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India's July petrol imports hit highest in at least eight years

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India's July crude oil imports declined from a year earlier, while petrol imports climbed to their highest since at least April 2011, data from the oil ministry's Petroleum Planning and Analysis Cell (PPAC) showed on Wednesday.

Crude oil imports into the world's third-largest consumer declined 1.2% from a year earlier to 19.34 million tonnes, but increased 14.6% from the previous month.

Petrol imports rose to 230,000 tonnes in July, the highest since PPAC data going back to 2011.

Government data published earlier this month showed sales of gasoline, or petrol, were 8.8% higher from a year earlier at 2.52 million tonnes.

LNG imports, meanwhile, fell to their lowest since February 2018 at 850,000 tonnes.

India's imports of crude oil have stalled in recent months, with both coal and liquefied natural gas (LNG) also soft. This could be attributed to Indian refiners adjusting to the loss of cargoes from Iran after the United States did not extend waivers to buyers of Iranian crude beyond the beginning of May.

Meanwhile, imports of oil products rose by about 9% from a year earlier to 2.81 million tonnes. Year-on-year exports fell 5% last month to 5.07 million tonnes, the data showed.

Exports in Naphtha fell to their lowest since October 2015 at 400,000 tonnes.

Free trade agreements under review

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The news comes when India is in talks for a Regional Comprehensive Economic Partnership (RCEP) which was proposed by the Association of South-East Asian Nations (ASEAN) as the biggest trade proposal. It has 16 participating countries and was expected to conclude this year.

The review will decide the future of RCEP along with other FTAs. The report pointed out that the government is also targeting to increase the share of manufacturing in the economy to 25 from about 16 percent (at current prices) by 2022.

Another reason to assess the current trade arrangement was given by tax authorities who have seen imports being brought from FTA route-- to save on raised custom duties. It sometimes beat the idea of tariffs discouraging import of certain goods. Moreover, imports from non-FTA nations could claim treaty benefits if got from the FTA route.

Large companies could have been violating these rules which undermines the swadeshi movement under Make in India.

This week, the Solvent Extractors’ Association of India had also filed a petition on behalf of Indian palm oil producers against increased imports from Malaysia hurting the domestic market. They claim that lower custom duties under the Comprehensive Economic Cooperation Agreement (CECA) have negatively impacted domestic production and sales. A probe has been initiated after the complaint.

The review will help the country implement better trade pacts if they hurt domestic manufactures.

Developers urge higher cap in metros for affordable housing segment

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The National Real Estate Development Council (NAREDCO) has recommended to the ministry of finance that the upper price limit in the definition of affordable housing for metro cities be raised from the current Rs 45 lakh to Rs 1 crore, DNA has reported.

Since land and construction cost come at a premium especially in metros, the council has sought relaxation of the norms by amendments to the Real Estate (regulation and development) Act, 2016.

This imperative amendment would bring more locations and projects under affordable housing, benefiting investors, a NAREDCO spokesperson told the daily.

Confederation of real estate developers' associations of India (CREDAI) has also on its part recommended amendment of RERA in view of soaring property prices.

Currently, to avail credit subsidy benefits for affordable housing, a home must be priced at less than Rs 45 lakh and not exceed 60 sq metre carpet area or about 850 sq ft built-up area, including overall loading.

The affordable housing segment has seen rising demand which has been aided by lower goods and services tax (GST). As per a report by Livemint, this segment has emerged as the sweet spot for both builders and buyers, even in the current slowdown.

Fiscal stimulus plans face a revenue roadblock

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With the Reserve Bank of India easing monetary policy, the theatre of action seems to have shifted to Delhi, with industry lobbies and a section of economists demanding a fiscal stimulus to boost the sagging fortunes of the economy. However, revenue constraints may limit the government’s ability to spend beyond what has already been proposed in the Budget, unless it resorts to extra-budgetary methods to boost public sector spending.

The latest data from the Controller General of Accounts (CGA) shows that the gross tax collections of the Union government in the quarter ended June grew at 1.4 percent over the year-ago period, the slowest pace since the slump following the global financial crisis in fiscal 2010. In the quarter ended June 2009, tax collections had fallen by 11.4 percent over the year-ago period. The last quarter was the worst June quarter in terms of tax collections since 2009.

