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Inflation in India Rises, Banks Get CRR Exemption, US Classifies India as a Developed Economy, Coronavirus Outbreak Rattles Markets

Professor of Financial Economics and Part-time Value Investor, Transfin.
Feb 16, 2020 4:30 AM 7 min read
Editorial

Retail inflation in India rises to the highest since May 2014 at 7.59%. SEBI bans portfolio managers from charging upfront fees. Wholesale inflation climbs 3.1% in January. GST rates may be revised annually. Banks get CRR exemption for auto, housing, MSME loans for 5 years. India has been classified as a developed economy by the US Trade Representative. Domestic passenger vehicle sales decline 6.2% in January. Urban unemployment rate rises to 9.7% in January. US antitrust officials to probe every acquisition made by Big Tech firms in 2010-2019. Microsoft’s Pentagon contract work halted by judge in early victory for Amazon. Huawei charged by US prosecutors with trading state secrets. 5G roll-out in India may be affected by the coronavirus outbreak in China. Analysts slash global growth forecasts over coronavirus outbreak.

 

 

INFLATION

Retail inflation in India rises to the highest since May 2014 at 7.59%.

Mounting Worries

Retail inflation in India rose to 7.59% in January vs 7.35% in the previous month on the back of higher prices of food items such as vegetables, eggs, meat and fish, along with spike in fuel costs. [BBG Quint]

 

In addition to this, data released by the National Statistical Organisation showed that industrial output contracted 0.3% in December compared yo a 1.8% rise in November due to decline in the manufacturing sector. [New Indian Express]

 

Wholesale inflation climbs 3.1% in January.

Up and Up

India’s wholesale inflation rose to 3.1% in January, Ministry of Commerce and Industry data has shown. Measured in terms of wholesale price index (WPI), wholesale inflation rose to 2.59% in December 2019 and to 2.76% in January last year.

 

The build-up inflation during the ongoing 2019-20 FY rate was at 2.5%, against 2.49% in the corresponding period a year ago, as per the data. [Indian Express]

 

POLICY

GST rates may be revised annually.

Once Upon a Year

Finance Minister Nirmala Sitharaman is reportedly set to make changes in GST rates an annual affair to remove “uncertainty” for businesses and the Government. Until now, GST rates were reviewed and revamped frequently, which Sitharaman says has led to an inverted duty structure where the raw materials ended up becoming costlier than the finished product.

 

“Therefore, when the rate of tax of one item is brought down, a whole lot of other ripple effects are created. With that ripple effect, refund is affected," Sitharaman said at a post-Budget interaction with reporters in Kolkata. [Livemint]

 

Union Cabinet approves merger of three state-owned general insurers.

M&A

The Union Cabinet is reportedly likely to approve the merger of three state-owned general insurers – Oriental Insurance Company, National Insurance Company and United India Insurance Company. The merger will be accompanied by capital infusion and is expected to improve operational efficiency, solvency ratio and profitability. [Livemint]

 

Banks get CRR exemption for auto, housing, MSME loans for 5 years.

Room for Lending

The Reserve Bank of India (RBI) announced that banks would not be required to maintain the cash reserve ratio (CRR) for five years on their deposits for an amount equivalent to loans given to MSMEs (micro, small, and medium enterprises), housing and vehicles sectors between January 31st and July 31st.

 

This is likely to have “multiplier effects to support growth impulses”, the RBI noted in its recent Monetary Policy Committee bi-monthly meet. [BS]

 

Good to Know

Banks currently maintain 4% on their deposits as CRR.

 

SEBI bans portfolio managers from charging upfront fees.

A Fair Game

The markets regular, SEBI has banned portfolio managers from charging upfront fees from clients either directly or indirectly.

 

Brokerage should be charged at actual to clients as expense.

 

Portfolio management services (PMS) providers can continue to charge annual fees, as a percentage of the investor's corpus.

 

“Operating expenses excluding brokerage, over and above the fees charged for portfolio management service, shall not exceed 0.50% per annum of the client’s average daily assets under management,” SEBI said in a circular on Thursday.

 

The circular comes on the back of several other regulations affecting PMS which have been introduced by the regulator over the last couple of months such as raising the minimum ticket size for PMS from ₹25L ($35,104) to ₹50L ($. The circular will become effective 1 May. [Deccan Herald]

 

Read SEBI's official circular here.

 

GROWTH

Exports decline by 1.7% in January and trade deficit widens to $15bn.

China Sneezes and India Catches A Cold

India’s exports fell by 1.7% in January, while imports fell by 0.75%, leading to a trade deficit of $15bn, according to Ministry of Commerce figures released on Friday. Imports fell for eight months in a row while merchandise exports fell for the sixth consecutive month.

 

The trade deficit itself is now at a seven-month high.

