocation are done the right way based on risk appreciation rather than based on tax considerations.

[00:33:20]So there is a policy work to be done.

[00:33:22]Third thing is you know in a funny way I know it's it's very difficult to contemplate right now when there is rupee volility I would argue that actually there is a case for increasing the flexibility that normal investors have to invest overseas. I know it sounds blasphemous right now when rupees you know skirting 94.95 but let me play you with the argument if this limit which is there for mutual funds to limit to invest overseas $7 billion that cap has not been raised for a long long time if you had raised that cap um if you still raise it now by $1 billion every month take it up to $20 billion what does that do for us a it allows us to use foreign assets as a legitimate part of our asset allocation in a meaningful manner. Second, the money actually does not entirely leave our shores because guess what? When you and I invest in domestic mutual funds which are investing overseas, we still hold rupee units. Eventually when we encash that, we have to bring the money back into the country. So what happens is dollars which are currently held by the central bank in its reserves, part of it moves into households as part of their reserves. Right? Why is this also useful? Remember what I argued to you was that we have a overvaluation in our domestic equity markets. I would argue that if you opened up the avenues for meaningful investments into debt and fixed income and into overseas markets, you get a natural, you know, vent for people to put in their their risk assets which will try and avoid the problem of overvaluation in the domestic capital markets. In turn that will allow FBI and FDI to come into the country because this problem of overvaluation will will subside. So in a funny way allowing money to go out actually will open the doors for money to come in. I I'll give you a parallel to this. If you have a current account problem and if you think that you're importing too much, one temptation could be ban imports. Let's only buy swadeshi. Right now, history has told us and economics has told us every time we try and do that with the best of intentions, you end up with a very inefficient domestic ecosystem which is not facing foreign competition.

[00:35:36]You have ambassador cars and fiat cars rather than having the state-of-the-art cars because of which your exports suffer. Your industry is in no position to actually send out and earn money because it's simply become inefficient.

[00:35:49]I would argue that parallel works for capital markets as well. If you close out your domestic capital markets and try and protect it by saying I will only allow domestic savings to go here and not outside, you end up making for inefficient capital markets which are have pockets of overvaluation which don't get in therefore net inflows.

[00:36:08]>> Right?

[00:36:09]>> So actually opening up to foreign inflows which will not happen right now.

[00:36:12]Everybody's worried about the rupee so nobody will even think about it. But I'm saying in the medium run we've got to be a to the best way to bring in flows is to open the door.

[00:36:21]>> Yeah. which might look like you're sending people out.

[00:36:24]>> It's like this. If you love them, let them go.

[00:36:27]>> Exactly. And guess what? When you let them go, they'll actually come back and they'll come back in droves. Right. The last bit as far as your question on why are people not investing when valuations are so high. Shouldn't people be issuing fresh paper?

[00:36:40]>> Two arguments and there are plenty of reasons. So nothing is a single variable out here. Everything is complicated. But I'll offer you two or three uh explanations. one people are offering stock as I mentioned to you. You have Korean companies which are raising you know domestic capital by selling stakes in their domestic um you know shops at at very high valuations compared to their home valuations. Correct. So we've had companies which currently have you know 5 to 6% of their global sales coming from India but their market cap 40% comes from India because of the valuations here. So people are raising money and doing the the right thing from their perspective. You can't argue with this with this argument and it's not just Korean companies. There are multiple MNC's doing this. The second thing which I'll tell you is a lot more insidious. If you are a company and I I hate to take an industry but so let's keep an industry out of it. If you're a company which is doing a simple business which is earning earnings growth is let's say 12% 13%. And because you're seen as a simple stable business and you know reputed in your particular field without doing anything fancy if you're getting price earnings valuations of 3540 4550 where on earth is your incentive to go and actually take take on more risk right >> any sensible board will tell you you have a valuation which is 50 times your earnings you're doing nothing fancy why on earth would you take on more risk of raising capital raising debt and trying to create new businesses So I would argue this is an insidious problem where this cloistering of demand going into one particular pocket is creating pockets of overvaluation is giving fantastic valuations to okay companies and therefore coming in the way of them taking on risk. I as I said I I hate to take on industries but take the software services >> where was the incentive on them to take on large risk when these companies with their large you know their steady earnings growth etc were getting fantastic valuations. So here is my prescription. Okay. One is I go back to my philosophy of let's not interfere in markets unless there is a market failure of some kind which requires intervention to happen. If you let your interest rate markets and your equity markets and your money going overseas to go within limits okay with minimal intervention things will settle. The asset allocation that you and I do will go towards all these asset classes. It'll ensure the right valuation in all markets. It will bring in foreign flows both into debt markets and into equity markets because they'll all see value there. And you and I will have a more balanced savings portfolio which includes overseas assets as well.