The year-on-year growth rate required in the remaining part of the year (Jul-Mar) to meet the budget estimate for fiscal 2020 is now 22 percent. But even if it misses the target for the year, it does not necessarily mean that the deficit target would be missed, at least on paper. In past years as well, the government has missed revenue targets, and often made up the shortfall to a great extent by delaying payments and through off-budget financing.

However, it is worth noting that such methods are not sustainable, and over time, the government’s auditor (CAG) as well as the government’s creditors (bond markets) have become extremely wary of the government’s off-budget financing methods. They may not continue to look the other way as such accounting tricks are deployed each year to make deficit figures appear respectable. Already, speculation about a stimulus package has sent bond yields soaring (bond yields are inversely related to bond prices). If yields continue to rise, this could raise the government’s borrowing costs significantly, and negate the impact of a stimulus package.

The core challenge facing India’s public finances is its broken revenue generating system, which cannot be fixed without structural reforms. And the first item on the reform agenda must be the goods and services tax (GST).

The shortfall in the centre’s GST collections was as high as 22 percent in the last fiscal year, provisional data from CGA shows. Given the trend in monthly collections so far, the prognosis for GST collections does not appear bright for fiscal 2020 as well.

Despite pick up, GST collections remained below the required monthly rate in July

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Hailed as the single biggest tax reform when it was implemented in July 2017, GST was expected to boost indirect tax revenues and improve compliance even while adding to growth

After two years of botched implementation, GST has failed to live up to its promise. A recent Comptroller and Auditor General (CAG) report shows how revenues have in fact slowed down after the introduction of the new tax.

The government’s revenues from goods and services (excluding petroleum and tobacco) in fiscal 2018, the first year of GST, fell 10 percent over the year-ago period (after these goods and services were subsumed under GST), the auditor’s report showed. With this, the growth in aggregate indirect taxes slowed down to 5.8 percent in fiscal 2018 from 21.3 percent in fiscal 2017.

While economic slowdown and GST rate cuts may partly explain the lacklustre growth in indirect tax collections, according to some economists, a complex structure may have also contributed to the disappointing revenues collected under GST. In an interview to Mint, the former chief economic advisor to the finance ministry, Arvind Virmani argued that a simpler single rate structure (along with exemptions and surcharges) would have simplified the compliance process and made tracing taxable transactions easier.

The complexity of GST returns that have to be filed by GST-payers and the technical flaws in the GSTN system has meant that tax compliance has not increased meaningfully in the post-GST era, the CAG report pointed out. The promise of a simplified tax compliance regime continues to remain elusive, it further added.

GST has not seen any significant improvement in tax compliance

Capture2

The complex structure with many tax rates has made the system of input tax credit (ITC) --- the bedrock of the GST reform --- susceptible to fraud. Input tax credit is a refund businesses can claim for GST already paid on the goods and services purchased as business input. But a complicated tax rate structure with different tax rates applied to different goods and services (and in some cases different rates applied to the same product or service based on material or unit value) along with a complex set of rules has introduced several loopholes in the system.

For instance, GST rules allow real estate companies to choose between a lower rate of 5 per cent without input tax credit or a higher rate of 12 per cent but with input tax credit. Real estate companies can choose different options for different buildings (or towers) even within the same real estate complex provided they are registered separately under the Real Estate (Regulation and Development) Act. As a Business Standard report pointed out earlier this year, this allowed some real estate companies to game the system and claim higher input tax credit than they were entitled to, by opting for 5 percent tax on one tower and claiming refund for GST paid on the entire construction cost by opting for 12 percent GST on other towers.

Other reports of ‘briefcase firms’ have emerged which suggest that fake companies have been floated to issue fake invoices and fraudulently claim input tax credits.

When GST was first rolled out on July 1, 2017, it was visualized along with a self-regulating system of invoice matching, which was crucial for determining the final input tax credit (ITC) in a fair and correct manner. As per the original design, input tax credit was to be generated in the GST portal after reconciling invoice-wise details from returns filed by sellers with those filed by purchasers. But even after two years, such a system-verified and automated process has not become fully functional, the CAG report noted, underlining that this system is necessary to realize the benefits of the tax reform.

