BLOGS
Rise in the price of gold
The relentless rise in the price of gold over the past year has left investors insecure. While existing investors wonder if they should make significant capital gains from their investments, new investors are unsure whether they should invest at current levels.
- On Wednesday, the US Federal Reserve said it would keep interest rates near zero until 2023. If the dollar index stays low and causes inflation to rise in the future, many believe that gold prices will fall closes or even ramps up, until a Covid -19 vaccine is in the offing and the global economy shows signs of recovery.
How have gold prices evolved?
Prices began to rise from May 2019, reaching a high of more than 50% in just over a year, from $ 1,250 per ounce to $ 1,900 or more now.
- In India, gold prices have risen from around Rs 32,000 to Rs 10 to almost Rs 52,000 during the same period, representing a profitability of almost 62%.
- As gold is an imported product, the depreciation of the rupee adds to the benefits enjoyed by Indian investors.
- In dollar terms, gold peaked at around $ 2,080 an ounce on August 7; The Indian market price touched Rs 58,000 for 10g that day, with gold trading at a premium of almost Rs 2,000 over MCX’s commodity exchange price.
- Since then, prices have fallen by around 7% in the international market and by around 10% in the Indian market. The decline was most pronounced in India, where the rupee appreciated by more than 2 rupees during this period.
- With international prices cooling from highs, the premium for physical gold is gone. Demand is expected to increase in India closer to Diwali.
Why have the prices gone up?
The main reason for the increase in the last five months has been the pandemic, its impact on businesses and economies, and growing concern about the global recession. Concerns about negative growth rates have pushed central banks and large investors toward gold.
- The weakness of the dollar, inversely related to gold, was the other reason for the rise in prices. As central banks, including the Fed, cut rates and injected huge amounts of liquidity to support the economy, the dollar weakened and gold rose.
- Traditionally viewed as an asset class that preserves its value, the demand for investment in gold has grown along with increasing uncertainty.
- The expansion of paper money generally tends to drive up gold prices, with higher prices supported by major purchases by major central banks in China and Russia over the past two years.
- While gold alone does not produce economic value, it is an effective tool to guard against inflation and economic uncertainties. It is also more liquid than real estate and many debt securities.
Could prices increase further?
- There is a widespread sentiment among commodity traders and experts that gold may remain strong, this is due to factors such as the increase in the number of Covid-19 cases and a signal from the Fed to keep rates low for the next three years.
So is gold a good investment for you?
- While trading in gold is not a good idea due to today’s high prices, experts say retail investors can periodically buy gold. Financial planners say gold should always make up between 5% and 10% of an investor’s total asset allocation.
- Financial advisers say gold shouldn’t be viewed as a short-term asset. Gold is a generational asset, and after a few decades it doesn’t matter what price you bought it for People are investors, but they think like traders even when buying a long-term asset.
- A cut in interest rates by the RBI led to a drop in bank interest rates for small savings and term deposits. Many analysts claim that buying gold can start around Rs 50,000 per 10g, which is close to $ 1,900 per ounce as a spot price that is expected to hold. Some see gold will drop to Rs 65,000 per 10g, or about $ 2,400 per ounce, by December 2021.
How to invest in gold?
Almost everyone agrees that unless you are buying jewelry for consumption, the investment should be made through gold sovereign bonds. They offer investors a price appreciation as well as a fixed coupon of 2.5% per year on their assets; In addition, they are in paper or demat form and are issued in the name of the investor, thus addressing security concerns. While interest earned on gold bonds is added to the income of holders and taxed at the installment rate, capital gains at maturity are exempt from tax, making them much more attractive than owning them. physical gold.
- Gold bonds have an eight-year maturity period, but investors have the option to exit after the fifth year. To provide greater liquidity, the bonds are listed on the stock exchange within fifteen days of their issuance and can be traded. However, trading volumes depend on liquidity in the secondary market.
What if gold prices fall?
Analysts warn that we must guard against a drop because the prices of gold, like those of other commodities, tend to move in long cycles. As long as the recovery picks up (now expected only by the end of 2021), investors will begin to allocate more funds to risky assets such as stocks, real estate and bonds, and retreat from safe havens such as gold, the US dollar, government debt and the Japanese yen. . Historical trends show that when stocks and risky assets start to rise, gold generally declines, as it did in 2011-2015.
