Depreciating the Rupee can help counter any dumping by China going ahead: Saurabh Mukherjea

Saurabh Mukherjea, Founder, Marcellus Investment Managers, says Chinese manufacturing has artificially lowered cost of capital and cost of land and that gives them an inherent advantage over democracies like America and India. The whole situation has come to a head. Mukherjea says China will try to dump on everybody, including India, and the main way to deal with that will be by depreciating our currency.

Will India emerge as a winner in this entire trade war? When two elephants fight, the grass gets crushed. In this case, it is an elephant and a dragon who are fighting. Will we get crushed like grass or is it a case where when two cats fight, it is the monkey that wins?
Saurabh Mukherjea: It sounds like the monkey scenario. Not just India, it is reasonably clear that a bunch of countries are sitting down with America at the negotiating table. As you would have heard, Japan has been the first off the block. India is not very far behind. And Europeans will follow. Most of the world, barring China, is sitting down with America. Deals will be cracked in the next 90 days. By and large, those deals will be to the benefit of the Indian economy as lots of other people have commented, we are not a particularly high tariff economy, nor are we an export-dependent economy to the extent that China is and to the extent that there is an opportunity to be had on China plus one, the next 90 days will show the way forward. The odds are pretty high that barring China, the rest of the world will conclude reasonably constructive deals with America over the next 90 days.

If the Chinese stop exporting to America, it means there is excess capacity in China. Will they dump Chinese products in the rest of the world? And could that have an impact on local manufacturing competitiveness because China in a sense has the advantage of scale, skill, and size and now it would be desperation which would drive their factories.
Saurabh Mukherjea: And it is not just scale, China also has an advantage in that, they take their citizens’ savings and they channel it towards industry at very low cost. So, the cost of capital for most Chinese businesses is ridiculously low, some 2-3%, no other country in the world can drop citizens of their rightful savings and channel it towards industry at artificially low rates of capital. Similarly, where need be, the Chinese government takes land from citizens and gives it to industry at incredibly low rates, again very difficult for a free market democracy like India to do that.

So, for many years, this has been the problem that Chinese industry, Chinese manufacturing has artificially lowered cost of capital and cost of land and that gives them an inherent advantage over democracies like America and India and it has been a bugbear for many years. The whole situation has come to boiling point on this. My reading is China will try to dump on everybody, including India, and the main way for us to deal with that is we need to consider depreciating our currency.

Beijing is already depreciating the RMB aggressively. We will see more of that from Beijing in the coming months. For them to deal with America, they are already realising they will have to go to the rest of the world and by depreciating the currency, the Chinese are making their exports even more competitive and we will also have to consider flooding our banking system with liquidity. The RBI has begun doing that. It is a step in the right direction. We need more interest rate cuts from the RBI and we need the rupee to move towards 100, 105, given the rate at which Beijing will depreciate the RMB.

But if China does not export to the US, that means excess capacity in China, could that have an impact on the rest of the world in terms of their local industries, manufacturing, getting flooded by Chinese imports? Chemicals, apparel, footwear, whatever is not sold in China will come to India….
Saurabh Mukherjea: I agree with you. I am saying that scenario has already become a real scenario. As you would have seen, Indian steel manufacturers, Indian steel companies have suffered badly over the last two years as cheap Chinese steel has made its way to India and you are right to say in a range of industries the risk grows even larger of Chinese dumping. My submission was to deal with this, qualitative barriers are not going to be enough.

I do not think tariffs are going to be enough to help Indians deal with Chinese dumping, we also need to make our currency cheaper so that in relative terms it becomes more expensive for Indians to buy Chinese products. We need to use currency depreciation to make Chinese imports into India more expensive. I do not think any one tool such as tariffs or qualitative restrictions will work. We need a range of tools to make it harder for China to dump in India.

We had a conversation in 2020 and you said the following: for India to do well, you need three things, rates have to be down, commodity prices have to be down, and the world should feel a tremor, not an avalanche. I can see the same conditions again. Rates are coming down. Globally, they will come down now. India, they have already come down. Commodity prices are down and the world is not exactly cracking. There is a tremor because of the trade war.
Saurabh Mukherjea: I agree with you. We are moving towards that perfect troika, one of the things I had noticed when we made the bull call on March 20th.

So, four years later, how cycles turn!
Saurabh Mukherjea: Absolutely. I still distinctly remember, through COVID, we went buy, buy, buy, buy. What gave us the conviction was what we had spotted was every single economic recovery in India had come on the back of a US recession. And we had figured out that the reason a US recession is followed by an economic boom in India is an American recession leads to cheaper money, US 10-year bond yields come down, it leads to cheaper oil. Our country is an oil importing country, so cheaper oil is like a gift to us, 2-2.5% of GDP is gifted to us and it also leads to the rupee to become cheaper, rupee depreciates and off we go to the races, we get an economic boom in India.We are moving towards it, but we are not there yet. We have not yet seen the Fed cut and we have not yet seen oil cracks through $50. Oil has thankfully gone below $60. The oil going below $50, the Fed starting to cut and the rupee depreciating materially, if that troika of things lines up, then we at Marcellus will start deploying much of the cash we have accumulated in the last seven months.

The difference between March 2020 and April 2025 is valuations.
Saurabh Mukherjea: We are not that worried about largecap valuations, but small and midcap valuations are still unusually high. We have worked very hard in our small and midcap portfolios over the last seven months to sell the expensive stuff, to go into cash, to bring the portfolio valuations down as much as we can. But small and midcaps in India have another 30-40% to go before the valuations can be deemed to be attractive. Largecaps are alright, especially the kind of quality largecaps that we like. This SMID cap piece is still a little too rich for my liking.

