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RBI's Rate Cut, the Way Ahead for Indian Economy Under Modi 2.0, and Top Cues in Focus Today

Mon, 10 Jun Pre-Open

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Indian share markets ended on a positive note on Friday.

Gains were seen in the telecom sector, banking sector and consumer durables sector, while stocks from the power sector witnessed selling pressure.

At the closing bell on Friday, the BSE Sensex stood higher by 86 points (up 0.2%) and the NSE Nifty closed higher by 26 points (up 0.2%).

The BSE Mid Cap index ended down by 0.2%, while the BSE Small Cap index ended the day down by 0.1%.

Top Stocks in Focus Today

From the pharma sector, Alembic Pharmaceuticals share price will be in focus today as the company last week announced it has received approval from the US health regulator for Carbidopa and Levodopa extended-release tablets.

From the steel sector, JSW Steel share price will be in focus as the company has agreed to acquire 10,000 shares of Piombino Steel from JSW Techno Projects Management. Further, Piombino Steel shall acquire 8,000 shares, comprising the entire issued and paid-up share capital of Makler from JSW Techno Projects Management. After this transaction, Piombino Steel will become a wholly owned subsidiary of the company and Makler will become a wholly owned subsidiary of Piombino Steel.

Market participants will also be tracking Indiabulls Real Estate share price as the promoters last week sold 14% of their holding in the company through open market. Data showed that 61.3 million shares changed hands on the BSE in a single transaction.

The company in a regulatory filing said, 'in line with company's promoters' strategy to focus on financial services in the long run, the promoters intend to dispose-of up to 14% of the fully paid-up share capital of the company to third party investors'.

RBI's Rate Cut and the Way Ahead for Indian Economy...

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) today announced a 25 basis points cut in repo rate last week. The repo rate now stands at 5.75% - the lowest since July 2010 (repo rate is the rate at which the central bank lends money to commercial lenders).

Apart from the rate cut, the MPC also changed its policy stance to 'accommodative' from 'neutral'.

Market participants and economists see a rate cut crucial at this point in time as the economy has been witnessing signs of slowdown.

India's retail inflation has remained benign for some time now. It stood 2.9% in April, which was well below RBI's mandated target of 4%.

Slowdown was also witnessed in the domestic economy in the sub-6% GDP growth for March quarter.

The rate cut by the RBI means a drop in the cost of funds for individual and corporate borrowers.

However, banks have not been very efficient is passing on the benefits of the recent rate cuts to their customers.

Excluding the above 25 bps rate cut, the RBI has cut policy rate by 50 basis point so far in 2019. However, banks have not adjusted their lending/deposit rates accordingly.

At the core of this mismatch between the RBI's action and the banks' inability to pass on the benefit to the borrowers is the slowdown in household savings.

Increased government borrowing, and elevated small savings rate have rendered deposit/investment mobilisation by banks/NBFCs expensive. Also, India's consumption demand is still not a pronounced credit fuelled or leveraged demand.

However, it said more than the rate cut, it is its transmission into the economy that has emerged as the bigger challenge.

It is well known that the impact of the monetary policy on the Indian economy is felt with a significant lag, but the situation at the current juncture has become further complicated due to the ongoing crisis in both the banking and the shadow banking sectors, it said.

While banks are struggling with high NPAs, NBFCs are struggling with solvency issues leading to credit freeze.

It would be interesting to see how this all pans out. Meanwhile, we will keep you updated on all the developments from this space.

Modi to Head Cabinet Committees to Revive Slowing Economy and Generate More Jobs

In the news from the macroeconomic space, Prime Minister Narendra Modi is said to head two separate Cabinet committees on investment & growth and employment & skill development.

The development comes on the back of urgency in the new government to revive the slowing economy and generate more jobs.

Earlier this month, in its first meeting of cabinet ministers, the Modi 2.0 government approved a proposal to extend the benefit of Rs 6,000 per year under the PM-KISAN scheme to all farmers in the country.

The Cabinet also announced over Rs 100 billion pension scheme for 5 crore farmers, thereby fulfilling the BJP's poll promise. Under this scheme, small and marginal farmers will get a minimum fixed pension of Rs 3,000 per month on attaining the age of 60 years.

Also, speaking of Modi 2.0, the newly elected government is likely to focus on infrastructure spending.

This we say is because if there's one area that needs immediate attention by the government, it is job creation.

According to a CMIE survey, the unemployment number stands at 41 million people. That is too big a number to be ignored.

Now, job creation at such a mass level won't be a walk in the park. To set the wheels in motion, the government will have to look at infrastructure spending.

And as we can see in the chart below, capacity expansion in new projects has seen a gradual slowdown recently.

Here's what Tanushree Banerjee wrote about it in one of the recent editions of The 5 Minute WrapUp...

• From Rs 3.3 trillion in June 2018, the number has come down sharply to Rs 2.1 trillion as of March 2019. I believe this will the first area the government will look to focus on. Apart from creating jobs in the infrastructure sector, it opens a lot of other avenues.
  
  Better infrastructure will mean better connectivity to non-metros. This will attract manufacturing companies to set shop in these towns. It will give a boost to the urbanisation of the population.
  
  This is a trend I see clearly playing out in the coming years.
  
  Infrastructure spending -> Improved roads -> Increased two-wheeler sales.

This is just one of the 50 irreversible trends Tanushree believes will carry the Sensex to 1,00,000.

The DHFL Saga Continues...

Dewan Housing Finance Corporation (DHFL) share price will be in focus today.

The stock of the company witnessed selling pressure and went on to touch its fresh 52-week low last week after rating agencies Crisil, CARE and ICRA downgraded commercial papers (CP) issued by DHFL to default or 'D' category. The move came after the company missed an interest payment on its non-convertible debentures (NCDs).

In response, DHFL said that the action by the rating agencies was extremely surprising as the company has been making & continues to make substantial efforts in ensuring no defaults on any bonds, repayment of its financial obligations.

Since September 2018, the company has repaid close to Rs 400 billion of obligations and also sold its strategic retail assets.

Note that DHFL is also facing questions about its financial health after the IL&FS default pushed up the cost of funds for the mortgage lender and made borrowing difficult.

Note that the NBFC stock also saw huge selling last month after the company said it has decided to temporarily stop taking fresh deposits and hold premature withdrawals from existing deposit schemes as it tries to manage its tight liquidity position.

The above move came after the downgrade of the credit rating of DHFL's fixed deposit (FD) programme. DHFL's fixed deposit programme was downgraded by Brickwork Ratings India Ltd on Friday to BBB+ from AA- and had been put on credit watch with negative implications due to the limited build-up of liquidity. In its rating release, Brickwork Ratings pegged the size of DHFL's fixed deposit programme at Rs 120 billion.

How this all pans out and what further developments take place for DHFL remain to be seen. Meanwhile, we will keep you updated on all the news from this space.

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