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RBI Keeps Repo Rate Unchanged, Inverted Yield Curve, Direct Listing Options for Indian companies on Foreign Bourses et al.

Professor of Financial Economics and Part-time Value Investor, Transfin.
Dec 9, 2018 2:34 PM 5 min read
Editorial

Good evening readers,

 

We have time and again seen how crude oil is an important piece in the global economy puzzle. Read Nikhil's piece here to know why. Any mention of the black gold is almost certain to make news. Considering this, it wasn't surprising when the news of Qatar exiting the OPEC took to the headlines. Read this week’s LongShorts here to understand the causes and plausible implications of Qatar's exit from OPEC on Global Crude Oil. We also discuss it in our weekly Podcast.

 

Other than this, this week saw a spillover of the heated discussion around India's recalibrated GDP numbers. We do deep dive on the re-calculation of the back series and the following redux in growth in this week's LongShorts as well as the Podcast.    

 

The weekend witnessed a pivot from the macro-economic themes. Read University of North Carolina Kenan-Flagler Business School's piece on understanding What Determines Employee Retention and Attrition to know how.

 

Now, moving on to the Top 6 Business Stories of the week through our End Of Week Wrap Up:

 

RBI maintains repo rate unchanged at 6.5%, maintains 'calibrated tightening' stance. Fitch downgrades India’s GDP forecast from 7.4% to 7.2% for FY19. Current account deficit widens to 2.9% of GDP in Q2 vs. 1.1% in the previous year.

 

The What: In its fifth bi-monthly monetary policy meet of FY2018-19, the RBI for the second time in a row maintained the repo rate unchanged at 6.5%. The reverse repo rate also stands unchanged at 6.25%.

 

The Big Picture: The decision of the MPC is consistent with its stance of calibrated tightening of monetary policy with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band +/-2%. A below estimate GDP of 7.1% for Q2 must have surely played a role.

 

The What: Fitch Ratings downgrades GDP projections from earlier estimated 7.4% to 7.2% for current fiscal year on back of weaker-than-expected GDP growth, higher financing cost and reduced credit availability.

 

Also, this: Fitch has projected the growth for FY20 and FY21 at 7% and 7.1% respectively.

 

The What: India’s current account deficit (CAD) stood at $19.1bn in Q2 FY 2018-2019, an increase from $6.9bn (1.1% of GDP) in Q2 FY 2017-2018 on back of a large trade deficit driven by rising crude oil prices and falling Rupee. The CAD stood at USD 15.9 billion (2.4% of GDP) in Q1.

 

SEBI Panel discusses direct listing options for Indian companies on foreign bourses.

 

Up Close: This would allow locally incorporated companies to list overseas without first needing to list in India.  

 

What Does This Mean: Currently only "profitable" companies can be listed in India, a condition which many late-stage startups cannot fulfill. This move would potentially enable businesses to access a broader, more diversified and sophisticated foreign investor base. 

 

What else: 8 separate regulations would need to be amended to enable SEBI's direct foreign listing push

 

US/INTERNATIONAL

 

The yield on the five-year Treasury dropped below the two-year and three-year Treasury yield, DJIA plunges by 800 points.

 

Up Close: For the first time since 2007, the yield curve inverted when the yield on the five-year Treasury dropped below the two-year and three-year Treasury yield.

 

The What: Yield curve is a graphical representation of bond yields of varying maturity dates. Typically, longer the maturity, higher the yield. A flattening/inverting yield curve is often perceived to be indicative of an upcoming recession, with investors increasingly being hesitant to lend in the short term.

 

Canadian Authorities arrest CFO of Huawei Technologies for alleged violations of Iran sanctions. Technology rivalry between US and China intensifies with the arrest of Huawei’s CFO, Washington allies pressurised to blacklist the co.  

 

The What: US authorities have been investigating Huawei, the world's largest telecoms equipment maker, since 2016 for allegedly violating US export and sanctions laws by shipping US-origin products to Iran and other countries. The company is also believed to pose a national-security threat to US because of its alleged ties to the Chinese government.

 

Zoom Out: Stock markets fell sharply following the arrest. S&P 500 plunges c. 1.9%. Dow Jones drops around 800 points.

 

The What: US officials say that they are intensifying efforts to curb Huawei because wireless carriers worldwide are about to upgrade to 5G that will connect many more items—factory parts, self-driving cars and everyday objects like wearable health monitors—to the internet. This will give Beijing the potential to interfere with an ever-growing universe of connected devices and pose a potential threat to national security.

Perspective: The developments coincide with Australia banning Huawei from its 5G networks, and New Zealand blocking one of its major wireless carriers from using Huawei.

 

Qatar to withdraw from OPEC; to focus on natural gas production instead.

 
The What: Qatar to withdraw its membership from OPEC effective January 2019 and instead focus on development and increase of natural gas production.

 

Zoom Out: Qatar has oil output of only 600,000 barrels per day (bpd), compared to the 11 million bpd produced by Saudi Arabia, the group's biggest oil producer and world's biggest exporter. However, it is the world's biggest exporter of liquefied natural gas (LNG).

 

The Big Picture: The development comes as OPEC and its allies consider a cut in supply in order to support falling crude oil prices which have slid more than 30% since Oct.

 

GSK to acquire Tesaro for $4.16bn. Hindustan Unilever signs €3.3bn deal with GSK to buy Horlicks and other consumer healthcare nutrition products.

 

The What: GlaxoSmithKline (GSK) to acquire cancer-focused pharmaceutical company, Tesaro for $4.16bn.

 

Up Close: The move will give GSK acquisition of Tesaro’s ovarian cancer drug Zejula - one of a new class of drugs known as PARP inhibitors, which have increased survival rates for women with recurrent ovarian cancer. It is also being evaluated as a potential treatment for lung, breast, and prostate cancer. 

 

Zoom Out: According to CEO, Emma Walmsley, the deal will strengthen GSK’s pharmaceuticals business by accelerating the build of their oncology pipeline and commercial footprint, along with providing access to new scientific capabilities.

 

The What: Unilever announced that it has signed an agreement to acquire the Health Food Drinks portfolio of GlaxoSmithKline (GSK) in India, Bangladesh and 20 other predominantly Asian markets in an-all equity deal.

 

Up Close: The transaction is in conjunction with Unilever’s strategy of increasing its presence in health-food categories and in high-growth emerging markets.

 

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