[00:39:15]And it's great to participate in some good overseas you know diversification.

[00:39:19]We'll do a better job of investing these these surpluses than RBI does simply because we can take on more risk than the RBI naturally can. So opening up markets I think and minimizing this requirement for big brother has to tweak as to what market goes where I think will help in the long run. The last bit I'm just to reassure your investors who are doing SIPs etc. continue to do a proper asset allocation. Think about all asset classes.

[00:39:47]I think we are in the right you know we can yearn for more. They'll always m more but Rome was not built in a day. we are on the right path. India will do well in the medium to long run. I think we can all be very very confident about that. So that story remains. What I'm suggesting is a few tweaks which I think will make us or allow us to achieve our immense you know financial potential.

[00:40:10]You think there is a chance that given the current situation what you're saying will be heard because and I want to put it out there that you may have stopped me from investing abroad through my overseas mutual fund but you know what I can still buy gold.

[00:40:25]>> Yeah.

[00:40:26]>> So exactly what you're saying it's a whack-a-ole.

[00:40:29]>> Yeah.

[00:40:30]>> You the more you try and repress it no prohibition actually works. No, the the ban is the worst sort of blunt instrument that anybody can use. So, how do you see this playing out? Because the environment is not very happy with what you're saying.

[00:40:44]>> No, you're absolutely right. So, let's let's face it, particularly after the breakout of the Iran war and the energy price situation right now. We have a problem, right? The fact is that our current account deficit is going to be worse this year than it was the last year. as it is we were struggling to fund the the the current account deficit even last year when it was very subdued.

[00:41:04]This year is going to be even bigger challenge. So therefore in the short run I'm guessing I have no insight into what's happening in the policy matters but I'm guessing that they would be considering various things that they could do to to ensure that we do get capital flows or that we don't see as much capital flows as as we could see.

[00:41:24]Right. I'm hoping that the steps are more towards the positive steps. For instance, um I have argued for long that the taxation that we impose on our foreign investors is frankly makes us an outlier. It it is it is it makes us stick out as one place which is very very difficult to businesses. We apply withholding tax and capital gains tax on every foreign investment in our country on shore. you and I as Indian citizens holding a and and and as Indian residents if we invest in in the US and in QQQ or a NASDAQ or whatever capital gains that we earn there we don't pay tax in the US we pay tax in India so everybody follows a residence-based taxation we follow a source-based taxation I'm saying addressing that which we should have done anyway even if we didn't have a crisis is the positive way of making sure that the friction goes away for investors to come in >> there are other things you could do which is you know why only gold you could you could yes you could restrict imports in gold by hiking import duties etc. There is LRS the liberalized remittance scheme which you know allows $250,000. It's not accessible for the normal human being but for the slightly HNI kind of people that that is a route which is open. Then you also have ODI and outward FDI you know maybe they could think of restrictions there first.

[00:42:44]If at all restrictions are thought about there I think they'll be very very temporary. It's not it's not the way of direction of travel for us in the medium run. I do hope they don't go there as a first port of call because that's not required. We have plenty of foreign exchange reserves. We have even after forward sales of RBI, we have 580 590 billion of reserves. We can easily make do and take care of whatever shortfall happens in the next couple of years. No, not a problem at all. So I don't think it's required to give a wrong signal to the market right now. But as opposed to what I'm suggesting, which is allow people to take money out, you could in the short run potentially see reversals as well. Just the opposite of that.