- An investor should keep an eye on the $ 1,900 and $ 1,800 (per ounce) levels in the short to medium term. A drop below $ 1,800 would signal the start of a downward trend in gold prices. These should be exit levels or stop-loss levels, depending on the risk appetite, for investors entering at current prices.
RIP Chetan Chauhan
Former Indian cricketer and Uttar Pradesh government minister Chetan Chauhan died on Sunday from complications from Covid-19. Chauhan is the second minister of Uttar Pradesh after Kamal Rani Varun, who held the technical education portfolio, who succumbed to Covid-19.
- A flamboyant cricketer and Sunil Gavaskar’s oldest opening partner in the 1970s, Chauhan represented India in 40 attempts and served the Delhi and Districts Cricket Association (DDCA) in various capacities; President, Vice President President , secretary and head of selection.
- His career statistics (40 rounds with 2,084 points and a high score of 97 against Australia in Adelaide with an average average of 31.57) were quite disappointing for a first game.
- The most irritating aspect was the lack of a triple digit score. Chauhan ranks alongside Shane Warne on the list of most points scored without a century.
- He also played seven ODIs. Chauhan was the first player in testing history to score more than 2,000 points without a penny.
- He was a career top scorer in national cricket. In international cricket he had earned a reputation as an intrepid fighter.
- One of the most memorable moments of his cricket career was the 213-runs post he wrote with Gavaskar in The Oval in 1979, breaking the era record for Vijay’s most open window association, Merchant and Mushtaq Ali, who put up 203 runs at Old Trafford in 1936. Chauhan contributed 80 runs.
- After leaving the game in the mid-1980s, he turned to politics and was twice elected Member of Parliament by Almorah in Uttar Pradesh on a BJP ticket.
- Before his stint in politics, he was named head coach of the Indian team, in their historic 2-1 win over Australia at home in 2001 and then on their bitter 2007-08 tour of Down Under.
- Chauhan was in the eye of a storm after being appointed president of the National Institute of Fashion Technology in June 2016, and political parties and fashion designers questioned the government’s decision.
- However, he only held the position for a year and was replaced after being appointed Minister of Sports in the government of Yogi Adityanath in Uttar Pradesh.
RIL’s Rights Issue subscribed 1.59 times
Reliance Industries Limited announced today that it has successfully closed the biggest rights issue in India of Rs 53,124.20 crore. It has been subscribed approximately 1.59 times, accumulating a global commitment of more than Rs.84000 cr.
The rights offering has attracted strong investor interest, including thousands of small investors and thousands of institutional investors, both Indian and foreign. The public part of the Rights issue has been subscribed 1.22 times. The allocation of participating shares will take place around June 10, 2020. Rights shares must be listed in the BSE and NSE on or around June 12, 2020, under a separate ISIN code.
The Rights Entitlement (RE) was actively negotiated, reflecting a broad interest in the issuance of rights. This is the first time that RE has changed in the form of a demat on the stock exchanges since SEBI introduced this platform and it was a resounding success.
A unique feature of RIL’s rights offering was that, despite its record scale, it was entirely done on a digital platform, defying the formidable constraints imposed by the COVID-induced blockade. And that was also a new record in the history of the Indian and global financial markets.
None of the stakeholders in 800 Indian cities and many overseas financial centers (regulators, bankers, financial institutions, retail investors and others) had to leave their offices or homes, and yet everything related to the issue of Rights were carried out smoothly and with the utmost care Efficiency. This shows not only the power of the emerging digital age, but also the potential of India to be a pioneer and innovator at the time.
RIL is India’s largest private sector company, with a consolidated turnover of INR 659,205 crore ($87.1 billion), cash profit of INR 71,446 crore ($9.4 billion), and net profit of INR 39,880 crore ($5.3 billion) for the year ended March 31, 2020.
RIL’s activities span hydrocarbon exploration and production, petroleum refining and marketing, petrochemicals, retail and digital services.
