On a day when the Congress literally dominated the Hindi heartland of India, the stock markets almost appeared to be nonchalant as the Nifty crossed the 10,700 mark. Most stocks reacted positively to the combination of a decisive win in the three states plus the taking over of Shaktikanta Das as the new RBI governor. The new governor is expected to take a more lenient view of liquidity, prompt corrective action and lending to NBFCs. Also, PSU banks are expected to benefit from reduced frictions between the RBI and the finance ministry. It did look like things were back to normal on Dalal Street.
British Prime Minister, Theresa May, survived the No-Confidence motion against her as global markets heaved a sigh of relief. Most of European markets reacted positively and the Pound also showed signs of strength as it was clear that May would live to fight another day. This still does not remove the uncertainty over BREXIT. However, it removes the immediate uncertainty over the survival of the Conservative government in the UK. Global shares also reacted positively to the news of a toning down of trade tensions between the US and China as oil prices also moved up.
The all important meeting between the RBI and the Ministry of Finance comes up on Friday. The most important item on the agenda will be the easing of liquidity in the financial system. The RBI has been infusing nearly Rs.40,000 crore into the system per month but that has proved inadequate considering that the shortfall is to the tune of Rs.100,000 crore. Among the items on the agenda will include infusion of more liquidity, more aggressive OMOs, liquidity support to NBFCs, allowing PCA banks to lend. Above all, the critical issue of government funding via RBI capital will also be taken up.
Retail inflation cooled by nearly 100 bps MOM to 2.33% on the back of negative food inflation. The inflation also benefited from lower oil impact in the month of November. Inflation has now fallen from a high of 5.07% in the month of January and this is well below the RBI comfort zone of 4%. But the real boost to the macros came from the IIP data. The index of industrial production (IIP) for the month of October came in at a robust 8.2% compared to a growth of just 4.5% in September. The big boost for IIP came from manufacturing that was up by 7.9% on a YOY basis.
Even a SEBI starts its probe into how credit rating agencies missed out the IL&FS fiasco in its entirety; it has also initiated measures to tighten the regulation of liquid and money market funds. This is a significant move as these funds were always less focused on due to the nature of its institutional clientele. On the other hand, equity funds, ELSS and balanced funds are normally preferred by retail investors. SEBI has already commenced adjudication proceedings against the three rating agencies which were caught napping while IL&FS was gradually sinking into a morass. Most of the liquid funds invest in a mix of short term debt instruments of the government and private issuers and it is in the latter where most of the problems have arisen in the last few months.
The GST Council has detected GST evasion to the tune of Rs.12,000 crore. According to the Council, this is much higher than the evasion that used to be happening under service tax and central excise. According to the department, most assessees have devised ways to circumvent and the department is now going aggressively after these evaders. The government revenue estimates from GST are turning out to be lower than expected and that could pressure on the overall revenues of the government. However, the government will have to balance business considerations and regulation for small businesses.