 

Trade could continue to tread in negative territory due to the coronavirus outbreak in China, which has put large swathes of the country in lockdown and hurt its economy. India is a greatly dependent on its northern neighbour, with Indo-Chinese trade having grown from $4.8bn in 2002-03 to $87bn in 2018-19. [Livemint]

 

Domestic passenger vehicle sales decline 6.2% in January.

Riding in Red

Domestic passenger vehicle sales declined 6.2% to 2,62,714 units in January from 2,80,091 units in the year-ago month, automobile industry body SIAM reported.

 

Car sales also witnessed a slump last month, falling 8.1% YoY to 1,64,793. Motorcycle sales were also down 15.17% to 8,71,886 units.

 

Sales of commercial vehicles were down 14.04% to 75,289 units in January. [BS]

 

Urban unemployment rate rises to 9.7% in January.

A Mixed Bag

As per data released by the Centre for Monitoring Indian Economy (CMIE), India had an unemployment rate of 7.16% in January, significantly lower than the 7.6% recorded in December.

 

Devil is in the Details

Rural unemployment fell to 5.97%, down from 6.93%, in the previous month. However, urban unemployment rose to 9.7% in January, up from 9% in December 2019 - close to its recent peak of 9.71% in August 2019. Meanwhile, the quality of jobs both in urban and rural India has been deteriorating.

 

Here are edited excerpts from a conversation between CMIE Managing Director and CEO Mahesh Vyas and Fortune India about the unemployment data. [Fortune India]

 

India has been classified as a developed economy by the US Trade Representative.

Has India Arrived?

India has been classified as a developed economy, the United States Trade Representative has said. This is expected to stop all chances of India reclaiming its benefits under the Generalised System of Preferences (GSP) scheme, the privileges under which were revoked in June.

 

The GSP is America’s oldest preferential trade scheme, which offers developing countries tariff-free access to the US market. It considers a country’s per capital gross national income (GNI) and share of world trade to designate its level of economic development. [BS]

 

TECH

US antitrust officials to probe every acquisition made by Big Tech firms in 2010-2019.

Probe Me In

The US Federal Trade Commission has issued Special Orders to five Big Tech firms – Alphabet, Amazon, Apple, Facebook and Microsoft. The motive is to examine every acquisition made by these firms in the past decade.

 

Big Tech firms don’t always disclose every acquisition they make, especially if the companies being acquired are little fish in the big tech pond. US officials believe that analysing these companies’ history of acquisitions could shed light on their financial power and market influence in anticompetitive ways. [TechCrunch]

 

Microsoft’s Pentagon contract work halted by judge in early victory for Amazon.

Yes! Bezos

A federal judge in the US has agreed to temporarily block Microsoft from beginning work on the Pentagon’s multibillion-dollar cloud computing contract. This is an early court victory for Amazon, which has accused the Trump administration of intervening in the contract-bidding process in favour of Microsoft due to grudges between the President and Jeff Bezos, who owns The Washington Post, a publication Trump accuses of being biased against him. [NYT]

 

Huawei charged by US prosecutors with trading state secrets.

Feel the Charge

Federal prosecutors in the US have charged Huawei and two of its subsidiaries with racketeering conspiracy and conspiracy to steal trade secrets. This ramps up pressure on the telecommunications giant, which has come under fire by the Trump administration for allegedly using its networks around the world to spy for the Chinese Communist Party. [WSJ]

 

CORONAVIRUS

5G roll-out in India may be affected by the coronavirus outbreak in China.

No End in Sight

The deadly coronavirus outbreak in China has already claimed more than 1,000 lives (as reported by Chinese media), and is showing no signs of abating.

 

A prolonged epidemic is not only expected to vastly hit businesses, trade and tourism, but also technological development. 

 

India too could be vastly hit. Auctioning and roll-out of the much-awaited 5G spectrum may be hit adversely considering that Chinese vendors such as Huawei have been leading the charge on the 5G front. Devices ecosystem development will also be negatively impacted, globally. [ET Telecom]

 

Analysts slash global growth forecasts over coronavirus outbreak.

Extended Uncertainty

There’s no sign of an end to concerns as the prospect of another extension of suspension of work in Chinese cities looms. Chinese authorities could extend the Lunar New Year holiday till February 17th in some key provinces as the country battles a deadly coronavirus outbreak that has, officially, claimed over 800 lives. An extended suspension of work in China, “the world’s factory”, could further strain global supply chains, with the reverberations being felt around the world. [ET]

 

Thus, China’s battle against the coronavirus is having implications on the global economy. So much so that most analysts have started lowered global growth forecasts. Some even argue that global GDP growth this year will see its weakest pace since the 2007-2008 financial crisis. [BS]

FIN.

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