RIL is the top-most ranked company from India to feature in Fortune’s Global 500 list of ‘World’s Largest Corporations’ – currently ranking 106th in terms of both revenues and profits. The company stands 71st in the ‘Forbes Global 2000’ rankings for 2019 – top-most among Indian companies. It ranks 10th among LinkedIn’s ‘The Best Companies to Work For In India’ (2019).
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Retrospective taxation
In a unanimous decision, the Permanent Court of Arbitration in the Hague on Friday ruled that India’s retrospective claim for Rs 22,100 crore as a capital gain and withholding tax imposed on the British telecommunications company for a 2007 settlement was “a violation of the fair treatment guarantee.” The court also asked India not to initiate tax proceedings against Vodafone Group.
What is the case?
- In May 2007, Vodafone bought a 67% stake in Hutchison Whampoa for $ 11 billion. This included Hutchison’s mobile phone business and other assets in India.
- In September of that year, the Indian government first raised a claim for Rs 7,990 crore in capital gains and withholding tax from Vodafone, claiming that the company should have deducted tax at source before making a payment to Hutchison.
- Vodafone challenged the notice of prosecution in the Bombay High Court, which ruled in favor of the Income Tax Department.
- Subsequently, Vodafone challenged the decision of the Superior Court of the Supreme Court, which ruled in 2012 that the Vodafone Group’s interpretation of the Income Tax Act 1961 was correct and that it did not have to pay tax on the purchase of the stock.
- In the same year, the then finance minister, the late Pranab Mukherjee, circumvented the Supreme Court ruling by proposing an amendment to the finance law, giving the Income Tax Department the power to retroactively tax these agreements.
- The law was passed by Parliament that year, and the responsibility for paying taxes fell to Vodafone. By this time, the case had become infamous as the “retroactive tax case”.
- The decision in favor of Vodafone marks a setback for the country’s retrospective tax policies. It also raises the possibility that other cases submitted to arbitration may be resolved in the same way.
What is retrospective taxation?
- As the name suggests, retrospective taxation allows a country to adopt a rule on the imposition of taxes on certain products, items or services and offers and to invoice companies from a point in time after the date on which the law was passed.
- Countries use this route to correct anomalies in their tax policies that in the past allowed companies to take advantage of such loopholes. While governments often use retrospective change in tax laws to “clarify” existing laws, it ends up hurting companies who knowingly or unknowingly have interpreted tax rules differently.
- In addition to India, many countries, including the United States, the United Kingdom, the Netherlands, Canada, Belgium, Australia and Italy, have retroactively taxed companies that have benefited from the loopholes. the previous law.
What Happened After India Passed The Retrospective Tax Law?
After Parliament passed the amendment to the finance law in 2012, the responsibility for paying taxes fell to Vodafone. The amendment was criticized by investors around the world, who said the change in the law was “perverse” in nature.
“The retrospective amendment that overturned the decision of the country’s highest court was poorly worded in its broad generalities and carried a perverse sense of revenge,”
said Nigam Nuggehalli, dean of BML Munjal University law school .
- Following international criticism, India tried to settle the matter amicably with Vodafone, but was unable to do so. After the new NDA government came to power, he said he would not create new tax obligations for companies that use the retrospective tax route.
- By 2014, all attempts by the telecommunications company and the finance ministry to resolve the issue had failed. The Vodafone Group then invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995.
What is the bilateral investment treaty?
- On November 6, 1995, India and the Netherlands signed a BIT for the Promotion and Protection of Business Investments of each country in the jurisdiction of the other.
- Among the various agreements, the treaty had established that the two countries would endeavor to “encourage and promote favorable conditions for investors” of the other country.
- The two countries, under the BIT, would ensure that businesses in each other’s jurisdictions “receive fair and equitable treatment at all times and enjoy full protection and security in the other’s territory. ”
- While the treaty was between India and the Netherlands, Vodafone invoked it because its Dutch unit, Vodafone International Holdings BV, had bought the Indian business activities of Hutchinson Telecommunicaton International Ltd., turning it into a transaction. between a Dutch company and an Indian company.
- The BIT between India and the Netherlands expired on September 22, 2016.
