Monday, February 5, 2018

Status quo on rate likely but RBI tone may be slightly hawkish on Feb 7: BofA-ML

After Budget 2018, all eyes are on RBI monetary policy scheduled to be released on February 7. Economists largely expect status quo on policy rates but key to watch would be the commentary.

According to a majority of economists, RBI may start hinting about rate hike in forthcoming policies in line with a tightening global interest rate cycle.

"We continue to expect the RBI to persist with its slightly hawkish pause in its Wednesday policy, from February, to err on the side of caution," Bank of America Merrill Lynch said in its research note.

"That said, falling onion prices, after tomatoes, support our call that inflation risks are overdone," it added. In fact, the government has reportedly removed the US$700/t minimum export price for onions.

Inflation is seen cooling to 5 percent in January from 5.2 percent in December with the vegetable price spike expectedly reversing, according to the research house.

December inflation actually printed a benign 4 percent, well within the RBI's 4-6 percent inflation mandate, adjusted for the onion and tomato price spike.

CPI inflation for January will be announced on February 12, 2018.

Fundamentals - weak growth, tight M3, a possible La Nina monsoon year this year - do not support a higher inflation outlook, looking through base effects, according to BoAML.

It expects the RBI MPC to look through base effects that will drive up growth, credit and inflation in mid-2018.

Although growth will pick up to 7.5 percent in the April-September quarters, on base effects of demonetisation/GST, it should slip to 7 percent in second half of FY19, it said.

While inflation will jump to 5.4 percent in April-June, which is spooking some in markets, this emanates from the base effects of low 2.2 percent April-June 2017 inflation, it added.

Finally, it thinks that the macro risks in the G-sec market are overdone with the RBI stepping up durable liquidity/reserve money injection to USD 27 billion (USD 30 billion BoAML estimates) from barely USD 4 billion in end-November. Still, markets will look to the RBI policy on Wednesday for confidence building measures, the research house said.

On balance, BoAML expects the RBI to cut 25bp in August if the La Nina dampens agflation.

Its oil analysts also expect oil prices to come off by 10 percent to USD 62 a barrel by December 2018. Not surprisingly, core inflation (ex food, fuel and HRA) is hovering about a reasonable 4.2 percent. That said, it does worry poor rabi sowing in the interim.

Although Budget 2018 has raised minimum support prices (MSP), the inflationary impact will likely be limited as the revised MSPS are still below market prices in many cases, it feels.moneycontrol

Need to expedite public services for higher growth, says FM

Expediting public services and ensuring fairness in procurement will supplement rapid economic growth in the South Asian region including India, Finance Minister Arun Jaitley said today.

The pick and choose system in public procurement, he warned, leads to unfairness and serious allegations of corruption and nepotism.

Speaking at the South Asia Region Procurement Conference here, Jaitley said: "Countries across the world, and we in India, have have seen this evolve administratively within the governments and jurisprudentially when it came to matters of procurement.

"When it came to matter of awarding largesse, contract, public private partnership itself, there had to be procedural fairness that state had to follow."

Procedural fairness would always ensure that it could eliminate all elements of nepotism, favouritism and ensure transparency, he added.

"This is the region (South Asia) where the fastest growth in the world is taking place and therefore this is the region where delivery of public services in the years to come really has to be expedited and this subject would be of key importance in this region itself," Jaitley said.

The society has increasingly moved towards absence of any form of flexibility with regard to public procurement, he said.

"And therefore each state now have formulated its own sets of regulation, and its own sets of rules as to how procurements are to take place," he said.

Speaking on the occasion, Expenditure Secretary A N Jha said that currently, average clearing of due against public procurement is 7 days.

"We hope to reduce this average further in the future," he said.moneycontrol

RBI Policy: MPC may keep policy rate unchanged at 6%; owl may sound hawkish

Urjit Patel, Governor of the Reserve Bank of India (RBI), and his five colleagues on the Monetary Policy Committee will not find it too hard to keep the key policy interest rate unchanged at the upcoming policy review on February 7.