“It (automated invoice matching) would protect the tax revenues of both the Centre and the States, it would lead to proper settlement of IGST (Integrated Goods and Services Tax) and would minimise, if not eliminate, the tax official-assessee interface," the report said. “In fact, even “assessment" in the sense understood in the manual system may no longer be necessary (returns themselves can be generated by a system that matches invoices); and cases of evasion etc. can be traced by applying analytical tools and AI to the massive data that crores of invoices generate."

Unsurprisingly, the current system has led to tax leakages and errors in computation of tax revenues of both the Centre and the states. But it has also led to improper settlement of the IGST (paid for inter-state transactions), the auditor pointed out.

During fiscal 2018, Rs 2.12 trillion of IGST balance was unsettled due to incomplete information in the ledgers. This reflects delays in settlement of IGST to states. Owing to the huge unsettled balance in IGST, the GST Council in its 25th meeting held in January 2018 recommended advance settlement of Rs 35,000 crores to the Centre and the States on provisional basis, which left an unsettled balance of Rs 1.77 trillion. While the IGST funds are being transferred to states on an ad-hoc basis, these transfers are provisional in nature as the GSTN system has so far not allowed a calculation of the actual transfers that need to be made.

The CAG report also highlighted that during fiscal 2018, there was a shortfall of Rs 6,466 crores in transfer of GST compensation cess (meant for transfers to states) to the public account (where the government parks funds not belonging to it). The lower transfer to the public account inaccurately bumped up the government’s fiscal position at the end of the financial year.

 Capture4


If indirect taxes appear to be a mess, things do not appear bright on the direct taxes front either. While there was a spurt in the growth of direct tax collections after demonetisation, it slipped in fiscal 2019 according to the provisional tax receipt figures from CGA. The average growth in direct tax collections over the past five years was 12 percent compared to an average of 15 percent under the UPA II government (2009-2014).

Reforms such as the direct tax code which could have lent simplicity and stability to the direct tax system have remained pending for long years.

Unless the government reforms its tax structure to boost revenue collection, it will have to keep relying on off-budget funding or incur spending cuts. As a share of the budget estimate, the government’s spending in the first quarter of the current fiscal (quarter ending June) has already seen a sharp decline compared to the previous two years.

Government spent a smaller share of the annual estimated expenditure in Apr-Jun this year

capture 5

As the pressure to spend rises, and the government’s revenue projections become ever harder to achieve, would we witness new forms of tax adventurism once again?

'RBI policy to remain accommodative, more rate cuts likely in future'

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The Reserve Bank of India (RBI) policy stance is clearly pro-growth, which is critical to achieve the target of becoming a $5-trillion economy by 2025. Of late, the Indian economy has been going through a challenging phase. GDP growth, although still high in comparison to other major economies, has been falling short of expectations. Recently, the International Monetary Fund (IMF) cut the gross domestic product (GDP) growth forecast to 7 per cent from 7.3 per cent for FY20.

RBI itself has cut the GDP growth target to 6.9 per cent from 7 per cent for FY-20. It expects the first half of FY20 to clock growth of 5.8 per cent to 6.6 per cent and the second half to clock growth of 7.3 per cent to 7.5 per cent. But the risks are somewhat tilted to the downside.

The weakening of demand along with the liquidity crisis in non-banking financial companies (NBFCs) are the two biggest challenges right now, and the central bank has clearly focussed on these two issues. It raised the ceiling for banks' exposure to a single NBFC to 20 per cent of the bank’s Tier-I capital, from 15 per cent earlier. It also relaxed the definition of priority sector lending, so that banks can lend to those NBFCs that further lend to such sectors. RBI has also announced the setting up of a central payments fraud registry to track the systems for frauds. It is expected to come up with detailed guidelines by the end of August to tackle the NBFC crisis. These measures, taken to increase flows to NBFC, is credit-positive and should enhance lending.

