When the stock markets open on Monday, the big question will be what happens to the SGX Nifty futures which will have to be eventually wound up by August this year. The decision was taken by NSE and BSE to protect the interests of the Indian market. However, the open interest of the SGX Nifty Futures is more than that of NSE Nifty futures and the big questions is what happens to this open interest. The intent is that these positions will shift onshore to India the reason they shifted out in the first place was the uncertain tax and regulatory environment as well as the currency risk.
Equity market investors are not too happy with the decision by the exchanges to keep the global exchanges out of the Nifty futures fray. In the past, the Indian government had tried telling the UAE government not to permit Rupee trades as currency futures in DGCX were much larger than in India. However, the request was not accepted by the UAE government as it was not likely to be in the interests of either economy. Similar logic applies here too. If SGX Nifty Futures are banned, then these trades could move to other informal markets that are less regulated and more fungible.
One of the obvious merits of demonetization appears to be that the number of non-filers of income tax has halved in the financial year 2017. While 67 lakh failed to file returns in the fiscal year 2016, only 35 lakh failed to file returns in the fiscal year 2017. That can be largely attributed to a sharper focus on compliance that was initiated through demonetization. But there may not be much of a reason to celebrate as the number of non-filers was as low as 12.19 lakhs in 2013 and had gradually risen to 67 lakhs by the year 2016. That probably puts the entire story in a clearer perspective.
After touching a low of $5922 on February 05th, Bitcoin clawed its way back higher to the $9070 levels by the end of the previous week. However, it is still more than 50% away from the high that it touched late last year. The volatility in the stock is obvious when you see that the Bitcoin is down nearly 70% from its recent peak. In a way, the sharp rise in the price of Bitcoin has been in direct contrast to the sharp cut in global equities after bond yields started rising sharply. The rise in bond yields is in anticipation of rate hikes and liquidity tightening, both of which are likely to be beneficial to crypto currencies.
After the liberal $300 billion spending package that was approved by the US government, the pressure becomes more acute on the US Fed to hike rates when it meets in March this year. The original estimate was of 3 hikes of 25 basis points each by the US Fed during the year but now observers are veering towards a total of 100 basis points in rate hikes. With the US economy likely to grow at 2.7% and the unemployment level closer to the 4% mark, there is a case for urgent rate hikes. The US Fed decision will be closely watched as it will be the fastest series of rate hikes by the US in more than a decade and the impact is likely to be felt across global markets. The worst hit could be the emerging markets like India which could see capital outflows as FPIs veer increasingly towards risk-off trades!
The RBI will soon have another tool for liquidity management in the form of the Standing Deposit Facility Scheme (SDFS). This proposal was part of the Finance Bill 2018. This will replace the existing Market Stabilization Scheme (MSS), which entails sale and repurchase of repos. Introduction of the SDFS will give more flexibility to the RBI in managing liquidity in the system. In the reverse repo facility, the provision of collateral for liquidity absorption became the major constraint. The SDFS will not require these provisions and will enable to infuse liquidity and also to sterilize surplus liquidity.