[00:43:21]Medium-term though I have no doubt that I think the less we interfere in markets and more freedom we give to people only interfering when there is a market failure of some kind I think that philosophy works the best >> right so I'm going to actually just shift lanes a bit and come to derivatives and this is slightly a longer sort of an argument so derivative is really a you're betting on the future price of something and uh the government has restricted money linked online gaming because they're calling it gambling ling and um not good for retail investors and then I followed uh this prediction market called poly market and I just thought it was yeah it's a gambling thing then I actually read what Shane Coplan the founder he actually bases this prediction market where I can bet on the uh interest rate hike or not the result of an election whether US will strike u a country or not you know you can bet on anything you can bet on a game. So I thought it's like just gambling, but no, he's f his foundation is economics and he's saying the price is that one number which encapsulates every information that different economic agents might have which then manifests as a price and this is what we are trying to discover.

[00:44:41]>> Sure.

[00:44:41]>> Right. And in fact poly market got Donald Trump's election right whereas the media did not.

[00:44:49]whatever surveys did not the poly market gave him that chance because that information was getting collected. Now I want a first principles answer from you because I I can't understand this that why is that not okay and somewhere I feel it's not okay right to bet on everything but why is a derivative contract okay you you we've regulated it we've put uh measures in place so it's a first principle argument which makes one part of a future market a betting market okay and the other part not.

[00:45:28]>> It's a great question Monica. So let me give you some preamles first and then I'm going to ramble on as usual.

[00:45:35]>> So the first set of preamles I'll reiterate what I mentioned was my operating principle which is to the extent possible regulators policy makers should not interfere in a free and fair market where you have willing buyers and willing sellers. Right? That doesn't mean we don't have personal opinions about it. I'll tell you my personal bias as well. My personal bias is I wish people in India would spend far more time creating value in the real world in manufacturing in AI in the tens of thousands of things happening in the economy rather than getting deeper into financialization. But that's me. I could be entirely wrong. Who knows? Maybe this is the future. So keep that bias aside.

[00:46:18]irrespect of the bias you've got to let the market willing markets where there is free and fair markets you know do uh continue you should only interfere when there is some kind of a market failure happening right with that preamble let's go into the area which I understand a little bit which is the sebi overseen parts of futures and options for instance in equity markets and in commodities as well >> now to start with as I've repeatedly said actually futures and markets to echo what the founder of poly market has said are inval valuable in many ways, right? So, what do they do? They allow for price discovery. They actually make for market depth, which means when a large investor has to buy or sell a large amount of stock at the same time, she gets a price, you know, which is available simply because that market exists and that the depth is provided by this derivative market. And finally, for those that want to hedge, right, the presence of a derivative market gives them plenty of degrees of freedom to do so, right? So for all of this for market depth for price discovery as well as for hedging opportunities derivatives are extremely important and they should be nurtured at the same time um when I was in sebi uh and and a lot of people will will remember that there were steps that sei took to control the derivatives market. So the the natural question would be you're preaching one thing about allowing markets to be free and fair and at the same time you've interfered. So what is the what gives?

[00:47:43]As I've again repeatedly said, there were three concerns that we had with respect to futures and options in India.

[00:47:48]Okay. The first concern was around information asymmetry and the fact that suitability and appropriateness for the retail investor was something that we were concerned about. You know very well uh Monica that we saw that 91 93% of all retail participating in FNO happened to make losses and this was way beyond what what we thought was normal. Normally you would expect that retail will make more losses than gains because of transaction cost because of ST and all of that but this was way beyond that. Okay. And what we also saw that there were of course large players um legitimately who had access to quicker price discovery because they were on on on the collocation and they they they could see prices much faster. They were running with very sophisticated algo. So the question really is when somebody is operating there and trying to trade and make a fast buck where trading is clearly done much more efficiently by people who have the resources to to put all these things in place. Is it really suitable and appropriate for everybody to walk in without any restrictions?

