Friday was almost a repeat of the Wednesday bounce, just a lot sharper. A combination of short covering ahead of a favourable rupee policy buoyed the Nifty to higher levels. The bounce was led by stocks in the financials, pharma and oil space. Meanwhile, the rupee strengthened to 71.855/$ and 10 year bond yields closed flat at 8.13%. The INR has recovered more than Rs.1/$ after touching a low of Rs.72.925 on Wednesday. The bond yields also tapered to 8.13% after touching a high of 8.23% after CPI Inflation at 3.69% and WPI Inflation at 4.53% favoured the tapering of the bond yields.
Hindalco is getting aggressive restructuring its capital mix. Hindalco has sought shareholders’ approval to raise Rs.6,000 crore via NCDs. The proceeds of the issue will be used to fund its ongoing capital expenditure as well as for repayment of existing loans. These NCDs will be privately placed with institutional investors. The company had recently repaid long term project loans to the tune of Rs.8000 crore which had reduced the debt/equity ratio of Hindalco to below 3. This is expected to substantially reduce the capital risk that Hindalco was running in its balance sheet.
DLF targets to become a zero debt company by March 2019. The company has already reduced its total debt from Rs.21,000 crore to a little over Rs.7,000 crore, largely with the proceeds of the sale of the commercial leasing subsidiary to GIC of Singapore. In a significant move, DLF will entirely stop pre-launch sales and only focus on selling finished inventory to avoid too much of stringent regulatory oversight under the RERA. DLF currently has a finished inventory of Rs.14,000 crore which will be used to fund its future projects. DLF is one of the few strong realty players to deleverage substantially.
It had raised a lot of hopes, but the actual package turned out to be a whimper. Arun Jaitley announced an interim package to rescue the rupee. As part of the rupee rescue package, the government will permit infrastructure borrowers to take un-hedged exposure to foreign currency loans. ECBs up to $50 million will be permitted for a minimum maturity of 1 year as against the current 3 years. The government has also eased Masala (rupee) bond norms, but there may not be many takers when the rupee is so volatile. HDFC Bank has expressed worries on loans at the short end.
The RBI may be really getting into a policy dilemma. Even as the dollar reserves are tapering, the CAD is widening and the rupee has been extremely volatile. India’s forex reserves fell below the $400 billion mark for the first time in 2018. The sharp fall in the forex reserves has been an outcome of the RBI defending the INR by selling dollars. That has seen the dollar reserves deplete by nearly $30 billion during this year. With the reserves dipping below $400 billion and enough to cover less than 9 months of imports, the RBI may have limited options left when it comes to intervention in the currency markets. It really cannot intervene very aggressively in the currency market and may have to restrict itself to currency derivatives hedging and probably hiking rates to stem the rupee fall.
Even as the US-China trade negotiations are on, Trump is likely to proceed with tariffs on Chinese imports to the tune of $200 billion. This comes on top of the $50 billion worth of tariffs that have already been imposed. While the US exporters have certainly been hit, China may have a much bigger problem on hand. Being a substantial net exporter to the US, China many not have much of US imports left to retaliate on. Whether China retaliates through other means like US Treasury selling; remains to be seen. China holds US treasuries to the tune of over $1.3 trillion in its reserves.
