RBI Deputy Governor Viral Acharya resigns. RBI union pitches collegium to select new governors to ensure institution’s autonomy. US considers pushing for development of 5G equipment outside China. Huawei offers to sign ‘no-backdoor agreement’ with India. Investment worth $14bn needed to lay 5G fibre network over the next 2-3 years, as per Crisil. SEBI announces slew of reforms to address credit-related crises. Mutual fund industry faces the repercussions of failing to self-regulate. Big NBFCs need greater scrutiny to prevent market contagion, RBI warns. But losses from failure of large banks has decreased. HDFC Bank plans IPO of its NBFC arm. India’s tariffs “unacceptable”, Trump tweets. Relations with India have never been better, Trump says. Xi Jinping plays with a risky gamble. Trump and Xi agree to resume trade talks. Possible levers that the US and China could pull to get the best out of a trade deal.
Moving on to the top Business news of the week.
RBI Deputy Governor Viral Acharya resigns. RBI union pitches collegium to select new governors to ensure institution’s autonomy.
Adios, Acharya: RBI Deputy Governor Viral V Acharya has resigned from his post and is set to leave office six months before the scheduled end of his term.
The RBI is now left with three deputy governors - N S Vishwanathan, B P Kanungo and M K Jain.
History Repeats Itself: Acharya is the second high-profile resignation in the past six months at the Central Bank. In December last year, governor Urjit Patel had resigned nearly nine months before the end of his schedule term, allegedly over differences with the government.
Comments, Please: While Dr. Acharya’s resignation has evoked mixed reactions from critics, it is believed that with his exit the composition of the MPC will likely become incrementally more dovish as Dr. Acharya stood on the more hawkish side of the policy spectrum. In fact, analysts at Nomura expect the RBI to cut repo rate by 25 bps in its next meeting in August, which could result in a cumulative 100 bps, or 1 per cent, cut in 2019.
Fall-out: A day after the resignation of deputy governor Viral Acharya six months before the end of his term, the RBI’s employees association has called for the creation of a “collegium of experts” to select governors and deputy governors of the RBI in the future.
Such a collegium, which would comprise “comprising former governors, other prominent central bankers and economists”, will ensure the central bank’s autonomy, the All India Reserve Bank Employees Association said in a statement.
Presently, governors and deputy governors of the central bank are appointed by the government as per the Reserve Bank of India Act, 1934.
US considers pushing for development of 5G equipment outside China. Huawei offers to sign ‘no-backdoor agreement’ with India. Investment worth $14bn needed to lay 5G fibre network over the next 2-3 years, as per Crisil.
5G Sans China: In a move which could reshape global manufacturing and potentially exacerbate ongoing trade tensions between China and the US, the Trump administration is examining whether to require that next-generation 5G cellular equipment used in the US be designed and manufactured outside China.
Real and Lightning Fast: Meanwhile, both Verizon and AT&T have launched their mobile 5G networks. Sprint turned to 5G alongside the launch of the LG V50 ThinQ 5G phone in June. UK carrier EE was the first in its country to turn on 5G.
Of late, more and more carriers are turning on their 5G networks, even if the coverage is still limited.
Here's everything you need to know about the exciting new technology the world is rapidly adopting.
No Snooping: Chinese telecommunications giant Huawei has offered to sign a ‘no-backdoor agreement’ with the Indian government, which will stipulate that it will not allow any snooping on its network or handing over of data.
Moreover, Huawei has reported that it will proactively shift data of Indian consumers to within the country. Currently, some of its servers are in Singapore and some are in India.
The Why: The move comes on back of the widespread allegations that the Chinese government has been using the Huawei’s products and equipment for surveillance and espionage, a charge the company has repeatedly denied.
An Expensive Affair: As per a report by the Crisil, Indian telecom operators may need to make investments of as much as $14bn for laying 5G fibre networks over the next 2-3 years.
A primary challenge for telecom operators in India will be the lack of investment in fibre network that can power 5G. 5G require 70 percent fiberisation levels compared with 25-30 percent at present.
Paying Through the Nose: High cost of fibre in addition to the elevated 5G spectrum costs (the reserve price recommended by the Telecom Regulatory Authority of India (TRAI) for 5G spectrum is much higher than in countries like the UK or South Korea) is likely to make the entire project a costly affair for the Indian telecoms.
SEBI announces slew of reforms to address credit-related crises. Mutual fund industry faces the repercussions of failing to self-regulate.
Damage Control: After a series of credit-related crises, SEBI has announced a slew of reforms over credit rating firms, liquid mutual funds, promoters’ shares and royalty payments to improve enforcement on all fronts.
Reforms Ahoy!: Mutual funds will now be allowed to invest only in listed securities and liquid mutual fund schemes will have to hold at least 20% of funds in assets like cash and government securities.
When it comes to promoters, SEBI said standstill agreements between promoters and mutual funds will not be recognised and promoters will be decreed to disclose reason for encumbrance when pledged shares cross 20% of total capital.
The market regulator’s announcements also include mandating shareholders’ approval if royalty payments cross 5% of annual turnover, new regulations for credit rating agencies, and approving a framework for differential voting rights (DVR), which the organisation’s Chairman said would be the first time DVR in shares would be attempted in India.
Paying the Price: The mutual fund industry is reportedly displeased over the recent reforms announced by SEBI.
Industry insiders are worried, for example, about the new exit load requirement on liquid funds. Investor reaction is yet to be gauged, but it could demotivate short-term investments, they fear.
