RBI Turns Dovish
Could this be a signal for an impending rate cut?
The RBI monetary policy announced on June 07th maintained status quo along expected lines. But focusing purely on the rates would be missing the bigger picture. There are four key takeaways from the policy which point towards a more dovish stance from the RBI…
Finally, there is dissent…
For a group consisting of academic heavyweights, there was a surprising degree of consensus in previous meetings of the Monetary Policy Committee (MPC). For the first time, one member of the MPC, Dr. Ravindra Dholakia, has taken a more dovish stance and dissented with the decision of the MPC to maintain status quo on rates. Of course, the majority of 5 members still voted in favor of status quo but the fact that members are beginning to think in terms of rate cuts is itself a positive signal.
Lowering inflation targets…
The RBI in its June review has clearly reduced its inflation targets for the current fiscal year. In fact, for the first half the expected inflation stands reduced by 100 basis points while for the second half the expected inflation is down by nearly 50 basis points. A lower inflation trajectory is a clear indication that the RBI is willing to consider rate cuts in the coming policies. While the quantum of cuts is still not too clear, the actual rate cuts may happen soon.
Bond yields are hinting thus…
The best indicator of a likely rate cut by the RBI is the preparatory movement in bond yields. In the aftermath of the RBI policy, the benchmark 10-year bond yields were down by 8-10 basis points. The bond markets are looking at this policy as an indication that the Monetary Policy Committee (MPC) may seriously consider reversing its monetary stance from “Neutral to Accommodative” once again. It may be recollected that the MPC had shifted its monetary stance from Accommodative to Neutral in the February meeting and had reinforced it in the April meeting. The bond markets are clearly betting on this stance changing in the August policy meet.
Infosys Promoters
What happens if they entirely exit the company?
On the 09th of June, the Infosys stock price corrected sharply on the back of news that the founder promoters may be looking to completely exit the company. While the initial reaction was one of panic, the question is whether it could really impact the stock in the long run. Here are a few considerations…
Dilemma of minority promoters…
While none of the promoters of Infosys have either denied or commented on the news, what it represents is the dilemma of minority promoters. Unlike other IT companies like Wipro, TCS and even HCL Tech, where the promoter groups still exercises substantial control due to the ownership pattern, Infosys has been a different ball game. For too long the original promoters have been holding on to just 11% of the company in share ownership terms. That makes Infosys a predominantly institution-owned company.
As a result the founder promoters have found it difficult to exercise any meaningful control over regular decision making within the company. Institutional shareholders typically prefer to stand by the existing board of management of the company as long as there are no major issues. That was evident the last time Mr. Murthy raised objections to executive compensation and governance standards. Without saying as much, the institutions backed the management of the company and the promoters could do little with limited ownership.
Gold and GST
How it could be a game-changer for the Indian gold industry…
The GST Council finally announced the rate of GST on gold. At 3% GST the Council has almost maintained the status quo on gold rates. Currently, gold attracts 1% excise plus 1% VAT and 0.5% cess. Thus the total impost on gold will marginally go up from 2.5% to 3%. What will be the implications of the GST rate on gold on the economy?
Almost status quo on rates…
By setting the GST rate on gold at 3%, the government has almost maintained status quo on gold tax. If the reaction of the gold makers is any indication, then this has come as a relief to all those who were expecting an impact of 5% under GST. In fact, the GST Council has gone to lengths to create a separate categorization, not originally available, to specially accommodate gold. Even if you include the impact of 10% import duty, the overall rate will still dissuade gold smuggling into India.
Will also get input tax credit…
The second big advantage that may not be apparent from the rates is that the input tax credit (ITC) will be available to jewelers fully and seamlessly, The ITC is the credit that is available to the manufacturers and service providers for the tax that is already paid on the inputs which go into making the final product. When the impact of the ITC is also factored, the actual effective rate of GST on gold may be much lower.