The inflation is firmly below the target level of 4 per cent, but there are clear signs of decline in consumption. The private sector is still hesitant on committing capital expenditure. The global economic condition has also been unfavourable for quite some time. The uncertainties of Brexit and the US-China trade war are persistent, along with the political turmoil in the Middle East. In this backdrop, RBI has been taking proactive measures to spur demand growth. This was the fourth consecutive cut in the repo rate, which now stands at 5.4 per cent. The economy is expected to start coming back to its high growth path as the benefits of rate cuts are gradually passed on. And as the balance sheets of banks become cleaner, we believe that they will accelerate the passing on of rate cuts to consumers and businesses.

Given the global economic outlook and the challenges on the domestic front, the economy may take some more time to start performing as per expectations, and therefore the policy stance is expected to remain accommodative. The inflation outlook remains benign, and therefore one can expect more rate cuts in the future.

Government building consensus to announce relief measures for FPIs, NBFC sector

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The government is likely to come up with an announcement to provide some relief to FPIs and the NBFC sector.

A senior government official told Moneycontrol that the government is aware of the issue of surcharge on foreign portfolio investors (FPIs) and it is building a consensus on the issue.

The official said, "Some relief for FPIs on higher surcharge may be announced soon. We are trying to build consensus on relief for FPIs surcharge issue."

In her maiden budget, Finance Minister Nirmala Sitharaman had proposed raising surcharge on the super-rich. This surcharge also increased the tax burden on FPIs as most are organised as non-corporate entities such as trusts and associations where taxation is similar as for individuals.

The announcement made way for the bears to take hold of the market as the average market capitalisation of the BSE-listed companies fell from Rs 151.35 lakh crore on budget day, to Rs 138.37 lakh crore on August 5, wiping out Rs 12.98 lakh crore.

Some relief measures on sectors like the non-banking financial companies (NBFCs) would be announced by the government soon, the official said.

The official also said that relief for NBFCs along with measures announced by the Reserve Bank of India (RBI) for NBFCs are expected to have a multiplier effect on the economy.

On August 7, in its monetary policy, the RBI announced the setting up of a central payments fraud registry to track the systems for frauds and increasing exposure limits for lending banks to single NBFCs to 20 percent. The previous limit was 15 percent of the bank’s Tier-I capital.

The RBI also said that to boost credit flow to certain priority sectors, bank lending to registered NBFCs for on-lending to agriculture (investment credit) up to Rs 10 lakh; micro and small enterprises up to Rs 20 lakh; and housing up to Rs 20 lakh per borrower will be classified as priority sector lending.

Valuations for India have become a lot more attractive, says Dan Fineman of Credit Suisse

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Credit Suisse has upgraded Indian equities to 'overweight', up  from 'market weight'. Dan Fineman, co-head of equity strategy for the Asia Pacific region at Credit Suisse, shared the rationale behind this upgrade.

"India may be a relative outperformer rather than producing a strong positive return," Fineman said in an interview with CNBC-TV18.

“We are quite cautious on the region as a whole for the second half of the year. Valuations for the region as a whole are no longer cheap as they were,” he added.

“India though has some appealing features and I feel pretty confident it will outperform at least on the downside and might produce some absolute positive returns.”

According to him, valuations for India have become a lot more attractive.

“India tends to outperform in times of falling global interest rates and global monetary easing especially with the latest escalation of the trade war we probably will be seeing continued downward pressure on rates and easing from global central banks,” added Fineman.

Talking about the renminbi, he said, “I do not want to give a hard forecast but I will note that our economic team has calculated that if China were to try to offset all of the damage from the tariffs which Trump might be imposing in September on the remaining $300 billion worth of Chinese exports, the renminbi would have to go beyond 7.20/dollar to 7.25/dollar.”

About the MSCI India index, Fineman said, “We have an index target for the region as a whole of 2 percent for the second half of the year that was said before the latest escalation of the trade war; there is downside risk to that forecast.”

“India should do a bit better than the region as a whole. I do not think we can expect double-digit returns by any means, it would be too difficult of an environment unless we have some positive outcome on the trade war. We are looking more at something in the low single digits or mid-single digits,” Fineman added.

