Reserve Bank may raise reverse repo rate next week
The central government’s plan of gross borrowing of Rs 14.1 trillion and net borrowing of Rs 11.6 trillion in financial tear 2022-23 is likely to prompt the Reserve Bank of India to hike the reverse repo rate, the rate at which it borrows money from commercial banks, in the monetary policy meeting next week. The rate has remained unchanged at 3.35 percent since May 2020.
Why it’s important: The Reserve Bank has started normalizing liquidity by withdrawing the government securities acquisition program and tightening short-term rates. The huge borrowing plan, more than market expectations, may force it to pick up the pace of policy normalization. The policy corridor, or the difference between the reverse repo and repo rate, is typically 0.25 percentage points during normal times.
Private capital spending could rise only by March 2023
Although the Indian government plans to spend a record Rs 7.5 trillion as capital expenditure in building infrastructure, new investments by Indian companies could take a few quarters to rise because the government’s orders come with a lag, corporate chief executives said. New variants of Covid-19, high commodity prices, and shortage of semiconductors, among others, is likely weigh on economic recovery, they said.
Why it’s important: Corporate capex spending has been muted in recent times, except by a few top companies like Reliance Industries, and the Tata, JSW and Adani groups. Weak demand and pandemic disruptions have seen lowered capacity utilization and weak revenue growth, prompting companies to go slow in capital expenditure.
Government to file LIC IPO papers next week
The central government may file draft papers for the mega IPO of LIC with SEBI by next week once the insurance regulator approves the plan. A portion of the initial public offering will be reserved for anchor investors. At least 5 percent of LIC’s shares will be sold through the largest-ever IPO in India.
Why it’s important: The listing of India’s largest insurer is vital for the federal government to meet its lowered asset sales target of Rs 780 billion, much lower than the Rs 1.75 trillion budgeted in 2021, in the current financial year that ends in March. Any shortfall may complicate the government’s budget math.
Crypto rupee will be safe and risk-free, to boost digital economy
India’s proposed digital currency, announced in the national budget and to be issued by the Reserve Bank of India, will give a push to the digital economy as transactions through it will be secure and free of risks, Prime Minister Narendra Modi said. The digital rupee will be easily convertible to physical currency, he said.
Why it’s important: India has taken early steps to legalize cryptocurrencies by announcing the launch of a sovereign digital currency this year by the central bank and by taxing trading in other cryptos. There has been heavy investor interest in recent years in various cryptos like Bitcoin and Ethereum.
Registration on crypto platforms surge after tax announcement
User sign-ups on cryptocurrency platforms jumped as much as 30 to 50 percent on Tuesday, when finance minister Nirmala Sitharaman in her budget speech announced a proposal to tax digital assets. The was a sharp increase in new users downloading apps and completing the sign-up process, data from crypto firms WazirX, CoinSwitch Kuber and Unocoin showed.
Why it’s important: Although crypto investors and exchanges are waiting for the fine print in the taxation proposal, some saw the announcement as an indirect endorsement of crypto trade in India. The finance minister has however said in a post-budget interaction that taxing does not automatically bring legitimacy.
Crypto investors may pare holdings on proposed taxes
While cryptocurrency platforms operating in India are relieved that tax on gains from digital assets indicates that the government is warming up to this asset class, retail investors are concerned the rate of tax at 30 percent is too steep. Many are looking to shrink their crypto holdings.
Why it’s important: One of the main attractions of cryptocurrencies is their volatility. Since prices fluctuate faster than any other asset class, investors buy on dips and book gains at highs. The proposed tax on trading and gains is likely to smoothen this volatility. Also, some retail investors would like to book profits before the taxes come into effect.
Household grocery spending stalled in 2021 on high inflation
Household spending on daily groceries and essentials in 2021 calendar year was stagnant in India, and even declined fell during the three months ended December, according to global consumer research firm Kantar Worldpanel. Volumes rose by a negligible 0.1 percent in 2021. A 1.3 percent growth in rural areas during the year was offset by a fall in the cities, where demand fell 1. 1 percent.
Why it’s important: The stagnant sales by volume indicates high inflation is forcing households, particularly in cities and towns, to pare spending that has in turn hurt revenue growth of consumer goods firms. For most companies, urban areas are the bigger market, accounting for nearly two-third of sales.
Rural stress to depress demand for fast moving consumer goods
Companies making fast moving household goods expect demand to remain under pressure as the government did not announce any direct initiatives in the budget amid persistent cost pressures.
Why it’s important: Although record capital spending by the government would likely increase employment, it will take some time for incomes to grow in rural households. Also, the allocation for the rural jobs guarantee program was not on expected lines, but that could be revised later in the year as it is a demand-driven welfare scheme.
Debate starts again on quantum of 5G spectrum
Telecom operators have once again started sparring with each other over how much of the 5G spectrum should be put up for auctioning. Airtel has asked the Telecom Regulatory Authority of India to substantially trim the amount of 5G spectrum. But telcos led by Reliance Jio say the entire spectrum that has been identified should be auctioned.
Why it’s important: The telecom regulator is yet to send its final recommendations to the department of telecommunications. The differing views by telecom operators could present another hurdle to the government.
Infrastructure status to data center business likely to spur growth
The grant of infrastructure status to the data center industry in the budget proposals has led to expectations of rapid growth due to increased flow of foreign investment and private capital. It may boost digital businesses, including fintech, healthtech and edtech, each of which generate a large quantity of data.
Why it’s important: The demand for digital infrastructure in India is likely to rise significantly in the coming years. However, the absence of a data protection law in the country could spoil the party.
Disclaimer: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
