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New FDI Norms Likely to Limit Opportunistic Chinese Investments in India

Professor of Financial Economics and Part-time Value Investor, Transfin.
Apr 20, 2020 3:10 PM 5 min read
Editorial

Experts applaud FDI move, say FII route should also be plugged. Cuts in reverse repo rate may not be sufficient to increase liquidity. HDFC Q4 profit jumps 18% to ₹6,928cr ($913m). Infosys profit rises 6% to ₹4,321cr ($569m) in Q4. Government may extend PF benefits to more companies to prevent job losses. China cuts benchmark lending rate, second time this year. Australia to make Google and Facebook to pay for news content.

 

 

REVERSE REPO

Banks have rushed to deposit excess money with RBI under reverse repo window.

Let Them Have Loans

The RBI has called out banks for parking huge amounts of money at its reverse repo window even as the reverse repo rate has been consistently slashed. The Central Bank is reportedly willing to impose a cap on reverse repo rate to ensure that liquidity translates to credit. [BS]

 

But will this be enough to make banks lend more?

 

Are Banks Overusing the Reverse Repo Window?

Bank lending has plunged in recent weeks. On February 20th, banks had deposited ₹39,983cr ($5.27bn) with the RBI under the reverse repo window. By April 12th, this had exploded to ₹7,01,69cr ($9.25bn), an increase of 1,655%. [Livemint]

 

This means there is less money with banks to loan out to companies and consumers.

 

Cuts in reverse repo rate may not be sufficient to increase liquidity.

Why Don’t Banks Want to Lend More?

Lenders seem to be rushing to deposit their excess money with the RBI. In these uncertain times, this seems like a safer bet for banks when compared to loaning it elsewhere (where, by the way, banks would be expected to slash interest rates considering the cuts in repo rate).

 

This translates to lower revenue from loans and the added dangers of more bad loans in coming months.

 

Therefore, asking lenders to lend right now is easier said than done. The RBI has already cut the reverse repo rate twice in the last three weeks. Whether this will lead to more money in the system will depend on how quickly consumer demand will pick up and on banks’ confidence on a swift economic turnaround.

 

EARNINGS

HDFC Q4 profit jumps 18% to ₹6,928cr ($913m).

Results Are Out!

Private sector lender HDFC Bank reported a 17.7% rise in net profit at ₹6,928cr ($913m) in Q4.

 

Net interest income for the quarter climbed to ₹15,204cr ($2,005m) from ₹13,089cr ($1726m), driven by 21.3% growth in advances and a 24.3% growth in deposits. [BS]

 

Infosys profit rises 6% to ₹4,321cr ($569m) in Q4.

Marching Ahead

IT giant Infosys reported 6.10% YoY rise in consolidated profit for the March quarter at ₹4,321cr ($569m) vs ₹4,074cr ($527m) last year.

 

Revenue for the quarter rose 8% to ₹23,267cr ($3,069m), the company said in a filing. 

 

Operating profit margin came at 21.20% against 21.40% last year. [ET Earnings]

 

FDI

Experts applaud FDI move, say FII route should also be plugged.

Guarding Boundaries

In a landmark judgement, the Centre over the weekend made prior Government approval for foreign direct investments (FDI) from countries that share a land border with India mandatory.

 

The move is likely to restrict opportunistic Chinese investments in the country and comes shortly after China's central bank recently raised stake in HDFC to a little over 1% according to March quarter shareholding data.

 

FYI

Previously, only investments from Pakistan and Bangladesh faced such restrictions.

 

Following this, experts feel that the Foreign Institutional Investor (FII) route should also be likewise plugged to maximise the impact.

 

Click here for a deep dive into the matter. [Moneycontrol]

 

Tech startups likely to bear the brunt of the new terms.

Troubled Waters

India's top unicorn startups Paytm, Zomato, BigBasket and Dream 11 count Chinese investors as their biggest backers, having so far received billions of dollars in investments from Chinese companies.

 

Now with the Government banning fresh investments from India’s neighbours, including China, through the automatic route and mandating that all injections would be subject to its approval first, these startups are likely to bear the brunt and face delay in raising capital. [Livemint]

 

MONEY

Government may extend PF benefits to more companies to prevent job losses.

A Good Deed Goes a Long Way

The Government is likely to extend the Provident Fund (PF) benefit scheme to more companies, irrespective of their employee headcount.

 

This would imply that the Government may pay the share of PF of both employer and employees for more companies than announced earlier.

 

Zooming Out

As part of a ₹1.7Lcr ($2.2bn) package announced by Finance Minister Nirmala Sitharaman on March 26th, the Government had said it would pay the entire PF contribution of those who earn less than ₹15,000 ($197) per month in companies that employ up to 100 people, where 90% draw salaries of less than ₹15,000 ($197) per month. [ET Policy]

 

How will taxpayers get impacted by recently announced relaxation in income tax compliances?

Extra Crunch

Sitharaman had previously made some major announcements regarding relaxation in income tax compliances in the wake of the ongoing pandemic. Here’s a look at how taxpayers will get impacted. [Financial Express]

 

GLOBAL

China cuts benchmark lending rate for second time this year.

Lucky the Second Time?

As widely expected, China cut its benchmark lending rate for the second time this year to reduce borrowing costs for companies and provide the economy with some relief.

 

The one-year loan prime rate (LPR) was lowered by 20 basis points (bps) to 3.85% from 4.05% previously, while the five-year LPR was cut by 10 bps to 4.65% from 4.75%. [Reuters]

 

Australia to make Google and Facebook pay for news content.

Pay For What's Fair

Tech giants Google and Facebook will be forced to pay for news content in Australia, the Government said on Monday as the pandemic has resulted in a collapse in advertising revenue for media outlets.

 

Treasurer Josh Frydenberg said the competition watchdog, the Australian Competition and Consumer Commission (ACCC), would in late July release draft rules for the platforms to pay fair compensation for the journalistic content siphoned from news media. [AP]

FIN.

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