The Monetary Policy Committee (MPC) in its second monetary policy of the current fiscal hiked the repo rates by 25 basis points. This is the first rate hike by the RBI in the last 53 months. The rate hike was necessitated largely by higher inflation and a weakening rupee. With the RBI unwilling to hike rates, the burden of higher inflation was being felt by the rupee. That was only leading to higher imported inflation. Also, FIIs have pulled out debt paper to the tune of $6 billion in the last four months and this rate hike will widen the yield spread and make Indian bonds more attractive.
Interestingly, the INR and the equity markets reacted positively to the 25 basis points rate hike by the RBI. For the equity markets, the rate hike of 25 basis points was already factored and the market took the neutral stance of the policy quite positively. The markets may have reacted negatively had the MPC give a very hawkish outlook for inflation and rates. The INR saw some of the pressure of higher inflation fading away post the rate hike. Also, the rate hike promises to partially reverse the FII outflows from debt and that is also likely to be positive for the Indian rupee.
With the US raising serious concerns over Brent Crude prices at $80, the OPEC and Russia have agreed to reduce their supply cuts for now. In January 2017, OPEC and Russia had got together for supply cuts to the tune of 1.8 million bpd. However, with supply disruptions from Venezuela, Libya and Iran, the impact on prices is getting harder. In fact, the US had already warned the OPEC and Russia to increase oil supply failing which the US would swamp the global market with US oil. The US WTI oil is quoting at a discount of nearly $10 compared to the Brent Crude, which is the European benchmark.
The NCLT has admitted Videocon Industries for bankruptcy proceedings. State Bank of India had filed the insolvency petition against Videocon, which is currently also embroiled in a conflict of interest investigation with Chanda Kochhar of ICICI Bank. The Videocon has already pledged its oil receipts from its wells to banks against dues. Videocon has borrowings to the tune of nearly Rs.47,000 crore of which nearly Rs.20,000 crore is stressed. The problems at Videocon started after its oil investments went bad. Videocon’s name also comes up in the NuPower deal, brought out by the ICICI whistle blower.
The government of India has approved revised guidelines for time bound closure of sick PSUs. This legislation will reduce the delays and bureaucratic sloth that normally is the bane of any PSU action. The first priority of the legislation will be to use the monetizable land parcels of the PSU towards affordable housing. Under the plan, the workers will also be offered VRS at the prevailing pay in 2007. These rules shall apply to sick and loss making CPSEs where approval or in-principle approval for closure has already been obtained. This will ensure that the land parcels of sick PSUs that are freed up are used for the government’s larger purpose of making affordable housing available to the lower strata of society. The government needs to move fast where divestment and strategic sale is nor practically possible.
Vedanta may have an exit plan for the shareholders of Electrosteel which it will acquire from the NCLT. While the stock still quotes at above Rs.1, normally in NCLT cases, the equity shareholders do not get any value. However, Vedanta has agreed to pay 19 paisa to the shareholders of Electrosteel. Under the resolution plan, Vedanta will infuse Rs.5320 crore against which it will get 90% of the shareholding of Electrosteel. The face value of the shares will be split from Rs.10 to Rs.0.20. Effectively, the shareholders of Electrosteel will get lower than the current market price but still better than getting nothing.
