The assembly polls results may not have been great news for the ruling NDA. The BJP lost Rajasthan and Chhattisgarh by a wide margin and is still fighting to save its rule in Madhya Pradesh. The state of Telangana was a virtual no-contest with the TRS sweeping the polls. But the bigger surprise was the stock market reaction on Tuesday. Despite a poor show by the ruling party and the resignation of Dr. Urjit Patel, the Sensex closed 200 points higher. Of course, the large scale selling by FPIs was more than compensated by buying action from the domestic institutions.
Former secretary, Department of Economic Affairs, Mr. Shaktikanta Das has been appointed the new RBI governor for a period of 3 years. It may be recollected that Dr. Patel had left the chair with nearly 9 months in his tenure still remaining over major governance issues with the finance ministry. Interestingly, Shaktikanta Das was a key crisis manager during the demonetization exercise and is likely to be a stronger support of demonetization. After the experience with Dr. Rajan and Dr. Patel, the Finance Ministry will be looking for a governor who is more low-profile.
RBI continued to be a net seller of dollars in the month of October to the tune of $7.2 billion in the spot market. This goes to show that the RBI has been continuously providing support to the rupee buy selling dollars at higher levels. RBI currently intervenes in the forex market via the spot market as well as the futures market. The RBI has consistently supported the rupee at 73/$ and later at around 75/$ and in both the cases the RBI has used a mix of spot market intervention and intervention in the currency futures market. The rupee is now at much more comfortable range compared to September.
Rating agency, Ind-RA is of the view that the acquisition of stake in REC by PFC will stretch its balance sheet to a considerable extent. While the deal will impact the ROE and the ROA of PFC, it is also expected to be cash accretive. For starters, both PFC and REC will continue to remain separate listed entities and PFC will not be making an open offer to the shareholders of REC. The total debt of PFC is likely to go up by Rs.15,000 crore as an outcome of the stake buy. The divestment proceeds of Rs.12,000 crore will go a long way in boosting the prospects of meeting its annual divestment target.
As a direct outcome of the state assembly election outcome, most economists are fearing that the current government may slip on its fiscal deficit targets. Quite often, you find that the ruling party resorts to populism and doles out money to rural India so as to make it politically worthwhile. The government is already set to breach its 3.5% fiscal deficit target for this year and the current election outcome will only make the government more intent to pander to the grass root needs of the masses. This could include a mix of social programs, agriculture focus, large scale loan waivers etc. Even in the past, political parties have resorted to announcing sops and freebies around the election time to gain a larger mindshare among the voter. The only risk is the fiscal health in that case.
After a sharp rise of 6% in Brent crude prices on Friday, crude again retreated on Tuesday. The 1.2 million bpd cut has not exactly enthused the markets. Firstly, the markets are currently worried about the likely economic slowdown due to the ongoing trade wars. Secondly, there is a bigger worry that the ability of the OPEC to influence prices is largely limited. OPEC accounts for less than 40% of daily output and today the US rather than Saudi Arabia has become the real swing producer of oil. Markets also feel that higher prices would benefit US shale and that is not what the OPEC really wants.
