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RBI cutting leverage ratio shows the direction, but there are more things to consider

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The RBI's latest monetary policy meeting was along expected lines with a 0.25 percent cut in repo and reverse repo rates.

However, the lack of any significant or concrete measure to contain the brewing liquidity crisis in the NBFC space has led to some disappointment (the stock market - Nifty 50 - closed 1.5 percent lower on the policy day).

Unless the rate cut of 0.25 percent and the previous two rate cuts of 0.25 percent each in February 2019 and April 2019 (amounting to a total of 0.75 percent) are completely passed to the end user, the RBI's decisions do not have much practical meaning. Till now, rates on new loans have fallen only by around 0.21 percent while rates on existing loans have increased by around 0.04 percent.

Banks and NBFCs point to falling deposits and high costs of capital for their inability to price loans cheaper. If the deposit collection is lower, banks cannot reduce deposit rates, which implies they will not be able to reduce lending rates. Similarly, if their cost of borrowing funds from the market is high (due to the ongoing liquidity crisis, cash is at a premium), they cannot lend to end consumers at lower rates. The RBI needs to work closely with them to solve this problem first.

The RBI also changed its monetary policy stance from neutral to accommodative, given the growth slowdown being currently witnessed. This is a good signal which shows the RBI's bigger fear is the falling economic growth, as compared to inflation (which has been low for quite some time and reasonably well-contained) at least for the foreseeable future.

Another important measure taken on June 6 that was not a part of the main monetary policy report was the RBI’s guidance to target 4 percent leverage ratio going ahead (against 4.5 percent currently) for domestic systemically important banks (like HDFC Bank, ICICI & SBI) and 3.5 percent for other banks.

The leverage ratio is defined as the ratio of a bank’s tier 1 capital (core assets such as equity capital and disclosed reserves) by its total consolidated exposure. A cut in leverage ratio implies that banks can lend more on the same capital base.

Given that current total consolidated exposure for the banking sector is around Rs 96 lakh crore, this decision gives the ability for lending to increase by approximately Rs 50,000-75,000 crore for the entire banking system as a whole.

The RBI's intention is that this excess money will reach sectors that are currently starved of liquidity especially MSME businesses. But, it remains to be seen how money much actually circulates into the economy.

On the whole, the RBI’s policy decisions were a step in the right direction. Now, it is time their benefit reaches the end customer.

TOT: Government mulls reducing lease period to 20 years

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The government may reduce the lease period for projects under the toll-operate-transfer model to 20 years from 30.

The TOT model was implemented in 2016 to monetise publicly funded highways.

The move needs the approval of the Union Cabinet and an NHAI official told the paper that it has initiated the process.

The first round of TOT auctions fetched the government more than Rs 9,000 crore. However, the second auction was cancelled due to a lukewarm response.

Industry experts welcome RBI rate-cut, all eyes on Budget 2019

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The RBI's Monetary Policy Committee meeting has been underway since June 4, and the decision has been made. For the third time in a row now, the RBI has cut rates by 25 basis points. This was widely expected, given the slowing economic growth along with rising global uncertainty. The MPC has also decided to change their stance from neutral to accommodative while stating that the RBI expects the government to remain broadly fiscal-prudent.

Amit Gupta, Co-Founder and CEO at TradingBells, says, "The RBI has announced a rate-cut of 25 basis points fuelled by a stable government, sharp decline in crude oil prices and a slowdown in the economy. The RBI changed its stance to accommodative, and a possibility of further rate-cuts this year remains open (we can expect a further rate cut of 50 to 75 basis points in 2019)."

"Real estate, NBFC, Banking, and Auto sectors would be the key beneficiaries of this rate cut where a temporary uptick can be seen in many stocks but quality stocks will continue to outperform," he added.

Shishir Baijal, Chairman & Managing Director – Knight Frank India, stated that the policy rate cut was likely to provide respite to the real estate sector.

"The first rate-cut in the newly-elected government’s regime is certainly a welcome step, especially for the real estate sector. The benefit of lower policy rate in terms of better credit cost as well as higher liquidity will hopefully be transmitted further by banks to NBFCs as well as home buyers," he said.

Baijal goes on to say, "The change in policy stance from neutral to accommodative is a welcome shift as it lays ground for further rate cuts. The cash-crunched NBFCs will definitely benefit from inflow of capital which will in turn benefit developers as well as home-buyers. NBFCs have been facing a liquidity crisis and this has negatively impacted their loans to real estate, including construction finance. Besides capital infusion into this important financier segment, this rate cut will also improve the home-buyers affordability and stimulate housing demand at this critical juncture.”

Romesh Tiwari, Head of Research – CapitalAim says, "25 basis point cut is in line with our minimum expectation and was already discounted in the market. The downward revision of GDP growth reflects concern over slowdown and supports shifting of RBI stance to accommodating policy. We expect banking shares to remain strong in the midterm while NBFCs may further correct before consolidating."

"Largely market will not be driven by this news. Current valuations do not justify Nifty and Sensex and are due for a correction soon. Now all the eyes will be on the budget session which may bring some big measures for revitalizing the economy. Short term target for Nifty is 11,880 and breaking below that may take the Nifty 11,660 levels in the medium term," he said.

