The News Editorial Analysis 9th October 2021

RBI policy over, global factors to dictate market trajectory from here on

Squeezing of liquidity and the likely hardening of bond yields may have a near-term “sentiment” effect on the BFSI sector; overall the policy should not have too much bearing on the equity.

The RBI MPC voted unanimously to keep rates unchanged and voted 5-1 in favor of continuing with its ongoing accommodative policy stance. Although there were some expectations in the markets that RBI would raise the reverse repo rate, the MPC continued with its ongoing accommodative stance and left policy rates unchanged.

While the RBI does acknowledge that the domestic economic activity is gaining momentum with the second Covid wave effects receding in the country, it probably wants to be watchful of the slack in the economy, the recovery being uneven, growth still being below pre-pandemic levels, and some of the global economies showing signs of slowing down. On the inflation front, the MPC looks to be a bit more confident this time, and expects the headline CPI inflation to moderate in the coming months with food prices softening, although core inflation is still ruling on the higher side and oil/commodity prices are hitting new highs.

Expectedly, the MPC has revised downwards its CPI projections for the coming quarters.

The noticeable progressive shift, however, in the MPC’s posture, is the more aggressive tapering of liquidity. While in the previous policy the RBI had announced a hike in the quantum of the fortnightly VRRR auctions from Rs 2 trillion to Rs 4 trillion, the current elevated surplus liquidity conditions through September and early October have prompted the RBI to raise the quantum further to Rs 6 trillion / fortnight, by 3 December. This should effectively bring down the surplus liquidity to about Rs 2 – 3 trillion by December. This is quite likely a precursor to an imminent hike in the reverse repo rate (likely in December), and to reduce the MPC policy corridor that had widened last year during the pandemic. Further, RBI has also opened up the possibility of conducting 28-day VRRR auctions, if the situation warrants, for a more lasting impact of the liquidity withdrawal.

The taper signal from the RBI is also evident from the discontinuation of the G-SAP programme that it had started earlier in the year in order to anchor the long-term yield expectations. So while RBI intends to continue with OMOs and Operation Twist as and when required, the extra liquidity inducement at the longer end of the yield curve will now cease.

Likely Implications

Bond markets: The measures announced in the policy are pretty much as we expected – that liquidity tapering would be accelerated and result in an eventual hike in the reverse repo rate, possibly by end of the year. Short-term interest rates have already bottomed out some time back, and should drift somewhat northwards with the enhanced withdrawal of liquidity by the RBI.

The steepness in the yield curve can thus reduce gradually through next year, with the hardening of short- term rates. In the absence of G-SAP support going forward, long-term (g-sec) rates will likely move in

tandem with the RBI activity on the OMO and Operation Twist front, to balance out upward pressure on yields from the ongoing auction supply from the Government borrowing. Overall, the yield curve should gradually shift upwards, although the RBI is mindful that it should prevent any disruption in the bond markets or in the liquidity situation.

Equity markets: In general, the policy should not have any direct impact on the equity market outlook. As laid out by the Governor in his policy address, domestic growth seems to be picking up comfortably, and there has been reasonable progress on the vaccination front, too. From Indian equity markets perspective, global factors will be more relevant at the current juncture: the “positive” backdrop of the global economic recovery and stable global equity markets so far, as well as certain “headwinds” on the other hand – the rising US bond yields, high global commodity, oil and energy prices (fueling global inflationary trends), the Dollar index standing firm (which is generally not encouraging for flows into Emerging Markets) and the ongoing regulatory and property-related developments in China that could potentially affect sentiment for the EM basket in general.

Although RBI is quite confident about food prices remaining moderate going forward, we need to be watchful about “imported inflation” – higher energy and commodity prices, and the resultant pass-through to the economy in terms of inflationary trends and pressure on corporate margins. To some extent, the squeezing of liquidity and the likely hardening of bond yields may have a near-term “sentiment” effect on the BFSI sector, but overall the policy should not have too much bearing on equity markets. The broader outlook is more a function of the evolution of demand and momentum in the domestic economic activity, and not so much the interest rates, at the current juncture. There has been a seasonal demand improvement of late in the auto and discretionary consumption sectors. Over the longer term, we are positive on financials, consumption, healthcare and IT (after the recent correction in some of the IT stocks).