Then there’s the market regulator’s decision to reduce to 20% the investment limit in a single sector and to 10% investment in HFCs. SEBI has also placed constraints on use of structured assets to about 5% of the portfolio and on bond purchases based on equity shares.
The industry might be miffed over SEBI’s intervention - it might even find it byzantine and atavistic. But over-regulation is the price one pays for failing to self-regulate. The mutual fund industry is learning that the hard way.
Big NBFCs need greater scrutiny to prevent market contagion, RBI warns. But losses from failure of large banks has decreased. HDFC Bank plans IPO of its NBFC arm.
Shadow Banking: Non-bank lenders’ sources dried up due to the NBFC crisis sparked by IL&FS’s default last year, the RBI said in its biannual Financial Stability Report.
NBFCs are the largest borrowers of funds from the financial system but banks and mutual funds decreased lending to these shadow banks and housing finance companies (HFCs), creating a cash crunch.
Spreading Chaos: The central bank also warned of a contagion effect arising out of failure of big NBFCs and HFCs. This could lead to losses similar to those caused by failure of big banks. This underscored the need for “greater surveillance over large HFCs/NBFCs”.
Silver Lining: On the bright side, the central bank noted that losses from contagion risks arising out of failure of large banks are lower for March 2019 when compared to March 2018.
This is due to better capitalisation and improved market discipline, the RBI said, as better-performing companies raised more funds while those with asset quality issues were subject to higher borrowing costs.
Alternate Capital: HDFC is planning an IPO of its non-banking lending unit, HDB Financial Services. The offering will likely raise the company more than $1bn.
HDFC owns almost 96% stake in HDB Financial Services and the IPO would make the NBFC the fifth HDFC Group company to be listed on stock exchanges
India’s tariffs “unacceptable”, Trump tweets. Relations with India have never been better, Trump says.
Trump, Trade, Twitter: Ahead of the G20 summit in Osaka, Japan where he is scheduled to meet PM Modi, US President Donald Trump tweeted his displeasure over India’s tariffs on American goods that were placed after Washington revoked New Delhi’s preferential trade status under GSP.
Trump said he looked forward to speaking with Modi about how India “for years having put very high tariffs against the US, just recently increased the tariffs even further”.
India, US Bhai Bhai: PM Modi and President Trump met along the sidelines of the G20 summit and the bonhomie was palpable.
Ties between the two countries have never been better, Trump told Modi, and pledged “very big trade deals” in manufacturing and 5G. The two leaders have also directed their officials to engage in talks to break trade tensions.
This marks a turnaround from Thursday when Trump had tweeted his displeasure over India’s recent tariffs on 28 American products.
Foreign Secretary Vijay Gokhale told reporters that four issues would be the subject of India-US talks – Iran, 5G, trade and defence.
Xi Jinping plays with a risky gamble. Trump and Xi agree to resume trade talks. Possible levers that the US and China could pull to get the best out of a trade deal.
Xi Blinks: Chinese President Xi Jinping will reportedly ask Donald Trump to end the international US camapign against Huawei – in exchange for agreeing to a trade deal with Washington.
This is a risky gamble to say the least and it underscores how important the telecom company is for Beijing. Xi will be asking Trump to end his two-pronged attack on China (via banning Huawei and tariffs) and in return he would sign a trade deal that is already awaited.
The X factor, then, is what the trade deal would involve for the two countries – particularly, what is Xi ready to sacrifice for Huawei? Meanwhile, China has become a poll issue in the upcoming US Presidential election. To ensure his re-election, Trump desperately needs to bring home a deal, or at least the blueprint of one.
All Eyes On Osaka: Trade talks stalled in May when Trump accused China of breaking a deal they’d agreed to sign. Now, with Trump and Xi slated to meet in the sidelines of G20 on Saturday, all eyes are on Osaka. Will they reach a consensus? The repercussions are high; the expectations ... not so much.
Mutual Understanding: The world’s two largest economies have apparently found a way to break an impasse and restart talks.
US President Donald Trump and Chinese President Xi Jinping met in Osaka on Saturday and held talks about the ongoing trade war between their countries. The results were substantial – Trump agreed to halt (for now) imposing 25% tariffs on the remaining $325bn worth of Chinese goods and allow sale of US products to Huawei.
Trade talks between Washington and Beijing, which had stalled in May, will now resume. A final trade deal, though, is still nowhere in sight.
Pressure Points: Now that trade talks between the US and China will resume, expectations for a trade deal will rise again. But talks have stalled, resumed and broken down many times before. And there are many levers each country can pull to get the most out of the talks and out of a deal.
The US can use Huawei as a bargaining chip – and Trump has publicly indicated before that this could be a course of action for US negotiators. Washington can also threaten to hike tariffs further on the remaining $325bn-worth of Chinese goods, which would mean all Chinese goods would be victims of the trade war, and this would hurt the Chinese economy even further.
On the other side of the table, China could weaponise its monopoly on rare earth metals, which are necessary for everything from mobile phones to nuclear reactors. Beijing could also take the decision to dump US treasuries, taking advantage of the fact that it is the biggest holder of US government debt.
Furthermore, China could devalue its currency to make its exports more competitive and sanction specific American companies and individuals – but this would spook investors and elicit further sanctions from Washington over currency manipulation.
Then there are defence levers and military ultimatums. But that would be a last-resort option, only if talks deteriorate to the point of hostility.