When the RBI announces its monetary policy tomorrow, the consensus is on status quo on rates. With yields up sharply and the US likely to hike rates by 75-100 basis points during the year, the RBI will have little room for rate cuts as of now. However, the markets will be more interested on the RBI commentary on two fronts. The markets will be keen to read the RBI commentary on fiscal deficit spillage and its likely impact on yields. Secondly, the market will also be looking at the RBI for urgent measures to stem the bond market rout in the last few days.
India doubled the import duty on sugar from 50% to 100%. That is because global sugar prices had fallen sharply and local sugar mills were finding it difficult to pay the mandatory price to cane farmers. Neighbouring Pakistan has given a subsidy on sugar and hence it has been dumping cheaper sugar into India. That will be curtailed after the hike in import duty. The sugar mills have to pay 11% hike in sugar cane prices to farmers but are finding it difficult as sugar prices have fallen by over 17% since October last year. India has also raised the import duties on chickpeas.
At a time when the equity markets in India has seen wealth destruction to the tune of Rs.10 trillion since the budget, corporate results continue to show pockets of outperformance. On a day when Lupin and PNB disappointed the street, Tata Chemicals reported a 3-fold rise in net profits to Rs.759 crore. These were largely due to gains from the North American business in the form of deferred tax gains which are not sustainable on an operational basis. Even operationally, Tata Chemicals did report an impressive performance across North America and Europe.
Stressed asset investor, Hong Kong based SSG Capital, acquired stressed loans of Bhushan Steel from Bank of Baroda and Union Bank of India worth Rs.2500 crore. This deal was structured though Indian ARC unit ACRE. While ACRE offered upfront cash to the banks, the deal is presumed at a discount of 50%, which could be a fairly large haircut to take. Bhushan Steel is one of the most troubled steel players with total loans to the tune of Rs.56,000 crore. It is expected that Tata Steel and a consortium led by JSW Steel have also submitted bids for Bhushan Steel.
The warning for crypto currencies was sounded by the finance minister in the budget and it has been immediately followed up with action. The Income Tax Department is issuing notices to people who invested in crypto currencies like Bitcoins but did not declare the income or profit earned on it. Since the FM has already declared crypto currencies as “not legal tender”, any profits on them would be speculative profits and will be taxed accordingly. This is part of the effort by the CBDT to expand the retail tax base and to also ensure that the leakage in tax is kept at the bare minimum possible. The number of tax payers has increased sharply in the aftermath of demonetization and GST and this positive trend is likely to continue in the next year as well.
One of the most respected names in the Indian capital markets, Motilal Oswal, estimates that there are funds to the tune of Rs.30,000 crore waiting in the sidelines to enter the equity markets and the sharp fall in the Sensex by over 2000 points could just be the trigger for this money to come in. This refers purely to domestic money and if the FII money that was waiting for better valuations could also come in the sky is the limit. The correction was not just due to the LTCG tax but also due to global factors like sharply higher bond yields. These issues are likely to settle down in the next few days.