What did the Permanent Court of Arbitration in The Hague say?
- The violation of the BIT and the United Nations Commission for International Trade Law (UNCITRAL) is one of the main factors that led the Court of Arbitration to rule in favor of Vodafone.
- In 2014, when the Vodafone Group initiated arbitration against India in the Arbitral Tribunal, it did so in accordance with Article 9 of the India-Netherlands BIT.
- Article 9 of the BIT establishes that any dispute between “an investor of a contracting party and the other contracting party in relation to an investment in the territory of the other contracting party” will be resolved, as far as possible, amicably through of negotiations.
- The other was Article 3 of the UNCITRAL Arbitration Rules, which establishes, inter alia, that “the constitution of the arbitral tribunal shall not be hampered by any controversy regarding the sufficiency of the arbitration notice, which shall be definitively resolved by the tribunal arbitration ”.
- In its decision, the arbitral tribunal also said that now that it had been established that India had violated the terms of the agreement, it must now cease its efforts to recover such taxes from Vodafone.
Retail inflation in August stood at 6.69 percent
India’s retail inflation for the month of August stood at 6.69 percent, according to data released by the National Statistical Office (NSO) on September 14. The consumer price index (CPI)-based inflation rate for July has been revised to 6.73 percent from 6.93 percent.
- The combined food price inflation (CFPI) for August stood at 9.05 percent, against 9.27 percent (revised) in July.
- Inflation in the vegetables basket came in at 11.41 percent in August, against 11.29 percent in July. In the fuel and light segment, inflation for the same month was 3.10 percent, against 2.80 percent in July.
- In cereals and related products, inflation stood at 5.92 percent in August against 6.96 percent in July. In meat and fish, it stood at 16.50 percent against 18.81 percent a month ago.
- For pulses and products, it stood at 14.44 percent in August, against 15.92 percent in July.
- The consumer price index (CPI) data for the months of April and May were not released by the Centre due to insufficient data collection amid the coronavirus pandemic and the lockdown that followed.
- In the last two consecutive quarters (January – March of FY 2019-20 and April – June of FY 2020-21), the average consumer price index-based inflation breached 6 percent.
- The Monetary Policy Committee (MPC) needs to target inflation to keep it within 4 percent, within a band of +/- 2 percent.
- During its policy announcement last month month, the Reserve Bank of India (RBI) said it expects headline inflation to remain elevated in the second quarter of FY 2020-21.
- RBI Governor Shaktikanta Das said food prices are expected to increase in the near term, due to broken supply chains as a fallout of the COVID pandemic.
- Overall inflation is expected to remain elevated in the near term because of costly petrol and diesel prices.
- The central bank’s Monetary Policy Committee had kept the repo rate unchanged at 4 percent and maintained its accommodative stance. Repo rate is the rate at which the RBI lends funds to commercial banks.
Results of serological survey in India
A serological survey in Pune has provided new evidence that the spread of Covid-19 in India has been much greater than what is detected by confirmatory tests. In Pune, more than 51% of those who have been tested have shown the presence of antibodies specific to the new coronavirus, suggesting that around half of the population of this city of 4 million people may already be infected.
- By the time the serological survey was conducted between July 20 and August 5, less than a lakh of people in the city had been found infected during confirmatory testing. Therefore, the actual spread could be 20 times greater than what confirmatory tests detected.
- Previous serological surveys in Delhi and Mumbai have also given similar results. A previous exercise in Delhi had suggested that the actual spread could be 40 times the number of confirmed cases. A new round of survey in the national capital, the results of which have not yet been officially published, confirms this.
Results of serological survey in India: what is the end result?
- These tests have been woefully adequate, despite a huge increase in the testing infrastructure. From the ability to test just a few hundred samples at the start of the outbreak in March to over eight lakh of testing per day now, there has been a massive upgrade in testing infrastructure. And yet, serological tests show that the vast majority of those infected are still excluded, especially those who have no symptoms.
- Appropriate testing is essential for containment strategies. This is the only method to identify and isolate infected people and their close contacts.
- The more tests are done, the better the chances of detecting infected people, including those who are asymptomatic.
