Along expected lines the Monetary Policy maintained the status quo on repo rates at 6%. In addition, the RBI also guided lower CPI inflation at around 5.1% for the first half and 4.5% for the second half apart from higher growth guidance of around 7.4% for the coming fiscal year. As a result, the RBI maintained its neutral stance. While the possibility of rate hikes are still there, it will largely predicate on how inflation and US Fed rates pan out. The RBI needs to keep rates attractive enough for FPI inflows and also needs to keep the rates subdued enough not to impact the borrowing program.
Indigo has confirmed that it is opting out of the race to buy Air India as it did not find the terms attractive. Air India has total debt of Rs.46,000 crore of which Rs.12,000 crore will be transferred to a separate company while the balance Rs.34,000 crore will have to be taken up by the buyer of Air India. The government will be divesting 76% in Air India and 100% in Air Express. While the aircraft fleet and the landing and route licenses are attractive for buyers, most are way of the debt levels and also of the monetization of the real estate assets of Air India at a future date. Cost structure is also a worry!
The outstanding pledged shares of promoters of Indian companies stood at Rs.240,000 crore in Q4, lower than the previous quarters by nearly 22%. The markets do not take pledging of shares by promotes too positively as it opens up the company to price vulnerability as we saw in cases of companies like GTL, GTL Infra and Rolta in the past. When the price cracks, the financiers ask for higher margins and if the promoters are unable to provide the margin then they just dump the shares in the market. Share pledging by promoters is done to raise funds for projects.
The RBI confirmed that it had transferred an additional Rs.10,000 crore as dividend to the government of India for the fiscal year ending 2017-18. This is in addition to the Rs.13,000 crore that the RBI had already paid the government during the year. The RBI had reduced the dividend by more than 50% to cover the cost of demonetization and also to create a reserve. However, the cash strapped government had asked the RBI to increase the dividends. The RBI also announced that the new Ind-AS accounting standards will apply to banks only after 1 year, which should be a temporary relief.
In rapid move the RBI banned entities regulated by the RBI from dealing in crypto currencies. Typically, crypto currencies like Bitcoin are based on the Blockchain technology and offer an alternate to fiat currencies like the dollar, pound and Euro. However, most central banks have been wary of two reasons. It reduces the control that the central banks exercise over currency and credit creation. Secondly, these crypto currencies have also been a platform for transferring slush money across the world. The RBI Deputy Governor, B P Kanungo also expressed fears that if the size of these digital currencies cross a certain threshold then they could threaten the stability of the finance system. However, former RBI Deputy Governor, R Gandhi, is unsure of how much the RBI will be able to regulate digital currencies.
J P Morgan big boss, Jamie Dimon, sees distinct risks to the global economy and to global financial markets if the trade war between the US and China intensified. Yesterday, China announced a list of 106 items of imports from the US where China proposed to import 25% tariffs as a retaliatory measure. However, Dimon acknowledged that the US was a major sufferer of intellectual property being stolen by other countries like China. The US currently runs a trade deficit of Rs.375 billion with China and Trump has been trying to make most of these larger exporters to the US pay a heavy price.
