In this edition, we talk about the RBI’s latest monetary policy meeting and two key decisions the government made this week. We also talk about a debt default by Byju’s and what that means for India’s biggest ed-tech company.
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Sometimes, doing nothing is just the right thing to do. That’s exactly what the Reserve Bank of India did this week. Okay, so what did the RBI actually do, or, well, didn’t?
The RBI’s six-member monetary policy committee kept its key repo rate—the rate at which it lends to commercial banks—unchanged at 6.5% in an unanimous decision.
This is the second time in a row that the MPC has held back from lifting rates after effecting a cumulative hike of 250 basis points since May 2022 to control inflation.
The decision was widely expected after headline retail inflation eased to an 18-month low of 4.7% in April and is expected to have cooled further in May.
So, has inflation now come under control? Will the RBI now start cutting interest rates?
Well, to answer the second question first, it’s unlikely anytime soon. This is because—and this also answers the first question—inflation remains above the RBI’s medium-term target of 4%. The RBI itself expects retail inflation for 2023-23 at an average of 5.1%, down from 5.2% earlier.
RBI Governor Shaktikanta Das has himself clarified the central bank’s stand. It’s a “pause”, he said, “not a pivot”. Now that we are clear about the RBI’s actions, how does this affect us, the common folk?
For borrowers, this is good news. Lending rates are unlikely to rise much from here on and so they can sit easy.
Meanwhile, banks, which have largely stopped increasing deposit rates, may now even lower these rates since liquidity has improved, especially after half of the Rs 2,000 notes—or a total of Rs 1.8 trillion—lying with people has returned to banks after the RBI last month decided to withdraw the high-value currency.
So, if you are a saver and have money to spare, you may want to rush and book a fixed deposit at high rates.
MSP hike
Doing nothing may not always be an option.
The Union Cabinet this week raised the minimum support price, or MSP, for 14 kharif—summer season—crops by 5-10%. The move is linked to inflation, too. Here’s how.
The MSP is supposed to signal the market the minimum price at which the crops should be sold. Legally speaking, the government doesn’t control crop prices. But it does set the minimum price at which it may buy the crops directly from farmers. Practically, this works only for rice in kharif season and wheat in rabi as the government hardly procures any other crop.
Most economists have said the hike in the MSP is not steep enough to lead to inflationary pressures. RBI Deputy Governor Michael Patra said the MSP hike will lift retail inflation only by 10-12 basis points.
There is another reason to allay fears of MSP-led inflation – chances of higher production. The 7% hike in MSP for paddy, the key kharif crop, may encourage farmers to sow more rice, leading to a bumper production and benign prices.
Among other crops, the government hiked MSP of pulses by 6-11%, the highest being moong at 10.4%, cotton by 8.9%, sunflower seed by 5.6%, groundnut by 9% and bajra by 6.4%.
But all these projections may go for a toss, if monsoon rains are not up to mark. The onset of the monsoon has been delayed in Kerala by more than a week, although reports say clouds have started arriving as we write this newsletter. For now, let’s keep our fingers crossed and hope for a bountiful rainfall.
BSNL revival
Damned if you do, damned if you don’t. That’s probably how we can best describe the government’s decision this week to approve a gargantuan package of Rs 89,047 crore, or $10.8 billion, to revive Bharat Sanchar Nigam Ltd.
The package, the government says, will help state-owned BSNL deploy 4G and 5G services.
Isn’t an attempt to revive a state-owned company a good thing?
It could be, if the money actually helps revive the company that has failed to compete in a market dominated by private-sector rivals Reliance Jio and Bharti Airtel.
It could be good for India’s telecom sector, too, if it leads to a meaningful improvement in competition and provides customers a credible third player that can offer good services.
Still, we have our doubts. For one, BSNL struggles with poor infrastructure and a heavy debt burden. Moreover, it has been posting losses for the past 12 years. In 2021-22, for instance, it recorded a massive loss of Rs 6,982 crore.