[00:48:52]Right? Even if it is suitable and appropriate, should we not start off by at least informing everybody that you know what there is a problem here. We, you know, everybody who goes into a casino in Las Vegas knows that the house will always win. And yet you go there for the thrills. So if you're doing that, go ahead. But at least be aware that the odds are stacked against you, which is why you have that irritating blowup which comes up, you know, saying n out of 10 people lose money when you when you log into a broker screen. So that was one part. The second part was a micro the market micro structure which worried us a lot. What we saw Monica was the the equivalent volumes being dealt particularly in index options on expiry day and even today that continues to the best of my knowledge even though I'm not in SEBI anymore that was something like 800 or 900 times the volumes being dealt in the cash market. Now that was a there was a severe cause of concern for for me and for for Sebie for the simple reason that this kind of an imbalance makes the market susceptible to instability, right? Where you can have the in in this case the reverse the cash tail wagging the derivative dog, right?

[00:50:01]And and this kind of vulnerability no market regulator would would countenance and be would be happy with. So either you have to have extremely strong surveillance ecosystem to ensure that there is no hanky panky happening but then the market is always going to be smarter than you or you have to make sure that the cash market volumes go up dramatically or at least the ratio between the two adjust to a level which makes life a lot more um you know peaceful for all the entire ecosystem.

[00:50:28]So that was the second concern which has in the nature of a market I wouldn't call it a market failure but something which is a market aberration which needed to be addressed. The third part which is again something that at least research told us look what we found in literature academic literature I I have a low opinion of academic literature even though I'm an academic right now but it it it was something that seemed to ring true and it was a consistent result coming out from multiple markets which is that the best the derivative markets are where the contracts let's say beyond one month are 65 to 70% of all contracts that contributes the most to price discovery towards risking uh risk hedging opportunities as well as to market depth right in India a significant chunk of all options being all derivatives being traded which are essentially index options expired the next week right they're all essentially weekly options led right and there was research to suggest that that kind of activity actually leads to increase in volatility not reduction in volatility which I would then argue is is that really adding to our capital formation uh in some for fashion or is it just adding to the noise? Okay, so that was a philosophical question. We were not addressing it directly but what it told us was we had to ensure that the longer end of the derivative curve grew a lot more that we had six-month futures and one-year futures allowing for sovereign wealth funds to actually hedge there in relation to this madness that we were seeing only in the weekly options. So these were the concerns that we tried to address over a period of time but we did so with if you remember in fact we faced so much of criticism from both sides. We had some people who were former regulators who were telling us why the hell don't you just ban all weekly options >> and for us that that was a no no to start with because again we are not here to play god >> right you have to be very very careful and thoughtful in any interference that you do in a market right there were others who are saying you're doing too much so funnily enough the within our within sebi the the discussions we would have is if we've managed to you know make everybody angry maybe you're doing the right thing by by going down the path.

[00:52:36]>> I think this this has to continue. This debate has to continue. These three concerns I think the steps that we took did address some of it. Some of it might remain. I don't know the exact data as things stand right now and the debate has to continue.

[00:52:48]>> Right.

[00:52:49]>> But overall, my personal bias, Monica, which is a personal bias. I I hope I didn't allow that to interfere in my uh actions on on derivatives etc. personal bias is I wish we would spend a lot more time particularly since cheap capital is available now on creating businesses which actually create jobs create define the future as opposed to just reacting to the future and and and hoping and praying that the future works out well.

[00:53:14]>> Yeah. And also a lot of people sort of push back saying that Sebie did too little too late. And I just want to take this opportunity to say the first working group was set up in 2022 >> and I was a part of that working group.

[00:53:27]>> And our first suggestion was that disclaimer that irritating disclaimer >> came out of our deliberations where we said we are not a nanny state.

[00:53:36]>> Let us try at least the disclosure piece that you will lose money. And then there was a second working group which said no we need to do more and then there was so there has been a process in place and this is just to market for the viewers that it isn't that you know sebi gets up one day and says go banker though it's not like that >> and I still remember a couple of things Monica one is I remember you had offered to take yourself off that working group.

[00:53:59]>> Yes I had I'm so glad I dissuaded you from doing that. I said please stay on because we need people like you to give a balanced opinion. Also you would remember the kind of intense deliberations even within that working group. Yes.