RBI policy: MPC unlikely to change stance to 'accommodative', says JPMorgan's Jahangir Aziz

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All eyes are on the Reserve Bank of India’s first monetary policy decision for FY20. Jahangir Aziz, head of EM economic research at JPMorgan, shared his expectations.

“We had been expecting a significant easing since December last year. We got one cut already done, we expect another cut this week and then followed by at least one more cut in the next round,” Aziz told CNBC-TV18.

With regards to a change in the RBI’s stance, Aziz said, “You are making way too much about the wording of the forward guidance being provided by the wording of the monetary policy committee (MPC). Most likely they will probably maintain a neutral language because moving to an accommodative stance would mean giving expectations to the market that there will be significantly more rate cuts coming down the road. My sense is that the MPC will not want to take that risk of providing that kind of an indication to the market.”

“I think it will provide forward guidance that there are no rate cuts to come but it is not the beginning of a significantly long easing cycle,” said Aziz.

Desalination: It is a big money game baby!

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How big is desalination in India?  That is hard to tell because one is confronted with two different sets of numbers.

One source is a document prepared by a Gujarat government brochure of 2017 inviting investors to build desalination plants in Bhavnagar and Mundra. It gives out data which many industry players believe is quite credible.  Of course, it must be admitted that ever since the preparation of this document, the ambitions of the state government have grown. The present chief minister talks about his state setting up 10 desalination plants.

Another good source is the Indian Desalination Association.  According to the latter, there could be more than 1,000 membrane-based desalination plants (the more popular technology) of various capacities ranging from 20 m3/day to 10,000 m3/day.

This flies in the face of figures given out by the Gujarat government document -- “As of 2013, India has 182 desalination plants operating majorly in western and southern parts and is expected to increase to over 500 by 2017.”  It is quite possible that the Gujarat government documents only lists large plants, and not experimental or small plants.

However, the government document does confirm that membrane based desalination plants are more popular – around 85% of the plants use this technology which is known to be 23% cheaper than the use of thermal technology. This document also talks about how many big players in India have been eyeing this sector – some names include Nirma, Gujarat Heavy Chemicals and Indian Rayon  -- to meet their captive requirement for water.

Desalination costs:

But why should companies opt for desal water? Simple. Desal water is cheaper than the water provided by the state for chemical process industries.  True, desal water is much more expensive than the natural water states get from aquifers, lakes and rain water that is stored.  But it is much cheaper than the exorbitant price tags state governments like to put on water for business or industrial use, hoping to use the additional money to cross-subsidise free water to vote banks.

In Mumbai, for instance, while the cost of fresh water supplied through pipes is just under 0.8 paise a litre, the price the government wants industry to pay the state charges industries is around Rs.4.8 per cubic metre (1,000 litres) for normal processing industries, but Rs 120 per cubic metre for industries where water itself is a raw material (bottled water, carbonated drinks etc) and for chemical industries. The latter comes to around 12 paise per litre.

This is significantly higher than cost of desal water (inclusive of interest and depreciation, but without including the cost of environmental damage and loss to sea life).

So, how much does desal water cost?

In July 2010, desalination cost around $1 per cubic metre. And given the exchange rate of Rs.50 per dollar then, the cost was 5 paise per litre.  But even then Igal Aisenberg, then CEO and president of Netafim, the world’s largest micro irrigation company did mention how “newer technologies have permitted this cost to come to under half-a-dollar per cubic metre.  We believe that these costs will go down further.”

This is confirmed by a recent (March 8, 2019) report by Bloomberg that the cost of producing one cubic metre of treated water could be around 50 cents. At today’s exchange rate (Rs.70=$1), that would come to around 3.5 paise per litre.

2019-07-27_desalination-costs-capex

A hint of corruption

And this is where one begins to suspect that the hype over desalination could have a lot to do with money.  Two factors point in that direction.

First, there is a lot of money involved in setting up projects for state and central governments.  The Gujarat government estimates the costs to be around Rs.387 crore for a 100 MLD (million litres a day) membrane-based plant  (and this is after capitalisation of five years of working capital requirement). True, there is a caveat that plant costs could vary, there has to be some excellent justification for the varying costs.

