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Posted on 15-Mar-2019 Comments  0

RBI Rate Cut

Why the RBI is unlikely to cut rates in the April monetary policy

The meeting of the RBI Monetary Policy Committee (MPC) on the 04th of April is likely to be one of the most keenly awaited monetary policies. The RBI had obliged the money markets by cutting rates by 25 bps in its February policy. Will the RBI oblige the markets with another rate cut or will it prefer to wait. Let us look at the macros first!

Inflation and IIP growth

The recent data coming out from MOSPI has shown a clear uptick in inflation. In fact CPI inflation was up at 2.57% and the WPI inflation was up at 2.93%; both above market estimates. The question is whether the rates could go higher. There are two things to watch. Firstly, food inflation is sharply up. That is partly base effect and partly the impact of higher MSP. That means, the food inflation could trend higher in the months to come. Secondly, the core inflation remains elevated at 5.3% and that shows no signs of abating. While the RBI may talk about headline inflation, it is core inflation that actually influences the cost push inflation in the economy. While 4% is still some distance away, the RBI could have room for worry. Then we come to growth. IIP has lagged at 1.7% and the pressure is coming from manufacturing. That is surely a case for a rate cut as low growth typically requires a benign rate regime. The RBI will have to address the dilemma of higher inflation and lower growth to decide on rates!
Global cues will matter too

There are a lot of global cues that will matter. The US-China trade pact is nowhere near fruition and a desperate China may be inclined to weaken the Yuan. That will weaken the rupee. Also any signs of hawkishness by the US Fed in its next two meetings could have real ramifications for Indian monetary policy. Then there is price of oil which remains the X-factor. The OPEC appears to be hell bent on curtailing supply for much longer and the sanctions on Venezuela and Iran are only adding to the pressure on oil prices. Oil has an immediate impact on the CPI inflation and also weakens the rupee. Lower rates may not be conducive in such a scenario.

RBI may actually pause

The RBI may actually be inclined to pause in April and observe the inflation data for a couple of more months. Elections are naturally inflationary and the focus may be more on adequate liquidity than on rates. In February, the rate cuts were not transmitted due to the complex cost of funds structures of banks. That was disappointing and is unlikely to spur growth. The launch of dollar swaps of $5 billion on March 26th could be the first of many. The signal is that in April the RBI and government will focus more on adequate liquidity than on dovish rates. That would make more sense with a new economic policy. For April, it may a halt on rate cuts!

NCLT comes of age

NCLT has learnt to put its foot down; and that is the good news

In the last few months, the NCLT and the NCLAT have certainly come of age. That is good news as it means that the insolvency and bankruptcy process should go through a lot more smoothly.

Essar versus Arcelor Mittal

This was, perhaps, the biggest challenge for the NCLT and the NCLAT. First the background! After Essar had defaulted on loans to the tune of Rs.50,000 crore, the committee of creditors (COC) decided it apt to sell Essar Steel to the highest bidder, Arcelor Mittal. In fact, Arcelor had agreed to pay Rs.42,000 crore and also invest an additional Rs.8,500 crore into the steel plant to bring it up to market. The problem started after that. The promoters, Ruias, came up with a counter offer at Rs.54,389 crore promising to pay off the financial and operational creditors in full. When the proposal was originally struck down by the NCLT Ahmadabad bench, the Ruias had approached the NCLAT. However, even the NCLAT upheld the judgment in favor of Arcelor. The NCLAT was right in the sense that allowing the promoters to buy back the assets would make a mockery of the entire NCLT process and would be a setback to buying interest in such cases. In fact, the NCLAT has tried to hit two birds with one stone. It has upheld the sanctity of the NCLT process and has also asked the COC to factor in the interests of operational creditors. This should keep all stakeholders happy.
Binani Cement was simpler

One of the allegations against the NCLT has been that they used a different set of standards for Ultratech and for Ruias. In the case of Binani Cements, Ultratech had come up with a substantially higher offer after Dalmia Bharat had won the bid. In this case, the NCLT had an easier job. A higher bid was in the interests of the financial and operational creditors of Binani Cements and hence the Ruia principle would not apply there. In the case of Binani Cements, the NCLT rightly gave Dalmia the opportunity to match the bid and only failing that the company was handed to Ultratech.

Finally, the RCOM / SBI story

This was perhaps the most confusing of the three stories. The Supreme Court had ordered RCOM to pay Rs.450 crore to Ericsson, an operational creditor. However, when RCOM tried to pay Rs.260 crore out of the tax refund, SBI did not release the funds. SBI’s contention was that giving preference to an operational creditor over the financial creditors went against the basic grain of NCLT. That is the reason, when Anil Ambani approached the NCLAT to instruct SBI to release the funds to Ericsson, the NCLAT refused to intervene. NCLT was right in that the issue is totally outside the purview of the NCLT. In these 3 cases, the NCLT has shown that it has truly come of age as an economic facilitator!

China says “No”

For the fourth time, China refuses to call a terrorist; “a terrorist”

For the fourth time in succession, China managed to stall India’s efforts to declare Masood Azhar as a globally designated terrorist. In fact, that was to be expected. China is one of the five countries that have a permanent seat in the United National Security Council (UNSC). This gives them the veto power to strike down any decision even if the majority has a view to the contrary. This is the veto that China has used even in the past. What should India do?

Up the ante on terrorism

Quite justifiably, India has adopted a more measured stance on the China action. Unlike on the previous occasions, India has not made China’s action look like the end of the road for India. Terrorism is India’s problem and that is something India needs to deal with in its own way. What India has done in Pulwama was absolutely justified. The fact that China said little about India’s actions means that beyond a point China does not really care about the whole issue. For China, Pakistan is an economic interest considering that they have a stake of more than $70 billion in the Pakistani economy. Even in the past, these efforts of India have been stalled in various forums by Saudi Arabia, Turkey and China. In a way, China’s action was expected. For China, Masood is just a bargaining chip to make India relent on its support to the Dalai Lama. That is exactly what India must refuse to do. They are just not comparable.
Make the UNSC redundant

During the American war on Iraq and Afghanistan, the US amply proved that the UNSC is relevant only as long as other countries choose to make it relevant. India needs to pursue its war on terror irrespective of the UNSC outcome. One thing is clear that India does have the support of other permanent members of the UNSC. The focus for India is not Masood Azhar. He is purely incidental. The focus should be to make it extremely expensive for Pakistan to harbor terrorists like Masood Azhar on its soil. That is an agenda that India has already started pushing. If that can be managed, Masood Azhar and China hardly matter.

Make China pay economically

Interestingly, China runs the second largest trade surplus with India; next only to the US. Hong Kong trade is not genuine so we can ignore that. What the US proved in the last few months is that when squeezed on the trade front, China starts to buckle. There is no way that China would want the trade surplus with India to reduce. India just needs to make it more expensive for China to export its goods to India. Instead, India must focus on the countries that have stood by them. It would be more productive to run a deficit with the US than with China. That would be too much of a gamble for China. It is time for India to walk the trade talk!

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