[00:54:12]>> Because we ensured that everybody who had a stake u including investors whom you represented uh was represented in some way or the other. And let's face it this is a complicated ecosystem when you build a regulatory framework for something like derivatives. A significant portion of the top line and bottom line of brokers, exchanges, clearing corporations come from derivatives. Right. So obviously there'll be a huge amount of you know impact and by the way that's not to suggest that they are pushing for the wrong thing. The point I made about unintended consequences if we were to go ahead and ban weekly options while it might sound great on on the face of it.

[00:54:54]What if that means that the entire revenue you know uh framework for many market players suddenly collapses and that that therefore has an impact on the cash market volumes. Right.

[00:55:04]>> So again, we have to be very very thoughtful um in determining what we eventually do particularly when we intervene in markets.

[00:55:11]>> But I'm still not clear about my first principles question. Is poly market wrong for a retail investor? Cuz people in India are finding the VPN route to invest to gamble or bet in any case.

[00:55:23]Mhm.

[00:55:23]>> So if regulated derivatives is right, why is a betting market on the future outcome of whatever wrong?

[00:55:34]>> Look, um whether it comes to poly market or any other um let's call it a prediction forum or a gambling forum depending on which part of the spectrum you're in.

[00:55:45]>> Um I would prefer that there was some oversight from Indian regulators, right?

[00:55:51]And I'll tell you why. Um as I said while a regulator should interfere as little as possible you've still got to make sure that there is investor protection that there is systemic um you know stability issues are taken care of and that there is a balance maintained in some form or shape right now all the stuff I I mentioned to you about about FNO in India there were issues around investor protection there were issues around market stability because of this mismatch match between the volumes and there were issues around overall is it really you know contributing towards capital formation.

[00:56:28]I think it's important for Indian regulators to oversee that part. So without playing a nanny state uh making sure that the market is not under a market fe for instance every time you hear of a of an insider who who is in you know in the in the war room on on on Iran uh preempting what's happening on poly market um that is a potential market failure now where is the port of call for an Indian investor to to get protected on against something like that right and this is a small thing but who knows if it's a if it's a larger thing which impacts a larger portion of our of our economy. So I think it's important to have an oversight with the caveat that frankly that oversight has to be minimalistic and only interfering when there is a market failure of any kind.

[00:57:14]>> Right? And this actually just segus beautifully into Bitcoin. So the whole crypto thing Bitcoin was born as an act of rebellion. Um no government could touch it, no regul regulator could get its hands on it, no bank could control.

[00:57:29]the same industry is in Washington asking for regulation. Apparently, the president's son is on some advisory boards of uh some of the crypto majors.

[00:57:39]So, is that over? Is the whole crypto dream over? And then what happens to somebody who's 25 who's still thinking that a crypto ICO or a Bitcoin is his or her road to instant wealth? So, where do we place this uh I can't even call it an asset. It's a digital token with no underlying for me.

[00:58:01]There's no underlying asset on it, but it's gone from an act of rebellion to being a suit.

[00:58:08]>> So, um I'll use the same framework that I've used consistently in this particular chat. Um I have a personal view. Um but that counts for zero, right? Because it's one view. It could be right. It could be wrong. It's a toss of a coin. So you have to keep all personal views aside and let's look at uh what you should be doing as a regulator or as a policy maker.

[00:58:31]Whether we like it or not, here are some brutal facts. Even with all the volatility and and Bitcoin has come down dramatically. All other altcoins have come down quite dramatically in the recent past. Of course, they're going up again. It's what the the market cap of Bitcoin is what 1.6 trillion or so.