Naveen Kulkarni, Head of Research, Reliance Securities says, "While the rate cut of 25 basis points was in line with our expectation, concerns over growth and challenges regarding liquidity continue to linger. The market is not necessarily cheering the rate cut as it had already factored in and something more was expected."

"RBI reduced repo rate by 25 bps as expected. The change in stance to ‘accommodative’ was a bit of a surprise. Debt markets will take this as a significant positive move though most of the rate cut cycle is probably over. The tone of the RBI policy was dovish and highlights the concerns on growth. We maintain our call for another 25 bps rate cut in August factoring in the benign inflation trajectory and the growing concerns on growth. However, transmission of the rate cuts will be key and the RBI should aim to maintain the liquidity, at least, at neutral over the next few months," said Suvodeep Rakshit, Sr. Economist, Kotak Institutional Equities.

Arvind Chari, Head –Fixed Income & Alternatives , Quantum Advisors Pvt Ltd said, "The Repo Rate cut of 25 bps was as expected. That it was unanimous, in a 6-0 decision is noteworthy. What is of most significance through for the bond markets is the change in stance to accommodative. This is a clear indication that the RBI is deeply concerned about growth and is prepared to use interest rates and liquidity to boost demand."

He also says, "Bond yields may have further room to drop as the markets will except further rate cuts especially another 25 bps in August to take the Repo rate to 5.5%. 10 year bond government bond yield at around 6.9%, is still attractively valued as more rate cuts gets priced in. We expect another rate cut in August but will caution against too much exuberance."

The GDP target has been lowered for financial year 2019-20 from 7.2 percent to 7 percent. The RBI also noted in its policy statement that consumer inflation for the first half has been pegged at 3-3.1 percent.

US decision to withdraw GSP benefits violates global trade rules: Experts

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The US' decision to withdraw incentives for Indian exporters violates global trade rules as it discriminates among developing countries, trade experts say. The US has decided to roll back export incentives provided under Generalised System of Preferences (GSP) from June 5. The move is expected to impact India's exports wroth USD 5.6 billion under this programme.

Dhruv Gupta, Partner (International Trade), Lakshmikumaran & Sridharan, said that irrespective of the eventual trade impact, the US' action of withdrawal of benefits against India is at loggerheads with its WTO obligations.

"It goes against the fundamental principle of non-discrimination because it discriminates between developing countries," Gupta said in a statement.

The decision also undermines the objective recognised in the preamble to the World Trade Organization (WTO) agreement that there is a need for 'positive efforts' to ensure that developing countries secure a share in their growth in international trade commensurate with the needs of their economic development, he said.

Industry body CII too has stated that this decision has been taken in "haste" and would hurt domestic exporters.

It has expressed hope that both the US and India would discuss the matter and find an amicable solution to this issue.

Federation of Indian Export Organisations (FIEO) said that in respect of products having GSP benefits of 3 per cent or more, exporters may find it difficult to absorb the GSP loss.

The sectors which would be impacted include most imitation jewellery, leather articles, pharmaceuticals, chemical and plastics, basic and processed agri goods, it said.

"Government should provide some supports to products where GSP loss has been significant so that the market is not lost. Extension of rebate of state and central tax levies scheme on such products on exports to US will be beneficial," FIEO President Ganesh Kumar Gupta said.

As many as 1,900 Indian products from sectors such as chemicals and engineering get duty free access to the US market under the GSP, introduced in 1976.

The US has alleged that India is not providing equitable market access to its companies and has raised serious concerns over capping of prices of certain medical devices. It is also seeking market for its dairy products.

India's May gold imports jump 49% on festive demand: Government source

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India's gold imports in May jumped 49% from a year earlier to 116 tonnes as a correction in local prices during a key festival boosted retail demand, a government source said on June 4.

Higher gold imports by India, the world's second-biggest consumer of the precious metal, could support global prices that are trading near their highest level in three months.

The country's gold imports in value terms rose to $4.78 billion in May from $3.48 billion a year ago, a government official said, who was not allowed to speak to the media.

India had imported 78 tonnes of gold in May 2018.

Ficci hails govt for extending PM-KISAN scheme to all farmers

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Industry body Ficci Saturday hailed the Centre's decision to extend benefits under PM-KISAN scheme to all farmers, saying Indian agriculture is yet to realise its full potential. The government Friday decided to extend the PM-KISAN scheme to all 14.5 crore farmers in the country costing Rs 87,000 crore a year and also announced over Rs 10,000 crore pension scheme for five crore farmers, thereby fulfilling the BJP's poll promise.

The industry body also congratulated Prime Minister Narendra Modi for a new pension scheme for five crore farmers as one of the first decisions of his new administration.

With agriculture as top priority, Ficci has been advocating the extension of PM- KISAN to all farmers in its 100 days agenda to government.

The government had announced Pradhan Mantri Kisan Samman Siddhi (PMKSS) in the interim Budget to provide Rs 6,000 per year to about 12.5 crore small farmers holding land up to 2 hectares.

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