As the RBI goes into a critical June policy

As the RBI goes into a critical June policy, the room is still divided on the rate outcome. While half of the economists are still betting on a 25 bps rate hike on June 06th, the other half is still of the view that the RBI may give a hawkish note and wait till August to hike rates after monsoon data is clearer. The GDP growth came in at 7.7% in the Jan-March quarter and that could be a key trigger for the RBI to hike rates. But the big factor appears to be the INR. With the RBI refusing to hike rates despite higher oil prices, the impact is showing in the form of weaker rupee. Rate hike could be the answer.

According to a report brought out by CRISIL, a total of Rs.5 trillion worth of loans turned bad doing the fiscal year 2017-18. Gross NPAs of the banking system are up by 170 basis points at 11.2% of the total asset book of banks. However, CRISIL has expressed confidence in the gradual bottoming out of the NPA cycle from current levels. The banks are also betting that nearly Rs.1 trillion should come back to the balance sheet of banks in the form of write backs due to the NCLT process getting completed. Of course, while steel is almost done, the real power sector problems are yet to manifest.

The government could soon be announcing an Rs.8000 crore package for sugar industry. The sugar mills are currently owing dues of Rs.22,000 crore to the cane farmers. The urgency appears to be driven by the defeat of the BJP in the sugar belt of Western Uttar Pradesh, which has been the RLD’s stronghold for many years. Sugar production in the latest sugar cycle was at 31.7 million tonnes and with that kind of a glut, the sugar prices are clearly headed downward. Most sugar mills are in deep financial crisis and this has led to mounting dues to cane farmers.

The government is getting concerned about the NPA provisioning of power loans and wants stricter provisioning norms. The RBI’s stricter bad loans are currently not applicable to the power sector since the matter is sub-judice and will be decided only once the final judgement is out. The power sector had moved the court saying that the new RBI norms may move most of large power projects with capacity of more than 70,000 MW towards bankruptcy. SBI is already working on a mega plan to revive nearly 1/3rd of the power producers in India. 34 units are stressed and lenders are evaluating 11 out of them.

Nearly 18 months after the OPEC implemented its 1.80 million bpd  supply cut, the US has now asked the OPEC and Russia consortium to add at least 1 million bpd of supply back into stream. Crude has moved up recently after the output from Venezuela and Libya and faltered and the US imposed fresh sanctions on Iranian oil. If the oil prices after touching $80/bbl are anything to go by then Saudi Arabia and Russia have bowed to US pressure to bring global oil prices down. Saudi Arabia needs the assistance of the US in keeping Iran in check, which is the other claimant for regional suzerainty. Soon after it was clear that the US was pressurizing OPEC and Russia, the price of Brent has fallen from $80/bbl to $73/bbl. For India, lower crude prices mean lower imported inflation and less rupee weakness.

For TCS which has already crossed market cap of $100 billion, there is another problem of plenty that it is facing. It is sitting on cash reserves of $7 billion and needs to quickly farm it out into productive avenues. The company is currently invested in safe investments across maturity tenures but it also has plans to heavily reward shareholders in the next one year. The CEO has already committed to distribute up to 80% of the free cash reserves generated each year. Of course, at some point it could create a valuation conundrum since the markets do not view a high dividend paying company too favourably