[00:58:46]overall all cryptocurrency tokens um is about $2.7 trillion or so. Okay. Um it's now something like half a percent of overall global wealth. Okay. And it's grown from nothing. Just as a as a matter of reference um I think the gold total market capitalization is about 15 16 trillion or so. Okay. So it's now three trillion which is like 1/5if of what the um what gold is and it's come from nothing 15 years ago right we know that ETFs on Bitcoin have been launched and apparently they're doing well even now I I don't know I'm not tracking it but reality is if you have willing buyers and sellers then at some stage we have to think about how do we control this damn thing even if you have to hold your nose to to look at the look at what how it operates what you if you have a situation where there is no ban on people operating in bitcoin uh in fact you also have a tax on what supposedly whatever you make on bitcoin >> but there is no control in the sense of an actual regulator looking at who's operating it who's providing the the platform for trading in it how do you know that tokens are being kept safely how do you know there is no mixing of the the the platform and its positions and what it's doing externally what are the implication ations for the current account the the capital flows in the country. Somebody has to have an oversight of all of that. Pretending that this is not a problem is not a great place to be in. So how muchever you have to hold your nose eventually we have to get a framework into how do you control this damn thing and make sure again the same principles one that there is a there is no market failure of any kind there is investor protection there is no market asymmetry there is no uh financial stability issue that is being missed out somewhere because you're not controlling it I think it's important to put all that uh to to to bed and the best way of doing that probably is to move towards some kind of oversight and regulation of that animal. Now, if there are people who believe that Bitcoin is the future and and that this is going to be money going forward or the store of value going forward, it's going to be digital gold or whatever you call it. I have no views on that. My simple prognosis would be to read Monica Holland's book and to do an asset allocation based on what your risk appetite is. I don't waste my time trying to say that this asset is going to outperform or that it for me life is, you know, just make sure you've got a good asset allocation going and then forget about it. Maybe once a month you look at the portfolio and then forget about it and do whatever else that you enjoy doing.

[01:01:33]>> But if it it's your hard-earned money, if you are uh not being misled by anybody and you have the strong view that you think that this is the next, you know, next thing to slice bread, be my guest, it's your hard-earned money and do what you want to do do with it.

[01:01:47]be aware of the risks though.

[01:01:48]>> Right. Right. Cuz I think what they don't seem to understand is that even the billionaires are putting less than 1% of their net worth and this young person in India is betting all that he or she has on this rainbow that somebody's shown. So I think that is really it's a difference in the way this whole asset allocation is something I think is the next thing that people need to understand that this is really the most important thing.

[01:02:12]>> Totally. I agree with that the challenge Monica for people like us >> uh one is I don't want to judge >> um did I catch the next big thing that's going to happen no I didn't >> who am I to judge whether somebody is right or wrong right u I go back to my first principal's answer you should be aware a a regular investor should be aware that the that there is ample literature to suggest that the best way of maximizing your returns is to have a diversified portfolio across all asset classes >> where something like a cryptocurrency you might have I don't know what 0.5% of your overall portfolio um and trading less don't trade too much in fact only trade to either add to your portfolio or to take out from it or to rebalance once in 3 years or whatever was your rebalancing time frame don't trade too much spend all your time in asset allocation don't try to pick up stocks and time and stuff like that is there is ample literature to say that's the way to invest for a normal human being right now if you know all of that and then you choose to put 100% into one particular stock in the midcap segment.

[01:03:18]Be my guest. Who am I to second guess and judge you and say no no no you're doing something wrong. You if you're doing with your eyes open it's your hard-earned money. Do what you have to do. But make sure that you're aware of what the literature is saying and then you take your call. To me education is important. The decision is yours. It's a free country.

[01:03:36]>> Right. No absolutely completely resonate because they do that it doesn't work and then there's this whole angst which you see on social media that you know the government has failed sebi has failed it's so yeah that angst comes because I think they've taken a judgment call which wasn't fully informed >> so just as we end just you you've talked about how they should invest but we are actually in very pretty very very turbulent waters right now just tell the audience audience what they should expect in the next 12 months, 24 months.

[01:04:10]I think it's a very tough 12 months ahead. Would you agree with it?

[01:04:14]>> So, two parts to this answer.

[01:04:16]>> Um, I'll tell you what I'm doing personally. Okay. Um, I was lucky. I'm supposed to be a markets guy. I've been a trader for many years of my life.

[01:04:24]>> I'm actually a risk averse person. Um, I'm a cur rice eating like boring kind of an individual. Um so 15 years ago I had a the the the fortune of coming across a good adviser who taught me how to invest my wealth a little better. Um one of the reasons I could move out of banking and go into teaching and into seb etc was because my wife and I had built a small nest egg which um we realized was enough for our wants. You know the aim is to reach enough not multiple whatever the numbers could be.