The 2-day deliberations on February 6 and 7 by the MPC on the repo rate decision are expected to remain tilted towards a pause mode, keeping the near term outlook hawkish.

However, they may raise rates later given the risks of higher inflation with fiscal slippages and higher food prices with the government planning to increase the Minimum Support Price (MSP).

In the Budget last week, the government promised to ensure MSP of key crops at 1.5 times the cost of production. This could mean at least a 50-70-basis-points increase in the headline inflation number.

While banks and bond markets have already signaled the end of the interest rate easing cycle, the MPC may keep the repo rate unchanged at 6 percent.

Inflation risks

Although, experts suggest the inflation-wary RBI, is likely to flag both factors -- risk of higher MSP and slower fiscal consolidation -- as a medium-term risk to inflation.

Saugata Bhattacharya, Chief Economist of Axis Bank said, "All the risks that the RBI had listed out (in December) still remain. Also, fiscal slippages that we may see are not significantly alarming, so that may not change things for the central bank. They will mention the risks, even more heightened now that the commodity prices are much beyond what they were in December. So the tone will be hawkish..."

With the rise in crude oil prices, coupled with a rise in prices of vegetables, India’s consumer price index (CPI) or retail inflation shot up from just under 2 percent in June 2017 to a 17-month high of 5.21 percent in December.

The government has said the fiscal deficit in 2017-18 will be 3.5 percent, higher than the budgeted 3.2 percent at the start of this fiscal, which is seen as a negative by the bond and equity markets, and already reflected in higher yields and falling stock prices in the wake of the Budget.

End of lower interest rate regime?

Despite the easing of interest rate cycle almost nearing its end, Bhattacharya ruled out the possibility of RBI's shift of 'neutral' stance to 'restrictive' as "inflation may come down around June, and GDP growth is still low".

Keki Mistry, Vice chairman and CEO of largest private home financier HDFC, said, "Clearly, rates have bottomed out but I don’t see rates increasing in a hurry. They will remain static for the next 3-4 months and a host of factors that are not under our control will determine the way forward."

He added that the stance may change if there is a big slippage in fiscal deficit "though, I do not expect it to happen".

The central bank, in its last policy review, had warned about inflation remaining elevated, causing numerous market participants to factor in a rate hike sooner rather than later. Most experts don’t see the rates going into the low interest rate regime any time soon.

However, the optimistic Finance Minister Arun Jaitley, in an interview post Budget said the price of crude oil is an unpredictable factor, and conventional wisdom doesn’t do much good when it comes to predicting where it will go.

Although the owlish RBI may not be as optimistic, they may not be in a position to show tough love to government for now and keep the rates unchanged at 6 percent for now.moneycontrol

Sunday, February 4, 2018

Investors could lap up ULIPs to skirt LTCG tax: Morgan Stanley

#Business #EconomyWith the Budget spooking the market sentiment with the 10 percent long-term capital gains tax on equities gains, American brokerage Morgan Stanley has opined that life insurance products, particularly Ulips could be relatively attractive from a medium-to-long-term.

The Dalal Street has been bleeding in since the Budget announcement, after the finance minister sought to reintroduce the long-term capital gains (LTCG) tax on equity investments at 10 per cent on profits in excess of Rs 1 lakh.

It also has slapped a 10 per cent distribution tax on long-term capital gains from equity mutual funds. That apart there is also a dividend distribution tax at the hands of the receiver.

While on the day of the Budget, the market was on see-saw ride and closed marginally down, the next day (on Friday), it saw the worst plunge since November 2014 with a massive 2.3 per cent drop.

"We believe against the given backdrop, life insurance products, particularly Ulips (unit-linked insurance plans) could appear relatively attractive from a medium- to long-term perspective,” Morgan Stanley said in a weekend note.

"Taxation of insurance products is governed by section 10d (of Income Tax Act), where the income is tax-free in the hand of the investor at the time of withdrawal.

"We await the Budget fine-print for further clarity, but if the above details are accurate, it should benefit private players like ICICI Prudential Life and HDFC Life," it said.