Tata Group to take on board a fourth of Air India’s total debt.

The Tata Group will effectively take on a fourth of Air India’s total debt and has to hold on to at least 51% of the carrier for a year and keep 12,000 of the carrier’s employees, also for a year, as part of privatisation conditions. It will also stick to a business continuity clause for three years and retain the brand for five years as part of the deal. Talace Pvt Ltd, a unit of the automobile-to- aviation conglomerate, Friday won the bid for Air India and its subsidiary Air India Express. The total bid amount based on the enterprise value is Rs 18,000 crore. Of that, Rs 15,300 crore is the debt that’s being acquired while the remaining Rs 2,700 crore will be cash paid to the government.

Talace Pvt Ltd, a unit of the automobile-to-aviation conglomerate, Friday won the bid for Air India and its subsidiary Air India Express. The total bid amount based on the enterprise value is Rs 18,000 crore. Of that,

Rs 15,300 crore is the debt that’s being acquired while the remaining Rs 2,700 crore will be cash paid to the government. The reserve price had been set by the government at Rs 12,906 crore. “The reserve price was calculated as a weighted average of the business valuation and asset valuation,” said Tuhin Kanta Pandey, secretary, department of investment and public asset management (DIPAM).

Air India’s debt was Rs 61,562 crore on August 31, primarily raised on sovereign guarantees to fund its losses. The airline’s accumulated losses at the end of March stood at Rs 83,916 crore. After the deal, the larger part of the debt and assets will be transferred to a special purpose vehicle known as Air India Asset Holdings Ltd. Pandey said the debt that the government is taking on will be retired. Lenders will not have to face a haircut as they are protected by sovereign guarantees. .. The assets will eventually be monetised.

Heavy rainfall expected to continue over Hyderabad today.

Hyderabad to continue receiving rainfall, according to the India Meteorological

Department (IMD).

Heavy rain is expected to continue over Hyderabad on Saturday, the city’s mayor warned, as Telangana’s capital, on Friday, witnessed showers which resulted in at two least people being washed away. “Heavy rainfall is expected to continue over the city. Monsoon emergency teams are on the field. Citizens are advised to stay indoors unless needed. Dial @GHMCOnline control room on 040-21111111, 040-29555500 for any rain-related issues and assistance,” Greater Hyderabad Municipal Corporation (GHMC) mayor Vijayalaxami Gadwal tweeted.

Almost all the areas under GHMC, Rangareddy and Medchal-Malkajgiri districts including Begumpet, Ameerpet, Somajiguda, Banjara Hill and Jubilee Hills, Rajendarnagar, Shamshabad, Tolichowki, Saroornagar, Kothapet, Meerpet, Peddamberpet, Balapur, Moghalpura, old Malakpet, Saidabad, Dilsukhnagar, LB Nagar, Mallapur, Nacharam, Habsiguda, Tarnaka, Sainikpuri, A S Rao Nagar, ECIL, Kushaiguda, Charminar, Chaderghat, Amberpet, Nampally,

India, UK decide to facilitate travel between two countries.

Britain had on Thursday decided to recognise India’s vaccination certification system after prolonged consultations between the two nations.

External affairs minister S. Jaishankar spoke to his British counterpart Liz Truss just hours after Britain decided to allow Indians vaccinated with Covishield to visit the UK without quarantine from October 11.

The two foreign ministers agreed to facilitate travel between the two countries, in a sign that bilateral ties are once again on the upswing following the removal of the irritant.

Just days after imposition of reciprocal measures by India from October 4, Britain had on Thursday night decided to recognise India’s vaccination certification system after prolonged consultations between the two nations.

“Good to talk to UK Foreign Secretary @trussliz. Agreed to facilitate travel between our two countries. This will help to implement the Roadmap 2030,” the external affairs minister tweeted.

