Over the past six months, financial markets have faced persistent volatility, and the recent Israeli strike on Iran has added further uncertainty.
According to Dave, global events like oil price spikes typically impact India through market sentiment. India’s heavy reliance on imported crude—nearly 80–90%—has historically made high oil prices a negative factor. Additionally, such geopolitical tensions tend to dampen appetite for emerging market assets, including currencies and equities.
However, Dave points out that beyond the immediate sentiment-driven reactions, India’s economic fundamentals have evolved. The impact of higher oil prices today is expected to be significantly different from what it was in 2015, and by 2035, it may become even less pronounced.
Oil consumption in India has steadily increased by around 3–3.5% annually over the last decade, while GDP has expanded at a faster pace, between 6.5% and 7.5%. This indicates a decline in the oil intensity of GDP, meaning the economy is becoming less vulnerable to oil shocks over time.
While prolonged geopolitical risk can weigh on markets, Dave suggests that unless the situation escalates significantly, the impact on India’s financial markets may be relatively contained, especially since oil’s weight in the inflation basket (CPI) is quite low.
This is the edited excerpt of the interview.
Q: Give some perspective to how we should look at this, should it be looked at as prolonged or, previous Iranian last October was a brief
A: Clearly, I possess no expertise in understanding geopolitics, and how long this will go on. But perhaps, if you see how this transmits into India, into wider broader financial markets. One is always through the sentiment channel. Historically, people have associated high oil prices as being negative for India, because India imports 80-90% of its crude oil. It has also associated with broader financial market uncertainty. In a broader financial market uncertainty period, emerging market currencies, emerging market equities, they tend to be less attractive as such.
But if you go a little deeper, I mean, if you set aside the sentiment and set aside people have to react when they get up in the morning to crude at $75 or whatever – see oil demand in India has been growing at about what 3-3.5% for the last 10 years plus. Economy has been growing between 6.5% and 7.5% so therefore the oil intensity of GDP actually is coming down quite a bit. So its impact higher oil prices in 2015 was very different to what it should be in 2025, and hopefully in 2035, it will be even less minimal. But sentiment has a very important role in financial markets.
If this particular situation that we have is long lived, then obviously we will be. But overall, as you mentioned yourself, we don’t get into the oil contribution to CPI is low, etc. so I would think this should blow over quickly from a financial market perspective.
Q: The oil contribution to CPI will not be an issue because the government did not reduce prices for the CPI basket even when prices fell to $60 so we don’t have to adjust it higher for now. But the inflation number came in a little lower than even low expectations, 2.8% and chances are that it could be 2.5% for the month of June or edible oil tariffs have been cut. There were expectations in the market after the last policy, that the terminal rate will not be 5.50% but could go, does that hope still remain?
A: With the Reserve Bank having changed the stance to neutral, the bar for any further rate actions either direction is very high right now. It does look like if it had to move, it would move more lower than higher, because neutral, as you can go either way. But the economic data that we are presented with growth at around 6.4-6.5% which is very good when you compare it to the rest of the world, but relatively disappointing relative to our aspirations as an economy and as a country.
Inflation, as you mentioned, I think it is likely to undershoot RBI projections. But for RBI to take any further rate action, I think the bar is quite high, so it has to undershoot quite dramatically. It cannot undershoot by just 30-40, basis points and RBI changes. You will need to get month on month successive prints that force the MPC to think that this neutral, which gives them flexibility they could use the flexibility.
But as I said, the average for the year would need to be, let us say, 2.75% or something, and not just for the current spot prints or inflation prints, but also what you are projecting 12 months. You need to get to a point where the 12 month hence inflation projection at 5.50% policy rate makes the real rate look very high.
Q: What have you made of this CRR cut. This is outside the RBI’s DNA. We have seen them use CRR only incrementally, 1% what is the message?
A: I think two, three messages here. One is, the industry has always questioned this – you take 4% of my deposits, beyond which I pay interest, and I earn nothing at all so to that extent, you can look at it as final Reserve Bank of India has accepted the industry’s demand a little bit.