Meanwhile, mutual fund experts are of the opinion that the taxation move on equity gains as well as on dividends from mutual funds could pose a small hurdle for investment flows into MFs.

But they warned that the move could impact long-term investments in the segment and said government should look at the possibility of people moving into Ulips to avoid the tax.

The benchmark Sensex plummeted 840 points last Friday -- its biggest single-day fall in two-and-a-half years -- while the Nifty tanked below the 10,800-mark as the sell- off continued for the second straight day after the Budget.moneycontrol

HPCL head to retain designation if ONGC follows Coal India model

Hindustan Petroleum Corp Ltd (HPCL) Chairman and Managing Director Mukesh Kumar Surana will continue to hold his designation if the firm's new promoter, ONGC is to follow the Coal India Ltd-model for governance of subsidiaries.

ONGC last week completed acquisition of government's 51.11 per cent stake in HPCL for Rs 36,915 crore.

HPCL is now a subsidiary of ONGC and it has been speculated that Surana will lose the Chairman's tag and would be reduced to Managing Director who would report to ONGC Chairman and Managing Director.

Industry sources said this situation can be completely avoided if ONGC follows the Coal India Ltd's (CIL) governance model.

CIL, the world's largest coal producer, is the holding company whose board is headed by a Chairman and Managing Director.

It has eight subsidiaries like Eastern Coalfields Ltd and Bharat Coking Coal Ltd, all of whom have a board headed by Chairman and Managing Director.

The Chairman and Managing Directors of the subsidiaries report to CIL head.

Sources said if this model is followed, Surana will continue as Chairman and Managing Director of HPCL who would report to ONGC head Shashi Shanker.

Prior to the stake sale, the government made it clear that HPCL would continue to be a central public sector enterprise (CPSE), retaining its separate identity and brand and will be independently run by its board.

The alternate governance model has been thrown just as a large section in ONGC feels that HPCL should be governed on lines of the company's other subsidiaries like ONGC Videsh Ltd, which have an independent board and a Managing Director or CEO as heads.

These heads of subsidiaries report to ONGC Chairman and Managing Director.

Last month, ONGC Chairman and Managing Director Shashi Shanker had stated that HPCL is "a good, professionally-run company and will continue to remain so".

Sources said ONGC is likely to revamp HPCL board in coming weeks.

Currently, HPCL board has four functional directors before the Chairman and Managing Director. It also has two government directors on board and six independent directors.

ONGC, they said, may look at nominating one or two of its directors on HPCL board.

Presently, ONGC has two major subsidiaries, ONGC Videsh Ltd and BSE-listed Mangalore Refinery and Petrochemicals Ltd (MRPL).

Both OVL and MRPL have Manging Directors and CEOs as head who report to ONGC Chairman and Managing Director. On both the boards, ONGC directors have presence.

OVL Managing Director is a special invitee on ONGC Board.

Sources said following the CIL-model of governance would save Surana, who is senior to Shanker, the blushes of a designation downgrade.moneycontrol

Saturday, January 14, 2017

ICICI blocks PhonePe transactions in sign of banks moving to protect payments turf

Mumbai: ICICI Bank Ltd has blocked transactions on payments app PhonePe in at least the second such instance of a commercial bank trying to protect its turf against non-bank mobile wallet and payment companies. PhonePe is a unified payments interface (UPI) app which works on the ecosystem created by the National Payments Corp. of India (NPCI).

On Saturday, PhonePe’s co-founder and chief executive officer Sameer Nigam took to microblogging site Twitter to allege that ICICI was blocking transactions since Friday. In a series of tweets, he said that ICICI was blocking “Definitely on purpose! Over 10x txns failed. Bank is not reversing the block.”

An email seeking comment was sent to ICICI Bank late on Saturday night. This story will be updated when the bank responds.

“We are waiting for an actual confirmation from ICICI through either NPCI directly or through Yes Bank, but we have no official intimation from any party,” Nigam told Mint. Yes Bank is a UPI partner of PhonePe.