- Timely isolation of these can prevent transmission to other people. Therefore, more tests directly influence the slowing of the spread of the disease.
- Given the current extent of the disease, based on the results of seroprevalence surveys, the screening capacity should be increased several times to make a significant difference in the growth of the disease.
- It probably won’t happen overnight. So, while it would still be important to keep testing as many people as possible, you’ve passed the stage where testing was the most effective tool for flattening the growth chart.
What does it mean when so many people are susceptible to infection?
- There is a silver lining in the absence of proper testing. The progression to a level of infection where “herd immunity” begins to sound plausible, it seems, has been faster than it would have been possible if more tests had been done and more tests were carried out. infected people were identified and isolated.
- The conventional wisdom is that increased testing and isolation slows disease growth and delays the achievement of widespread immunity in the community.
- The caveat remains; Scientists do not yet know the level of infection in the population in which “herd immunity” would begin to play a role. But regardless of the level, India has moved towards community-level immunity at a faster rate than the ability to conduct further testing and isolation would have allowed.
How do serologic results relate to confirmatory test results?
- The serological survey in Pune has some interesting results. The room in which the highest prevalence was detected is also the one that is currently growing at the slowest rate in recent weeks.
- In this area, Lohiya Nagar, more than 60% of the participants were detected with antibodies. It would still be premature to suggest that Lohiya Nagar could be close to achieving community-level immunity, but scientists can now look at other areas that come close to that level of infection to see if the disease behaves in the same way. At the moment, there is not enough data to draw conclusions.
- There are also other indicators, cities with very high prevalence rates, like Delhi, Mumbai or Pune, have already started to show signs of slowing down.
- Growth rates in Delhi and Mumbai have been declining for some time, while Pune is just starting to join the trend.
- The number of breeders, or R, for these cities has increased from R1 is the number of people infected, on average, by one person already infected. An R-value of less than 1 would mean that, on average, all people infected.
- There are also some other indicators cities with very high prevalence rates, such as Delhi, Mumbai or Pune, have already started to show signs of slowing down. Growth rates in Delhi and Mumbai have been declining for some time, while Pune is just beginning to join the trend.
- The number of breeding animals, or R, for these cities has dropped below 1. R is the number of people infected, on average, by an already infected person.
- An R value of less than 1 would mean that, on average, not all infected people transmit the virus to others. Generally, an R value of less than 1 signifies the beginning of the epidemic’s decline, although in this case care must be taken to draw conclusions, as the pandemic is still ongoing, the information is still evolving and the R values they are only estimates.
- But the decline in growth rates and R values is in line with what is expected when about half the population has already contracted the infection.
- The pool of uninfected people is gradually shrinking and therefore the transmission rate is decreasing due to the availability of fewer potentially infected people.
But is it not understood that immunity through a community is not a certainty?
- In fact, there are important caveats. Serological surveys reveal only the likely extent of disease prevalence in a population group.
- Infected people do not necessarily have to have developed immunity.
- As scientists constantly insist, getting the infection and building immunity are two different things.
- The serological survey allows to know the number of people who have specific antibodies against the disease.
- The presence of these antibodies is an indication that they have been infected at some point.
- But immunity comes from so-called “neutralizing” antibodies or “protective” antibodies.
- Serological studies do not detect neutralizing antibodies. For this, another test is necessary.
- And although no case of reinfection has been detected so far, the matter remains open for investigation.
- Immunity at the community level is only possible if those who have been infected also develop immunity to the disease. At the moment, we don’t know.
- This is the next step of the investigation. Scientists are already preparing to perform exercises in which they would try to assess whether an infected person has developed immunity.
- Until then, debates on “herd immunity” would not be substantial.
Resignation of Union Minister Harsimrat Badal
The resignation of Union Minister Harsimrat Badal indicates an unusually strong stance by his party, Shiromani Akali Dal, against an initiative by his longtime ally, the BJP. His resignation was to protest against three ordinances:
- Agricultural and Agricultural Trade (Promotion and Facilitation) Ordinance, 2020;
- Agreement with farmers (empowerment and protection); and
- The Essential Commodities Ordinance (Amendment) 2020, enacted by the NDA government, which has now submitted bills to Lok Sabha to replace them.
