Midnight News Update – Jun 13th 2017
The IIP number for the month of April 2017 came in at 3.1% lower than the 3.8% reported in the previous month. The three components of IIP viz. mining, manufacturing and electricity showed positive growth. However, in user based terms, the negative growth in capital goods is still a worrying factor. The IIP growth for the full year 2016-17 came in at 5%. The only good news from the IIP number is that the trajectory of the IIP growth in the last couple of months has firmly held above the 3% mark. That is a quantum shift from the 1-2% growth that we saw in the 3 months following demonetization.
Inflation continues to fall and fall lower. The CPI inflation number for the month of May 2017 came in at 2.18% well below the 3% mark that the RBI was targeting for the first half of the fiscal year. The main depressing factor was the food inflation which slipped into negative territory during the month. One of the reasons for the fall in food prices could be that the IMD has already given an estimate of monsoons at 98% of the LPA and that is likely to keep food inflation subsidized. Consistently lower inflation may be a big prop for the Monetary Policy Committee (MPC) to go ahead with a rate cut in the next meeting.
Crude oil prices on Monday went up after Saudi Arabia pledged to make some real cuts in supply. Currently, the OPEC and friendly nations like Russia and Mexico are making production cuts to the tune of 1.8 million barrels per day (bpd). However, with a supply glut from the US and massive stockpiles around the world, the markets are not exactly impressed. In the meanwhile, the embargo on Qatar has also depressed oil prices as the nation is expected to walk out of the supply deal. Brent is already $48/bbl and is quoting well below the psychological $50/mark. OPEC may cut supply to Asia.
Gold was a little cautious ahead of the 2 day Fed meet that is commencing on 13th June. The Fed decision on rates is likely to be announced late on 14th June and the data will be available only after the markets close on 14th. The general expectation is that the Fed may hike the Fed rate by 25 basis points and leave the room open for another rate hike during this calendar year. India will be watching this data point closely as its future rates trajectory will largely predicate on how the Fed guides for the full year. RBI will be keen to ensure that the rate differential does not encourage FPI outflows from India.
In the algo-trading case, SEBI has alleged that the NSE did not cooperate with the investigations undertaken by the SEBI expert committee as well as the forensic auditors. The whole case came into public prominence after a whistleblower had written a letter to SEBI alleging that the NSE was offering preferential access to a set of brokers in their algo trading. The regulator has already issued a show cause notice to Chitra and Ravi Narain and both have already reassigned from the services of the NSE. It is now being alleged that the NSE did not cooperate with the investigations and did not furnish the required information in the algo trading case. The revenues from algo trading, which forms a chunk of NSE revenues, are currently in an escrow account and the issue needs to be resolved ahead of its IPO.
The finance minister, Arun Jaitley, has confirmed that the list of defaulters will soon come up for review towards an early resolution of the bank NPA problem. The list will identify borrowers and wilful defaulters where the money will be recovered through the Insolvency and Bankruptcy Code. The NPAs of the banking system are estimated to be around $90 billion. If you add the doubtful assets and the restructured assets, then the total quantum of stressed assets could be nearly twice the number. The FM has also affirmed that states will have to meet farm loan waivers from their own resources.
Reliance Communications (RCOM) that has been plagued by recent defaults and rating downgrades, is now planning to hive off its undersea cables business. The Global Cloud Exchange (GCX) business of RCOM is estimated to have a market value of around $1.1 billion and it has approached CITIC for a sale of the same. Back in 2014, CITIC had made a bid to buy GCX for around $500 million but the deal had not gone through on valuation concerns. Lenders of RCOM have given the company a 7-month moratorium to repay the loans by when the company is also expected to complete the sale of the towers business.
Prime minister, Narendra Modi, will be visiting the US to meet up with Donald Trump on 26th June. One of the major points of discussion will be the challenges created for the IT business due to the H1-B visa regulations since Trump came to power. The discussion is also likely to revolve around the role of Pakistan in the current Kashmir imbroglio. In the past, Trump has expressed reservations that more that more than 50% of the US H1-B visas were literally cornered by the Indian IT industry. The Paris Climate Deal, from which the US has withdrawn, will also come up for discussion.
With another Fed rate hike almost looking likely, the Asian central banks are building up their defences against any currency volatility that could crop up due to the same. China has the biggest reserve chest I Asia in excess of $3.1 trillion followed by Japan at around $1.2 trillion. Among the other Asian nations, Taiwan, Hong Kong, Singapore and India hold sizable forex reserves. Of late, Malaysia and Indonesia have also been building up their reserves at a rapid pace. The forex reserves of China have come down sharply from $4 trillion a couple of years back as the PBOC has been trying hard to defend the Chinese Yuan. Most of the Asian markets have seen substantial FPI and FDI inflows during the last year on the back of weak returns from the US and European markets. The Fed meeting outcome will be critical!
