RBI is likely to maintain status quo on rates…
With
the month of September almost coming to a close, the question shifts to
the stance of the RBI in the forthcoming credit policy in
October.Remember, the RBI may have cut rates by nearly 200 bps since
January 2015 but the CPI inflation during this period has gone down by
more than 600 bps. This high level of real interest rates is one of the
prime reasons why bank lending is not picking up. A rate cut would solve
this problem. However, the RBI may choose to hold rates in October and
prefer to err on the side of caution. Here is why!
CPI inflation is up sharply…
If
there is one development in the last 2 months it is the sharp rise in
inflation. The CPI inflation is up by 190 basis points from 1.46% in
June 2017 to 2.36% in August 2017. Out of this 190 basis points rise,
nearly 152 bps has been contributed by food prices alone. The RBI may
tend to believe that higher MSP on most food crops may result in a sharp
rise in inflation as we saw between 2009 and 2011. The second worry is
on the core inflation where oil prices play a key part. Brent Crude has
already settled above the $55/bbl. mark and oil is now promising to get
closer to the $60 mark. That will imply a sharp rise in core inflation
and that could be a further boost to CPI inflation. The RBI may not be
too keen to risk setting lower rates,especially at a time when inflation
is showing upside risks; both on the food and core inflation front!
Jaitley’s fiscal stimulus…
The
finance minister has, for the first time, acknowledged that lower GDP
growth could necessitate a fiscal push. In fact, the government is
already pushing for a $7.7 billion stimulus to the Indian economy.For
the current fiscal, the government is likely to overshoot its fiscal
target by the permitted 50 bps and end the year at a fiscal deficit of
3.7% of GDP instead of 3.2%. That will put pressure on the rupee and
also lead to rating downgrades resulting in FPIs pulling out money.
Under this scenario, the government would not be too keen to aggravate
the situation by cutting rates. Rather the government may wait for GDP
growth to pick up in the next quarter before considering rate cuts!
Fed is getting hawkish!
Inits
September FOMC meet, the Fed has already given two hawkish indications.
The higher inflation guidance is seen as a likely trigger for another
rate hike in December this year. The Fed has also spoken about a
possible taper of $10 billion per month starting October 2017. While
this is too small to make a significant dent, the sentiment on global
liquidity and US rates is likely to shift against emerging markets.
Probably, October may be too early for the RBI to consider a rate cut
without seeing the impact of the taper. The financial markets may have
to be prepared for status quo in October!©
Fiscal Deficit Target
Should the government give up on its fiscal discipline?
The
first quarter GDP at 5.7% and the GVA at 5.6% came in as a shock to the
markets and to policy makers. In fact, the government has shown
alacrity and hinted at a special fiscal package of $7.7 billion to boost
growth in the Indian economy. The move, it is feared, will lead to the
fiscal deficit overshooting its original target for the year by 50 bps.
So, we may end up with a full year fiscal deficit of 3.7%instead of
3.2%. The question is whether such a higher fiscal stimulus at the cost
of fiscal discipline is justified at this juncture. The answer is a
clear “No”. Here is why!
We are already stimulating…
To
be fair, the government is already giving the economy sufficient
stimulus. If one breaks up the IIP number and the GDP numbers, the only
sectors that are outperforming are either the sectors that depend on
government spending or on government policy. Thus, steel and natural gas
sectors are outperforming. Similarly, under the services category we
get to see the best growth in public services,social investments and
defense services, all of which are stimulated by the government. In
fact, the biggest stimulus to the infrastructure sector in India is also
coming from government’s massive spending on roads. Most of the
government spending already has strong externalities. The problem is
that private investment is not picking up and that looks unlikely to
change. More stimulus,therefore, may not help!
The problem lies elsewhere…
The
real investment shortfall is from the private sector. That is because
they have neither the resources nor the intent to invest. Like the
government has supported steel and chemicals, a more favorable policy
towards power and telecom can go a long way. These sectors are under
tremendous stress and the recent policy on MPPs and IUC has only
worsened matters for these sectors. There is also the need for
along-term solution to the NPA problem. There have been smalls steps,but
no quantum shift has happened. Focused and granular action will go much
farther than a macro fiscal stimulus.
The cost of fiscal indiscipline…
The
most important thing to remember is that fiscal stimulus has a cost.The
global investors and rating agencies appreciated India’s focus on
fiscal discipline in the last 2 budgets. Counter-cyclical fiscal
policies have been tried in many countries with little effect. Even in
India, we have seen the negative effects on inflation in the years
between 2009 and 2012. Then there is the threat of external rating
agencies downgrading the ratings if there were a sudden spike in the
fiscal deficit or in the revenue deficit. We have seen the negative
impact of such a move in 2013. The government has shown exemplary fiscal
discipline in the worst of times. The challenge is to stick to it! ©
Tata Sons
The consolidation of power has just about begun…
Back
in 1992 when the original satraps like Rusi Mody, Darbari Seth and Nani
Palkhivala posed the first major challenge to the Tatas, Ratan Tata
learned an important lesson. It was necessary to consolidate his
ownership over Tata Sons. What Ratan Tata must have learned from the
Ministry saga is that his control over the Tata group must be absolute
and unquestionable. The all-important meeting of the Tata Sons board on
21st September needs to be looked at in that light!
Taking Tata Sons private…
The
proposal to convert Tata Sons into a private limited company was easily
passed through by a comfortable majority, despite objections from the Misty camp.
This will have two major implications. The Tata family will now be able
to exercise much greater control over the operations of Tata Sons and
therefore the Tata Group as a whole.Secondly, the Mistry group will be
largely marginalized as they willnot able to even sell their shares
without the explicit consent ofthe Tatas. That will virtually obviate
the risk of a group of businessmen led by Mistry trying to take control
of Tata Sons through the back door. Of course, the eventual decision
will rest on the National Company Law Tribunal (NCLT), but it is
doubtful to what extent NCLT could really make a difference to the final
decision that has been taken in the board meeting with a decisive and
comfortable majority.
The preference share issue…
The
board meeting also passed a significant resolution that preference
shareholders will have a right to vote if dividends were skipped fora
period of 2 years. Why is this so important? It needs to be remembered,
that Ratan Tata is the largest holder of preference shares in Tata Sons.
There was a dispute over whether Mistry family’s share in Tata Sons was
to be calculated with or without considering the dilution due to
preference shares. In fact, if the dilution due to issue of preference
shares is considered then the share of the Mistry family in Tata Sons
comes down sharply from 18.4% to 2.86%.Ratan Tata, individually, becomes
the most significant shareholder in Tata Sons giving him total control
over the group in the process.
What next for Mistry?
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