And it is already late to the party. Airtel launched 4G services almost a decade ago. And Jio upended the sector in 2016 when it launched data services for free, eroding rivals’ profit and eventually leading to consolidation.
In addition, the BSNL revival package seems a lot like the billions of dollars the government spent in rescuing Air India, before selling it to Tata Group.
But, as we said earlier, we are damned if we don’t even try. So, let’s hope BSNL proves the naysayers wrong.
Byju’s debt woes
Talking about a company struggling with debt and losses, ed-giant Byju’s skipped paying $40 million in interest payments on a loan this week and even went a step further—it sued a lender for harassing it!
Byju’s said it filed a lawsuit in a US court against Redwood, an investment management firm, to challenge the acceleration of a $1.2 billion term loan B facility and disqualify the lender for its “predatory tactics”.
The company said that, in March, the lenders “unlawfully accelerated” loan repayments due to certain alleged non- monetary and technical defaults. It said that the lenders undertook “unwarranted enforcement measures”, including seizing control of its US unit, Byju’s Alpha, and appointing its management.
The company said it won’t make further loan repayments even though it can, until the court decides on the dispute. The latest turn of events compounds problems for Byju’s. The company hasn’t yet filed its financials for 2021-22 and has had to pay higher interest on the loans that it took at dirt-cheap rates a couple of years ago.
It is also looking to raise fresh equity capital from external private investors, and said this week that it plans to float an IPO of its offline exam preparation unit Aakash Education by mid-2023.
However, markdowns by big public investors such as BlackRock have queered the pitch. BlackRock, which owns a small stake in Byju’s, estimates the company is now worth less than 60% lower than its peak valuation of $22 billion.
An investigation by the Enforcement Directorate into Byju’s makes matters worse. The ED had raided three premises linked to Byju’s in April over alleged foreign exchange law violations. Byju’s, of course, has denied the allegations.
Clearly, Byju’s is in a lot of problems right now. Will it recover? It’s too early to say but we will definitely let you know.
Crypto conundrum
Another lawsuit in the US made big news this week. The Securities and Exchange Commission (SEC) sued Binance and Coinbase, two of the world’s biggest cryptocurrency exchanges, for allegedly breaching its rules.
The SEC’s actions come as US regulators have cracked down on the crypto industry after the collapse of FTX last year.
The SEC alleges that Coinbase traded at least 13 crypto assets that are securities and which should have been registered. Separately, it accused Binance of offering 12 crypto coins without registering them as securities.
Both Coinbase and Binance have denied the allegations. Still, the SEC’s actions have raised doubts among other crypto exchanges and may prompt at least some of them to delist the tokens in question.
So, if you are a crypto investor, tread carefully.
Market Wrap
Both benchmark stock indices didn’t do much this week, ending marginally down as a slide in IT stocks outweighed optimism from another pause in rates by the RBI and the possibility of the US Fed, too, taking a breather from rate hikes.
While the 30-script Sensex ended down 0.4%, the 50-share Nifty was down 0.3%.
The Nifty stocks that gained the most this week included JSW Steel, L&T, Axis Bank, Britannia Industries, Power Grid, Tata Motors, NTPC, Ultratech Cement, M&M, Hero MotoCorp, Maruti Suzuki and IndusInd Bank.
The Nifty stocks that fell the most included Tech Mahindra, Infosys, TCS, Kotak Mahindra Bank, HCL Tech, Eicher Motors, Wipro and Hindustan Unilever.
Other headlines
- India Services PMI declines to 61.2 in May, but stays above the 50 mark for 22nd straight month
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World Bank cuts India 2023-24 GDP forecast to 6.3%
- Tesla agrees to set up domestic vendor base in India
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OPEC, allies extend production cut; Saudi Arabia to cut crude output to 9 million barrels/day in July
- Aviation ministry warns airlines as ticket prices soar
- CBI gets nod from ICICI Bank’s board to prosecute former chief Chanda Kochchar
- Maruti Suzuki launches SUV Jimny starting at Rs 1.3 million
That’s all for this week. Until next week, happy investing!
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