markets Worried about The RBI monetary policy guidance

The RBI monetary policy maintained status quo on repo rates at the 6% level, along expected lines. The bigger worry for the markets was on the monetary policy guidance. The policy has guided for GDP growth of 6.6% for the full fiscal year 2017-18 but the inflation has been guided at above 5.1%. According to the policy statement, the higher inflation is likely to be triggered by a mix of higher food prices due to higher MSP and steeper prices of crude oil. Higher growth in the second half of the current fiscal and the staggered impact of the HRA payouts by the states is also likely to impact inflation.

The Supreme Court order to cancel all mining licenses could cause a loss of Rs.2000 crore for Vedanta. As a result of this Supreme Court order, the total banned capacity in Goa stands at 20 million tonnes of which Vedanta operates nearly 5.5 million tonnes. The total loss of revenues considering the price of $30/tonne works out to a revenue loss of Rs.1050 crore. That is just about 1.5% of the total revenues of Vedanta Group at Rs.71,000 crore. While Vedanta produces 5.5 million tonnes at its Goa facility, it produces nearly 2.3 million tonnes at its Karnataka facility.

Cognizant, which competes with TCS and Infosys for a share of the global outsourcing pie, has reported a loss of $18 million in the quarter ended December 2017. This was largely due to a one-time tax hit of $617 million that the company had to take in the quarter in line with the tax reforms in the US. However, its revenues grew 10.6% to $3.83 billion for the December quarter. Cognizant is betting largely on the digital market expanding in a big way as a new wave of businesses are investing into Artificial Intelligence, machine learning, deep analytics and cloud solutions.

With a huge payout of $5.5 billion for the government’s HPCL stake, ONGC is planning to sell in its holdings in IOCL and GAIL to the tune of $4.8 billion. Since a major chunk of the ONGC-HPCL deal was to be funded with internal funds and borrowings, this indicates that the government has already sounded out ONGC about more such deals in the next year. The government is trying to create an oil behemoth to give it global scale such that it spans across extraction, refining, distribution, marketing and gas. That is the model followed by global giants like Exxon, Chevron, BP, Shell, Conoco, Repsol, Total etc.

With the government clarifying that the LTCG tax will be levied on FPIs too, these global institutions may look at alternative entry methods into India via France or the Netherlands. The tax on long term capital gains was brought back in the latest Union Budget at a rate of 10% without indexation. However, since LTCG will be tax free if booked by March 31st 2018, there is likely to be a rush to book profits. With the treaties with Singapore and Mauritius being modified, FPIs are now required to pay STCG tax. With the latest budget, they will be required to pay LTCG tax too. To overcome the additional cost and compliance burden, FPIs may shift their domicile to France or the Netherlands with whom India still has the treaties going. This may make sense for FPIs even after April 2019 when new rates kick in!

As part of the RBI policy, the governor has underscored that there will be no additional dividend to the government. During the last year, the RBI had cut the dividend to the government by over 50% to compensate for the cost of printing of notes after demonetization. A sum of Rs.13,000 crore was also transferred by the RBI to a contingency reserve, which has since become a bone of contention.           While the RBI dividend normally yields $10 billion for the government, this year it was less than $5 billion. Dr. Patel has clarified that the RBI was unlikely to approve any higher dividend payout to the government.