Yet, many of the desalination plants set up by private players for governments (they are invariably set up by private players in India) have a higher price tag.  For instance, the price at which Essel Infraprojects wants to set up a 100 mld desalination plant in Gujarat is expected to cost double this sum – Rs. 700 crore. Or consider Tamil Nadu’s plans to set up  two desalination plants at Nemmelli and Minjur, each of 100 MLD capacity, another 400 MLD capacity plant is being set up at Perur. These plants too are at significantly higher costs.  According to one media report, each 10 MLD desalination plant in “would cost around Rs 140 crore. The three plants will cost over Rs 420 crore.”

2019-07-27_desalination-costs

And the price at which Tamil Nadu procures desalinated water is well over 10 paise a litre compared to the cost of 3.5 to 5 paise a litre.  A five paise difference translates into Rs.50 lakh a day for a 100 MLD plant.  That translates into Rs.182 crore each year for each 100 MLD plant.  As the procurement prices increase, the numbers grow uncomfortably larger too.  When multiplied into the number of plants, the sums could be scandalous

Significantly, the Niti Aayog proposal mentions neither normative capital costs nor normative pricing for desal water.  As a think tank it should have done that as well.

In brief

Niti Aayog should have made a case for better metering, working out consumption estimates, making a case for preventing contamination of existing freshwater sources – rivers, ponds, lakes, the sea and even ground water.  It should have talked about ways to harvest water on a public-private-partnership basis. It ought to have made a case for pricing of water in a sensible but sustainable manner.

As had been pointed out by Madhav Gadgil in his report on environment in the Western Ghats of India, there are times when unscrupulous industrialists try to conceal effluent discharge by pumping it into the ground.  There are instances of the Central Pollution Control Board (CPCB) and its state affiliates actually ignoring enforcement of a zero discharge policy for all highly polluting companies. Niti Aayog should have put up a note on how to strengthen monitoring mechanisms – even using third-party inspections by reputed global organisations like the SGS.

That would have given India more water than all the proposed desalination plants.

Instead of doing this, it is sad to see a body like Niti Aayog actually advocating a disastrous policy of putting up desalination plants along the country’s coastline. Such a move will destroy environment, livelihoods of fisherfolk, and burden India with a huge import cost. It will divert the attention of policymakers away from the actual things that need to be done.

A coincidence is helping Indian banks tame NPAs, not for the first time

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A swift bond rally triggered by a fall in interest rates and a fiscally-responsible Budget has come to the rescue of beleaguered Indian banks, which are in the throes of a deleveraging cycle.

India's 10-year bond yield have fallen over 150 basis points from their highest point this year.

Bond yields and prices are inversely correlated as a fall in yields makes older bonds yielding higher interest rates more attractive.

So investors holding bonds in a falling-yield environment see a notional gain. For banks, this means that bad loans become smaller as a proportion in an overall book that has been repriced higher.

The fall in bond yields, combined with a generous Rs 70,000-crore cash infusion by the government, would help exacerbate pressure on Indian banks, which are battling their worst NPA crisis in two decades.

Every basis point fall in bond yields benefit banks by an overall $50 million, given the size of their portfolio, an Economic Times article quoting an estimate by ICRA said.

The bond rally has been further bolstered by India's proposal last month to issue its first overseas bond.

Further, the Reserve Bank of India’s (RBI) rate-cutting panel will again meet on August 7 to decide policy rates.

India is among few countries with an investment-grade rating to offer yields of more than 5 percent, Manu George, director of fixed income at Schroder Investment Management Ltd. in Singapore, told Mint. “Indian bonds offer good value in a low-yielding world and have the potential to rally further."

In a recent interview, Romesh Sobti, chief executive officer at IndusInd Bank, pointed out that even in 2002, around the time the NPA cycle peaked out, it was a fall in bond yields that had come to the rescue of banks.

Hence, this is not the first time that a strong bond rally helped in dealing with the bad debt hovering over India’s financial system.

“While this time around the drop in the sovereign bond yields is not as dramatic, the quantum of bond holding is way higher,” Sobti said in the interview. “Gains will be handsome enough to enable banks to start cleaning up the books faster."

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