- Akali Dal President Sukhbir Badal said the party had never been consulted on the ordinances and that Harsimrat, his wife, had informed the government of the farmers’ reservations. Farmers in Haryana and Punjab have mobilized against the ordinances / bills. The party voted against the bills. Less than a month ago, the Akalis had complied with the ordinances.
- Just before a one-day session of the Punjab Assembly on August 28, Sukhbir Badal published a letter from the Union Minister of Agriculture, Narender Singh Tomar, in which he said that the practice of buying grain at a minimum price Sustainability (MSP) will remain unchanged. He accused Chief Minister Amarinder Singh of misleading farmers. Now the two speak in unison against the ordinances.
What explains the opposition of the Akalis?
- The peasantry forms the backbone of the Akali Dal voting bank in Punjab. Earlier this week, Sukhbir Badal said: “Every Akali is a farmer and every farmer is an Akali.”
- Farmers unions across the state have sunk their political differences to unite against the ordinances.
- Residents of the Malwa belt have warned that they will not allow any chiefs who support the ordinances to enter their villages.
- The centennial party, which did its worst in the 2017 Assembly elections with just 15 of 117 seats, cannot risk alienating its main electorate.
- Political analysts believe this is a question of survival for the party that had two successive terms from 2007 before the defeat in 2017.
- The SAD-BJP alliance won only 15% of the seats. while Congress recorded its biggest victory emphatic since 1957.
What are the risks involved?
Farmers fear that they will no longer be paid in MSP, while commission agents fear losing their commission. According to a study by the Punjab Agricultural University, there are more than 12 billion farming families in Punjab and 28,000 registered commission agents.
- Much of the state’s economy depends on funds provided by central purchasing bodies such as the Food Corporation of India (FCI).
- Most of the wheat and rice grown in Punjab are purchased by or for FCI.
- During the 2019-2020 rabi marketing season, Punjab provided 129.1 lakh metric tons (LMT) of the 341.3 LMT of wheat purchased for the core group.
- In 2018-2019, it contributed 113.3 LMT of rice for a total of 443.3 LMT in the central reserve.
- Now protesters fear that the FCI will no longer be able to obtain mandis from the state, which will deprive the sloth / commissioner / arhatiya of his 2.5% commission.
- The state itself will lose the 6% commission it used to charge the buying agency.
How does this affect BJP and his connection to Akali Dal?
This will strengthen ties that have eroded for some time amid speculation that the BJP may flirt with an Akali separatist group led by MP Rajya Sabha SS Dhindsa, which the Modi government attributed to Padma Bhushan.
- Furthermore, together with Sukhbir, he has yet to demonstrate the persuasive powers of his father and the fivefold CM Parkash S Badal, who has kept the alliance together every day.
- But the bills will also affect the BJP’s predominantly urban voting bank, which includes commissionaires, and make it a weaker partner in the alliance. He will no longer be able to defend his demand for a higher proportion of assembly seats than the 23 there are.
- On the other hand, Akali Dal’s whip against his own alliance government could piss off the BJP in the Center.
Is this the first time Akali Dal has distanced himself from an NDA decision?
In January, the Akalis had supported a resolution of the Punjabi Assembly against the central law (amendment) on citizenship, after voting in favor of it in parliament.
- The party later decided not to fight in the Delhi Assembly elections due to its differences with the BJP on this issue.
- Earlier this week in parliament, Sukhbir Badal opposed the non-inclusion of Punjabi in the new Union Territory of Jammu and Kashmir language bill, claiming it is a spoken language by the inhabitants from the Khalsa Raj.
Reserve Bank of India’s MPC updated
During the bi monthly monetary policy presentation, the Reserve Bank of India’s Monetary Policy Committee (MPC) said on Friday that a faster and stronger rebound in the economy was “eminently feasible” if the momentum the current recovery it is gaining ground.
- MPC, which has kept key interest rates unchanged, said that real GDP is expected to grow 20.6% in the first quarter of 2021-2022.