From October 11, Indian travellers who have received both doses of Covishield or another UK-approved vaccine at least 14 days before arrival in the UK can travel without having to quarantine; will not be required to take a pre-departure test nor take a day 8 test following their arrival.

Earlier on Thursday evening, in an indication of things to come, India had said it was “hopeful” of a resolution of the vaccination-related travel restriction issue with the UK just days after New Delhi retaliated and imposed reciprocal regulations on British nationals arriving from the UK to India from October 4.

Britain had last month recognised Covishield as an approved vaccine in an official travel update but had given no relief for Indian travellers arriving in the United Kingdom from October 4 who have received their two doses of the Covishield vaccine in India, with the British authorities indicating Britain has certain concerns about India’s vaccine certification process.

Andhra Pradesh government all set curb fiddling at fuel outlets.

A majority of fuel stations use self-destructive pulsars in nozzles to dispense fuel as they are tamper-proof.

Following a recent finding of filching of nearly 30 ml fuel for every litre sold to the consumer by using manipulative software in Telangana state, the Andhra Pradesh government has decided to take up a special drive at fuel retail outlets to find out and curb such illegal practice shortly.

AP has 3,878 fuel retail outlets run by oil companies like IOCL, HPCL, BPCL, Reliance, Essar and others and about 20,000 dispensers. Gilbarco Veeder-Root is the major supplier of fuel dispensers.

Though the company-owned fuel retail outlets avoid fraudulent practice, private agencies which take such outlets on lease, resort to short delivery of fuel ranging from 10 ml to 30 ml per litre by tampering with the motherboard of fuel dispenser with integrated chips to manipulate the software programme.

Legal metrology sources say that Dubai-based masterminds fix the nozzle by using software in such a way that it can be operated by remote control. The owners of on-lease fuel stations fix the mechanism to one or two fuel dispensers at the bunk. They instruct the workers to direct vehicles to such fuel dispensers so that they can resort to short delivery of fuel.

Sources say that the legal metrology authorities are getting ready to catch such illegal practices. They say that it is mandatory to fix certain equipment to prevent short delivery of fuel.A senior official from the legal metrology department said, “We are going to take up special drive on fuel stations to find out any fraudulent practice of short delivery of fuel very shortly. A majority of fuel stations use self-destructive pulsars in nozzles to dispense fuel as they are tamper-proof. Our task is to find those who fix non-destructive pulsars and make them replace them with self-destructive pulsars to ensure accurate dispensing of fuel as per display.”

Nobel Peace Prize to journalists is acknowledgement of challenges to the profession

Ressa and Muratov have spoken truth to power, and shone a light in areas that their governments would rather leave shrouded in opacity.

Too often, in recent times, there has been a tendency among the powers that be in many countries to confuse order for peace, harmony for freedom. Proto-authoritarian governments have a tendency to attack those that ask questions of them: Sometimes, they literally shoot the messenger. In this context, the decision of the Nobel committee to award the peace prize to Maria Ressa and Dmitry Muratov “for their efforts to safeguard the freedom of expression, which is a precondition for safeguarding democracy and peace”, is an acknowledgement of the challenges of, and threats to, journalism today.

Ressa and Muratov have spoken truth to power, and shone a light in areas that their governments would rather leave shrouded in opacity. In 2012, Ressa founded Rappler, a digital media company that has focused on investigative stories on the severe rights violations and killings by the Rodrigo Duterte regime in the Philippines. Muratov has been a free speech campaigner in Russia for decades. He is

editor-in-chief of Novaya Gazeta, one of the few national newspapers that has extensively reported on government corruption and state over-reach under Vladimir Putin.

Journalism has been an embattled profession for some years now. Even in democracies, those asking questions — doing their job — are routinely targeted and villainised. That the Nobel Prize for peace has recognised the importance of the Fourth Estate in protecting democracy, and holding governments to account for the rule of law, is welcome and encouraging. Yet, the accolade is bittersweet. Telling truth to power, and making sure the voices of the powerless are heard, is a profession and a vocation that should be a normal and routinised part of every society. That doing the job is now, in large parts of the world, something that requires courage; that it is a battle for peace and justice that also invites a prize, is poignant.