Weekly Capsule with Impact Analysis for the week ending Dec 30th 2016

Highlights of the Week (Dec 26 – Dec 30) and Impact Analysis

 

Major News Item Impact Analysis
Ø Prime Minister hints at taxing capital market profits

Ø While the actual form is unclear, it may either amount to increasing LTCG to 3 years or higher tax rate on STCG

Ø This move is likely to constrict demand for equities as equities attracted favour due to its favourable LTCG status

 

Ø IDFC Securities projects flat top-line and bottom-line growth next 2 quarters

Ø The impact of demonetization will actually be visible in the Q3 and Q4 numbers in terms of business slowdown

Ø Higher oil prices (up by 20% in December) will also reduce the profitability of industries using oil as a key input

 

Ø After demonetization ends on Dec 30th, the government may impose BCTT

Ø Banking Cash Transactions Tax (BCTT) is imposed on cash transactions at a bank

Ø This is the logical next step by the government to track black money after the demonetization and IDS drive

 

Ø FIIs continued to be net sellers in Indian equity and debt markets

Ø In a virtual repeat of November, FIIs pulled out over $5.5 billion from equity and debt in December 2016

Ø The pullout by FIIs became acute after Trump’s victory and Fed hawkishness. Domestics have been aggressive buyers

 

Ø Saudi Arabia plans to sell off 49% stake in Saudi Aramco in next 10 years

Ø Saudi Aramco is the world’s largest oil company and could be worth nearly 1 trillion dollars

Ø Current valuations are weak due to cheap oil and hence the Saudi government will be phasing out the sale

 

Ø Tata Sons accuses Mistry of misusing confidential company information

Ø In a legal notice, Tata Sons has given Cyrus Mistry 2 days time to return all sensitive material pertaining to the Tata group

Ø The Tata group has accused Mistry of making classified data public endangering the company’s competitiveness

 

Ø Indian companies raised foreign borrowing of $488 million in Nov 2016

Ø This is sharply lower than the $3.16 billion raised in November 2015 through the foreign borrowing route

Ø The good news is that Rupee Denominated Bonds (RDBs) with no currency risk accounted for 40% of these borrowings

 

Ø Modi government plans to attack Benami property deals

Ø Benami properties are purchased in third party names and are a popular means of laundering black money in India

Ø After putting constraints on cash, the next step is to track down benami properties, though it is practically difficult

 

Ø Finance minister hints at lower tax rates in the forthcoming budget

Ø Lower tax rates will, according to FM, help India to expand its tax base substantially and improve compliance

Ø The reduction of tax rates is also seen as a compensation for the pain people went through in demonetization

 

Ø RBI in its FSR raises serious concerns over NPAs of PSU banks

Ø The Financial Stability Report (FSR) projects the Gross NPAs of PSU banks to touch 12% by March 2018

Ø According to the RBI, this could constrain lending, liquidity management and profitability of these banks further

Ø JSPL gets nod to recast its loan under the RBI’s 5/25 scheme

Ø JSPL’s loan of Rs.7125 crore will be recast up to a maximum of 25 years, with a rest and review every 5 years

Ø SBI is the biggest lender in the consortium and steel continues to be the biggest strain on banking NPAs

 

Ø INR cracks beyond the 68/$ mark on year-end dollar buying

Ø With the Fed rate hike importers and banks wanted to hedge themselves against further appreciation of the US$

Ø Global brokerage houses expect the INR touch 72.5/$ by end of the year as the Fed turns increasingly hawkish

 

Ø Ordinance to extinguish demonetized notes passed by the government

Ø This will extinguish the liability of the RBI to the extent of the notes not yet surrendered by people

Ø The RBI will be able to pay out this entire amount (estimated at Rs.200,000 crore) to government as dividend

 

Ø Dr. Viral Acharya appointed as deputy governor of RBI for tenure of 3 years

Ø Dr. Viral Acharya has worked closely with Dr. Rajan and has co-authored the paper on sovereign bonds

Ø Dr. Acharya is an avid votary of the “Bad Bank” strategy, something Dr. Rajan was opposed to.

 

Ø NSE filed with the SEBI this week for its proposed Rs.10,000 crore IPO in 2017

Ø The IPO will be an offer for sale (OFS), where existing owners will be giving an exit route

Ø NSE recently saw Chitra resigning from the CEO’s post and Deloitte has raised red flags about their broker preferences

 

Ø The demonetization drive ends officially on December 30th

Ø Post Dec 30th, old notes cannot be deposited at banks but only at the stipulated RBI counter

Ø Banks are already demanding extension of cash restrictions as the liquidity situation is yet to improve in the banks

 

Ø Japan’s industrial output for Nov 2016 rose by 1.5% annualized

Ø This is substantially better than the consensus market expectation of (-1.7%) for Japan

Ø The big industrial push has come from an export thrust to the US and China on the back of a weak Yen versus the US$

 

Ø Samajwadi party in UP may be headed for a vertical split

Ø This could bring about interesting changes to the political equations in UP ahead of the 2017 state elections

Ø UP remains critical for the ruling BJP as they will be looking to a good performance after losing Bihar and Delhi

 

Ø Government extends the deadline for the DTSS till January 31st.

Ø This Direct Tax Settlement Scheme (DTSS) was offered to companies like Cairn and Vodafone regards their tax disputes

Ø The idea was not just to resolve pending cases but also unlock the billions that are locked up in disputes.

 

Ø Cash crunch and asset quality will be the big worry for Indian banks

Ø According to the FSR, these will be the two big risks for the Indian banks, especially PSU banks

Ø Although demonetization ends on Dec 30th, the impact is likely to survive for a few more months

 

Ø Real estate deals have virtually dried up after demonetization

Ø The curbs on cash have literally made cash transactions in real estate impossible, impact demand steeply

Ø With the proposed controls on benami transactions, the real estate market could be in for tough times.

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