Are markets ignoring the fact that tax rate cut has kicked in? If crude goes down, there could be a fuel cut. Interest rates have come down. Inflation clearly is not at 6, 6.5, or 7%. It is now poised to stay between 4% and 5%. All that will lead to consumption demand. I do not see too many people talking about buying consumer stocks. Everybody is still saying, oh, if you want to buy, buy a bank, buy a defence or railways; or even a beaten down IT. No one is talking about good things which are happening in the consumption space.
Saurabh Mukherjea: Part of the reason, I guess, is a degree of circumspection is the tax cut, the one trillion rupees tax cut, is useful, all credit to the FM for expediting it. On Budget Day, I sat in your TV studio and lauded the FM for the one trillion rupees tax cut. But in the context of very high household debt, if you exclude mortgages, Indian household debt as a percentage of our GDP is amongst the highest in the world. In the context of high household debt, in the context of a weak job market, the consumption piece is naturally posing a concern.

In the result season that we began a couple of days ago, we will also see yet another season of weak consumer demand and that is why there is a degree of circumspection on the consumer stocks. Now, as valuations come off over the next two quarters and I am pretty sure consumption-related company valuations will come off given how weak the demand situation is, this piece will start looking more interesting.

So, the tax cut is a step in the right direction. I am not sure it is going to be a big driver of consumption in the current fiscal. The bigger driver will be rate cuts. I am hoping to see the RBI push through multiple rate cuts this year. I think even 200 bps of rate cuts this fiscal year will be warranted given the underlying ground level realities.

As you are rightly joining the dots, if commodities are getting cheaper, demand locally is modest. So, inflationary pressures are muted, commodities are getting cheaper. There is no reason why the RBI cannot expedite hefty rate cuts and flood the financial system with money, that necessarily will push the rupee lower, but that will also be helpful. It will help exporters and it will make imports, especially from China, more expensive. So, the policy outlook is actually very clear. Lower rates, lots of money in the system, and a cheaper currency, that is what we need, that is what the doctor ordered for the Indian economy. I think that is on its way and as that comes through and valuations get cheaper, things will look very interesting, I suspect, by August, September.

Post COVID, we all said, okay, time to start looking at PSUs, defence, capex, industrial, machinery companies. Is it time now to start looking on the other side? And the reason is the delay in decision making, capex will slow down. When the government did not spend for six months, look at what happened to GDP? With the tariff interplay, I do not know who will spend where, where a steel plant will be made, where a car plant would be made, which assembly line will be created and where, and that all will lead to delay in decision making. Capex thanda ho jaiyega, (capex will wither) that is the bottom line.
Saurabh Mukherjea: Leaving aside the historical concerns on government and PSU capex, the other reason I would be a little bit even more circumspect on PSU and government capex is that tax collections will be fairly subdued in the current FY26. The capital gains tax piece will become far more subdued than it has been in the last three years. The dividend from the RBI, which has been a hefty amount in the last three years will also be harder to deliver. GST collections, corporate tax collections will also grow at a more subdued rate than they have done in the last three-four years and therefore, the overall government tax collections piece will be more subdued than has been the case for the last three-four years.

Naturally, the government will then throttle off on capex. I think the budgeted capex number is 11 trillion for the current fiscal. I doubt we will get close to that 11 trillion. If we get to 10 trillion of government capex in the current fiscal, that itself will be an incredible outcome.

Equity markets in the US showed the first signs of a classic trading bottom, lots of volatility and suddenly a spike down and a spike up, that is how markets bottom are made. How do you see the sequence of events moving now? Could there be more cracks in the dollar index? Could it be a spike in the US 10-year papers? Could it be a revival in gold and silver? Is the worst behind us. Is the bottom coming?
Saurabh Mukherjea: Let me split this and let me do America and India separately because the economic circumstances of America and India are a little different here. In America’s case, in the S&P 500 case, and I will give the caveat that we are heavily invested in the American market through our Global Compounders portfolio. In the American market’s case, we do believe that the panic and the stress is a little overdone.

Talking to friends across Asia, across Europe, it is reasonably clear that the Japanese, the Europeans, and the Indians are moving towards bilateral deals with America. For the Europeans and the Japanese, they get massive defence cover from America and I find it hard to believe that they will tell America aap defence cover hatalo, we will fight a tariff war with you. I think that it is simply beyond the realms of logic that the Japanese and the Europeans will not go to the negotiating table and sign a deal with America.

In our government’s case, the government has been very-very clear that the Government of India has been very clear for the last 60 days that there will be a bilateral trade agreement. So, as the S&P 500, as the world realises that barring one mega economy, China, much of the rest of the world will strike trade deals with America.

There is likely to be a degree of relief, the S&P 500 that will get priced in. And the Chinese piece is still a troublesome piece. I do not have any easy answers as to how that resolves itself. So, in terms of, is the S&P 500 more likely to move up than down? My reading is that it is more likely to move up than down. Coming back to our country, that troika of things that I was looking for, we need lower interest rates, we need more liquidity in the banking system, and we need the currency to be far cheaper than it is today.

If we get those three, earnings growth in India will come through towards the second half of this year. And if by then valuations are more reasonable, then the Indian market can also rally. At this juncture, at current valuations, it is not clear to me that there is a bull market button to be pressed in India. Unlike March 2020, when we were happy to buy aggressively, we are not buying aggressively at the moment because we can see the domestic weakness and it is not yet clear to us that the policy piece is as clearly laid out as it perhaps was in March 2020.

In March 2020, the Government of India did a spectacular job in both fiscal and monetary policy. At the moment in India, the policy piece is not as clearly laid out and hence we are being more cautious in India.