refused to proactive rate cut by the RBI

The stock markets refused to react to the unexpectedly proactive rate cut by the RBI and ended flat. RBI in its monetary policy announcement cut repo rates by 25 basis points to 6.25% and also changed the stance of the monetary policy from “calibrated tightening” to “neutral”. However, the markets saw profit booking at higher levels as traders and investors were cautious in the light of the higher fiscal deficit guided in the Union Budget. Bond yields ended lower although the correction was not too sharp considering that the overhang of the higher borrowing lingered on.

Growth pangs in the European region had its impact on the US markets. The DJIA fell over 100 points on opening after the EU region downgraded its growth forecasts for the full year. Even as Twitter disappointed in its quarterly numbers, a slew of disappointing quarterly numbers took its toll on the US markets. The US market indices have also been under pressure as there has been little progress on the trade talks with China, despite multiple iterations. The sharp fall in the trade deficit was actually an indication of a distinct slowdown in trade between the US and China.

Governor of the RBI, Shaktikanta Das, has confirmed that the government has the complete discretion to demand and use the RBI surplus at any point of time. It may be recollected that the transfer of surplus was the bone of contention between the RBI and the government during Urjit Patel’s tenure. The meeting to discuss the interim dividend has been postponed to February 18th. The RBI has already transferred Rs.40,000 crore to the government in the current year but in the previous year the RBI had held back nearly Rs.13,000 crore in its contingency reserves. That is what the centre is targeting.

Even as the Ruia family tries its best to retain control of its flagship Essar Steel, the Ruias now face the risk of lenders of Essar Power invoking guarantees. Lenders to Essar Power including ICICI Bank and IDBI Bank have moved the various benches of the Debt Recovery Tribunal (DRT) and have filed recovery cases to invoke the personal guarantees provided by the promoters. This is happening even as the Essar Promoters are making one last ditch effort to hang on to Essar Steel by making a bid higher than Arcelor Mittal. Promoters had given personal guarantees for debt issued by Essar Power.

RBI policy had its impact beyond rate cuts as the policy statement eased the ECB route for IBC resolution bidders. To simplify the access to global funds, the RBI announced that potential bidders for stressed companies under NCLT will be allowed to borrow via ECBs to repay the loans of the target company. Currently, ECBs cannot be issued for repaying domestic loans. This will be a boost for the NCLT process. In addition, FPI investment in corporate debt gets RBI relaxation as do some NBFCs. RBI announced withdrawal of the current restriction that does not permit FPIs to expose more than 20% of its corporate bond portfolio to a single group. Now, FPIs need not deliberately diversify their bond portfolio. Also, NBFCs will be assigned different risk weights based on credit ratings to improve credit flow to NBFCs.

OPEC quotas are being adhered to as Saudi Arabia pumped just 10.24 million bpd of crude in Jan; below its OPEC target. OPEC and allies had committed to cut their daily output by 1.2 million bpd. Under this agreement, Saudi Arabia’s oil quota was 10.311 bpd. Saudi Arabia has stayed well below its production target to underline its commitment to the OPEC targets and hold prices from falling. Saudi Arabia, the world’s largest exporter of oil, had pumped a total of 10.643 bpd in the month of December 2018. Brent crude currently quotes around $62/bbl in the European market.