In a surprise move, the RBI Governor, Dr. Urjit Patel, submitted his resignation with immediately effect. Ironically, the decision comes exactly three days before the crucial meeting with the Finance Minister where the larger governance issues were to be discussed threadbare. While Dr. Patel has cited personal reasons for his resignation, the markets are not exactly buying that argument. The negative reaction to the news was evident from the sharp fall in the SGX Nifty. Tuesday could be a critical day for the markets with the counting to commence in the morning and exit polls predicting a tight contest.
On a day when the RBI governor resignation had led to market panic, there was good news on the news recovery front. The UK court has allowed the extradition of Vijay Mallya to face fraud and money laundering charges in India. India has sought extradition of Mallya on the grounds that he had cheated the banking system to the tune of Rs.10,000 crore and had also been guilty of money laundering. Of course, Mallya still has the option of approaching a higher court in UK and if he was still dissatisfied, he could even approach the UK Supreme Court. The entire process could take close to a year.
After losing over $1 trillion worth of market cap in a week, the US markets touched an 8-month low on Monday. The Pound sank after the traders took a grim view of the fact that Theresa May had decided to delay the BREXIT decision. With little progress on the US-China rapprochement on trade, there is also the worry that it could eventually lead to a global slowdown in growth. The US has already hinted at a 3-month cooling period post which the sanctions would resume on China at peak rates. The US markets have also been extremely worried about the inversion of the US yield curve, which signals recession.
There was some good news on the direct collections front. The total direct tax inflows for the first 8 months Apr-Nov was up by 16% on a YOY basis. Nearly 50% of the full year tax collections have happened in the first 8 months and normally the last quarter is the busiest. That means, the government could comfortably meet its direct tax targets for the year. This growth is interesting because the base was quite high last time due to the impact of the amnesty scheme. The government has managed to substantially broaden and deepen the tax base, thanks to Aadhar, Jan Dhan and demonetization.
Kotak Bank lost over 6.5% in a single day and the reason was that the company had decided to take the RBI to court against the decision on promoter holding. The RBI had refused permission to Uday Kotak to reduce the promoter stake in the bank through the preference route. The company has filed a writ petition in the court to protect its interests in the matter. Kotak had proposed to reduce the promoter stake through the issue of Perpetual Non-Convertible Preference Shares (PNCPS), which was rejected by the RBI. The milestone date for the Kotak Group was December 13th and with the date approaching the company had no choice but to file the writ against the RBI. Uday Kotak needs to bring down his stake from 29.73% to 20% by December 2018 as per the RBI stipulations.
With Jet Airways tanking again on the back of a rating downgrade by ICRA, the big question is whether a fund infusion alone can make a big shift for Jet. The company has nearly Rs.1500 crore of debt that is repayable immediately and the airline is looking at selling some of its fleet and a capital infusion by Etihad to tide over this liquidity crisis. But the real problem is that Jet may need more than that. It needs to cut down on its Cost per Average Seat Kilometre (CASK) so that the spread with the RASK can be created. The full service model is proving to be a major drag for the finances of Jet Airways.