[01:04:59]Um what I do is I follow the philosophy that you've espoused in your books which is I know precisely what my risk appetite is. I've done enough analysis of what my risk appetite is. I have an asset allocation portfolio where I don't try to time the market. Um it is diversified across real estate, equities, fixed income, commodities, foreign assets, uh all of that put together.

[01:05:24]because it's diversified. I don't need to look at my portfolio every day and I don't need to worry about what's happening today tomorrow.

[01:05:32]>> It has worked out brilliantly for me based on my risk appetite. So I'm really not somebody who's looking up every day what my portfolio is. Let's keep that aside to your I I won't duck your question of what happens over the next 12 months. Um it's a personal view and with a caveat that um often if you do the opposite of what I suggest, you'll make money. So with that caveat and if you make money then you remember me. If you don't make money this conversation never happened.

[01:05:57]Um personal view I think the negativity about India is overdone right now. Okay.

[01:06:04]Uh reality Monica is that I don't hear too many people who are bullish on India. When I speak to overseas investors I speak to domestic investors they're all kind of depressed and morose and oh my god what's happening on the current account. Oh my god what's happening on we don't have an AI story.

[01:06:19]What is our growth story etc etc. So the way I look at it is is the following.

[01:06:23]Let's say currency which is so much in the news nowadays. It has reacted quite a bit over the last one and a half years. Right? So dollar rupee was about 84 uh a year and a half back. Today it's at 94 and between 94 and 95. Right? Uh at a time when dollar itself has weakened.

[01:06:40]>> Correct. So against the sterling against the euro we've actually depreciated quite a bit. So there's something called the reer the real effective exchange rate that's come down from 107. This is a 40 country trade weighted real effective exchange rate from 107 to about 90 now. So there's been a big reaction already. So a lot of risk premium has been built into the currency markets already. It's not as if we are not prepared for the bad news ahead of us. Okay. So that's point number one.

[01:07:06]Similarly in equity markets we saw a peak in September 2024. Since then we've really not managed to break that peak and we are right now below the peak.

[01:07:14]every other market in the world in dollar terms or many many markets in the world are at the peak currently despite Iran right and we are nowhere close to that so I track the price earnings ratio of let's say Msei India versus MCI emerging markets or MSEI globe the spread between the two is amongst the lowest that I've seen in many many years again indicating to me that the risk premium in India has gone up dramatically positioning both on currency as well as on on equity markets when I take a poll amongst an audience who I speak to or or or with investors, I find very few people who are bullish India. That tells me everybody's prepared for bad news.

[01:07:54]Nobody is really prepared for good news.

[01:07:56]So without disputing any of the fact that actually we are going to see tough times. After all, oil prices at $100 is not good news for us. Capital flows looks like a problem. I do think a lot of the bad news has been factored in and given the market positioning, it's not a good time to start betting that things will change. Having said that, will I use this view to therefore reallocate more into India and all that? I will think 10 times before doing that because my asset allocation has worked well so far.

[01:08:24]>> I don't want to disturb that too much.

[01:08:26]>> Right. Absolutely.

[01:08:28]Um I think we've really traveled a long way from currencies to our personal portfolios. I think it's been a fantastic conversation. At least I think I have learned a lot because there were specific questions I hadn't understood about the currency market. So thank you so much for sparing time on this Sunday.

[01:08:44]>> Thank you so much for having me Monica.

[01:08:46]As you said and we were discussing offline, it's it's very difficult to have a conversation which is so comprehensive in this particular day of social media.

[01:08:54]>> Yes.

[01:08:54]>> Where everybody is listening to shorts.

[01:08:56]>> Yes.

[01:08:56]>> Uh it feels relieving and and very kind of fulfilling to have a full conversation. So thank you for that.

[01:09:02]>> Thank you. I know this conversation was a little technical but I hope you liked it. I do them so that you can think through the India story with all the information and knowledge that we can bring you. Tell me who you'd like me to invite next and what you'd like to talk about. Keep watching. I'll be back soon.

[01:09:28]Investment in securities market are subject to market risks. Read all the related documents carefully before investing.