The second thing is, we have seen in the last five-six months, there is a very strong belief in the MPC/RBI, that rate cuts without liquidity don’t really have the same effect as the desired effect so I think this is really reassuring deposit taking teams, lending teams, as much as money market dealers and bond traders, etc. that don’t worry, liquidity will be there. It will be abundant. We will always be soaking in liquidity for the foreseeable future. You now plan your deposit and lending activities and rates accordingly.
I would think this is largely about ensuring that there is a long-term commitment on the part of RBI so that the transmission, which is in early stages, doesn’t fall off.
Q: The tussle is when you say neutral, the yields went up on the policy day, in spite of this massive double bazooka, yields went up from 6.2% to 6.3% almost the 10-year. So, in spite of it, do you think transmission will happen?
A: There are two markets – one is the bond market, and then is the much larger loan and deposit market. I think loan and deposit market will react. It always reacts slowly. See, by nature it doesn’t react to a rate cut straight away start, unlike T-bill markets or bond markets or whatever. So there, I think as long as you keep liquidity abundant, and you have the assurance of liquidity will be abundant, even during the busy season and all that, I think you will find progressively, lending rates come down, deposit rates come down.
In any case, we are living in an era where a very large part of the bank assets are linked either to repo rate or to T-bills so there the transmission has been quite remarkable. I mean 100 basis points just in what six months or so, and in the case of T-bills, even more than 100 basis points or so. So, it to the extent these rate cards and liquidity injections were towards transmission that I think will continue to happen, and each month it will continue to happen.
On your point on, why is the bond market not getting the message from RBI, they have got 50 basis points, which was more than almost everyone’s expectation. They have got a CRR cut, which wasn’t on anyone’s agenda or radar at all. I think you just need for some time things to stabilise. I think this uncertainty and today, the opening question that you had on oil and Iran and Israel, I think doesn’t really help. But my sense is, as with the passage of some time, as RBI is able to clarify what exactly do they mean, what exactly should the market be projecting in terms of what happens if inflation undershoots and things of that nature – I think it is trying to discover equilibrium today so anybody can offer in helping discover that equilibrium will help.
Q: What is your sense about FII and FDI, more particularly, FPI in bonds? Do you think this gets disturbed? We saw good flow and then tapered for a month?
A: If you are an FPI sitting in New York, London, Geneva, wherever in the world, the one common word everybody uses, I mean, you read MPC reports of many central banks, the most commonly used word is uncertainty. And if you are sitting so far away from a country and there is so much uncertainty, tariff was one, oil is one, geopolitics is another one. Do you want to keep cash close to your chest? It’s a natural reaction. I think many Indians are doing the same. So why would foreigners not behave differently?
As far as bond market is concerned, the key drivers, which is lower rates, abundant liquidity, frankly, zero supply, we are into the third month of the financial year. I think net of RBI OMOs and government buybacks and things like that, there is zero supply. The underlying conditions of fixed income markets are very, very constructive, as constructive as they have been in many, many years. I think you have to ignore what’s happened in the last three, four days, because the market will find a new equilibrium. The positions will get washed away, etc. and then you will see the next round lower is my sense.
Q: Just give me a final word on what you make of the India story. You stand on the crossroads of FDI as well. Does it look like we will attract China Plus One? Does it look like private capex will pick up?
A: See China Plus One, there is a logical reason for India to aspire to be the largest country that gets the supply chains and manufacturing located inside our country. The government has tried out quite a bit right through production linked incentives and capital subsidies. In certain sectors, you can see success. You can see it in phones, you can see in semiconductors. You can see it even in some electronic products as well.
At a broader level, I think people who are closer to this subject than I am do tell that the opportunity is there, but there is no God given right we have that it will only come to us because countries smaller than ours have ensured that the whole ecosystem, from land to people, to electricity prices to logistics or transportation, tax at the ports, etc. everything has come together. We should not be wasting this opportunity. This whole development around US tariffs is a – I think every board around the world must be thinking, which country should we go double down on and we must do everything possible. I know the government, you can see lots of ministers travelling around the world, etc. but this is really us, for us to lose.
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