GDP stimulus
- Projecting negative (-) growth of 9.5 percent of real GDP in 2020-2021, RBI Governor Shaktikanta Das said; “The deep contraction in the June 2020-2021 quarter was left behind us; Rays of light are visible in the flattening of the active workload curve across the country.
- The policy panel said that real GDP growth in 2020-2021 is expected to be negative at (-) 9.8% in the second quarter of 2020-2021, (-) 5.6% in the third quarter and 0.5% in the fourth quarter.
- “Real GDP growth for the first quarter of 2021-22 is set at 20.6%”, the panel said.
- According to Das, the MPC has decided to view the current rise in inflation as transitory and to address the most urgent need to revive growth and mitigate the impact of Covid. GDP fell 23.9% in the June quarter.
Inflation on the verge of falling
- RBI projections indicate that inflation will approach the target in the fourth quarter of 2020-2021.
- In the September 2020 RBI survey cycle, households expect inflation to decline slightly over the next three months, a hopeful sign that supply chains will rebound.
- Retail trade inflation is projected at 6.8% for the second quarter of 2020-2021, 5.4-4.5% for the first six months of 2020-2021 and 4.3% for the first quarter of 2021-2022, the RBI said.
- The MPC’s assessment is that inflation will remain high in September printing, but will gradually decline towards the target in the third and fourth quarters.
- Our analysis suggests that supply disruptions and associated spreads / margins are the main drivers of inflation. As supply chains are re-established, those gaps should dissipate, he said.
On the recovery
- Das said the economy is likely to experience a three-speed recovery, with individual sectors showing variable rates, depending on the specific realities of the sector.
- The sectors that “open their accounts” first should be those that have been resilient to the pandemic and are also labor intensive.
- Agriculture and related activities; fast moving consumer goods; two-wheelers, passenger cars and tractors; drugs and pharmaceuticals; and electricity generation, particularly renewable energy, are among the sectors in this category.
- The second category of “striking” sectors would include those in which activity gradually normalizes. The third category of sectors would include those that face “great efforts” but can save their sleeves.
On the economy
- The Indian economy is entering a decisive phase in the fight against the pandemic.
- Compared to pre-Covid levels, several high-frequency indicators point to a slowdown in contractions in various sectors of the economy and the emergence of growth impulses.
- “Covid-19 has tried and exhausted our resources and our resilience. Our difficulties are not over yet and a further increase in infections remains a serious risk, “said Das.
REPO Rate unchanged
The Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously decided to keep the repo rate unchanged at 4%. While Governor Shaktikanta Das has said that the RBI’s accommodative stance continues, the maintenance of rates runs counter to general market expectations that the central bank will cut official rates to allow banks to lend more funds to customers.
- Along with its decision to maintain rates, the central bank also announced a major restructuring program to lend to stressed MSMEs (loan rescheduling), which banks and NBFCs have strongly championed in the face of growing concerns on the front line.
- A Bad debts panel will be established to work out the details of this scheme.
- As the Indian economy is still grappling with new localized lockdowns to control the spread of Covid-19 and lingering concerns about demand, especially in sectors such as residential real estate and consumer durables, the RBI was increasingly expected to cut back further its policy by an additional 25 basis points (one basis point equals one hundredth of a percentage point) to stimulate growth.
There could be two main reasons why the MPC did not cut rates
First, retail inflation, measured by the consumer price index, rose in June from 5.84% to 6.09% in March, exceeding the central bank’s medium-term goal. 2 to 6%. This appears to have been a major red flag, prompting the MPC’s unanimous decision to refrain from cutting official rates.
- Das specifically expressed concern about national food inflation, which remains high, although he mentioned that the outlook for the agricultural sector has improved with the good monsoon and increased acreage for planting kharif.
- Second, in May, the MPC reduced the repo rate by 40 basis points to 4%, while maintaining its accommodative policy.
- In fact, in the past seven months, the MPC has already lowered the repo rate by 115 basis points amid the COVID-19 outbreak and the resulting economic consequences, even as the transmission by banks to clients has not yet is fully operational.
- In the big picture, Das said global economic activity remains fragile, although financial markets have been vibrant.
- Real GDP growth will remain negative, he said, even as “any positive news about the COVID-19 containment efforts would change that scenario.”
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