Infosys co-founder Nandan Nilekani, who currently serves as an advisor to the NPCI and has overseen the development of the Unified Payments Interface (UPI), declined comment.

This is the second instance of an incumbent getting nervous over a disruptor. On 4 January, CNBC-TV18 reported that State Bank of India has blocked net banking transactions with e-wallet companies, although it allowed customers to top their mobile wallets with debit and credit cards. At that time, SBI chairman Arundhati Bhattacharya had said that service was blocked because of security concerns.

“Wallets don’t have proper risk mitigation measures in place and also don’t ensure that one mobile number can use only one wallet. We have seen multiple cases of customers opening multiple wallets on a single mobile number and transferring the money from the bank account to these wallets and then transferring this to non-KYC complaint accounts,” said a senior SBI official.

Since the government decided to ban Rs500 and Rs1,000 currency notes on 8 November, it has tried to promote cashless transactions in a big way from asking banks to waiving off debit card transaction fees to offering discounts for using digital payments to buy fuel.

ALSO READ | Demonetisation is a major assault on poor: Economist Pranab Bardhan

The biggest beneficiaries of this move have been digital payment firms and wallet operators. Paytm, for instance, witnessed a jump from 115 million users to 150 million users in the first week after demonetisation, according to stats shared by the company.

It is clear that banks aren’t enthusiastic about the increasing reach of such non-back payment firms.

“There is a certain degree of apprehension about KYC (know your customer) standards of digital payment app of non-banks. Currently banks and wallets are subjected to two different regulatory and security standards. While banks follow the two factor authentication, wallets have a single pin access,” said a senior official of one of the top three private sector banks on condition of anonymity.

“The wallet architecture is currently not interoperable which means customers using bank wallets cannot pay to those using wallets of other digital payment companies. So, why should banks allow these companies to have a free ride by transferring funds from their account to the wallet,” this person added.

The rise of these firms has also come at the cost of UPI, whose adoption was lukewarm at best during the initial few weeks after demonetisation. At the time, all the big banks were aggressively promoting their own net banking apps and in-house digital wallets instead of promoting UPI.

ALSO READ | What’s ailing UPI and how to fix it

That was because banks didn’t have enough incentive to promote UPI and disrupt their own e-payment services, said experts. Simply put, banks don’t get fees or commissions from UPI transactions originate from the UPI platform, unlike debit and credit cards, and net banking.

To address some of the initial concerns and boost adoption of UPI, the NPCI in late December launched Bharat Interface for Money (BHIM).

Now, with the focus slowly shifting to UPI (where a user can link a bank account to any app—even that of a different bank, or of a third party), the competition has just got tougher for banks as smartphone users switch to these services instead of cash and cards.

Foreign holding in bourses: Sebi notifies rules

Regulator Sebi notified rules allowing foreign investors to own up to 15 percent stake in an exchange, a move that is expected to help attract more overseas funds.

Currently, foreign entities can hold only up to 5 percent in an exchange.

Sebi has amended regulations to increase the limit of shareholding of foreign entities like stock exchange, depository, banking and insurance company and commodity derivatives exchange in Indian stock exchanges to 15 percent, from 5 percent.

Now, these entities "may acquire or hold, either directly or indirectly, either individually or together with persons acting in concert, up to 15 percent of the paid-up equity share capital of a recognised stock exchange", Sebi said in a notification dated January 12.

The move comes after Sebi board in September approved a proposal to this effect.

Already, a number of overseas investors have invested in leading exchanges NSE and BSE and the latest decision will help them enhance their exposure to the Indian market.

In July, the Cabinet had cleared the proposal to increase foreign shareholding limit to 15 percent in exchanges.

Finance Minister Arun Jaitley had made an announcement in this regard in his 2016 Budget speech.

"Investment limit for foreign entities in Indian stock exchanges will be enhanced from 5 percent to 15 percent on par with domestic institutions. This will enhance global competitiveness of Indian stock exchanges and accelerate adoption of best-in-class technology and global market practices," he had said.