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RBI Monetary Policy review: Pause or hike, opinion divided

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Mumbai: After raising its key policy rate — the Repo rate by 25 basis points in June, it could well be a close call this time around for the Monetary Policy Committee (MPC) of the Reserve Bank of India in the bi-monthly policy review on August 1 with opinion divided over whether to raise interest rates or to leave it unchanged.
A section of the financial markets and analysts say that there may not be much urgency in delivering back to back rate hikes when the policy stance is still neutral. Given the lack of clarity regarding inflationary and fiscal risks, the RBI is likely to persist with the neutral stance of the monetary policy to signal that the timing and magnitude of upcoming rate hikes would be data dependent, analysts said.
If the RBI stance is changed to withdrawal of accommodation, it may be perceived as a signal of a series of impending rate hikes. This could lead to a rise in bond yields, while contributing to a pullback of the rupee which is now showing volatile movements. With the stock markets moving Northwards, foreign investors who sold around Rs 60000 crore in the April to June, have made marginal purchases.
However, others, including rating firm ICRA say: with mixed cues regarding the extent of inflationary and fiscal risks, and the momentum of economic growth, the MPC would adopt a cautious stance and increase the repo rate to 6.50 per cent in the August review. The rise in core inflation is the real worry of policymakers.
Lakshmi Iyer, Chief Investment Officer, Kotak Mutual Fund, said: “The August MPC decision could be a close call. Consumer inflation for June was lower than expected. Crude oil prices have been largely range-bound. There also seems uncertainty on how the global trade war could potentially unfold. In such a scenario, the MPC could afford to do a ‘wait and watch’ at this juncture and consider more data points before a rate action.” From the market perspective, bond yields already seem to have discounted another rate hike and hence yields are at elevated levels.
The relief is that the August policy comes with a breather on the inflation front as the expected inch up to inflation in June has not materialised with a print of 5 per cent against expectation of 5.4 per cent. Monsoon also recovered sharply in July and international oil prices have corrected by 5 per cent since last policy in June and the currency is now moving in a narrow range.
The case against status quo could be on two counts. First, higher core inflation seems to have peaked at 6 per cent as per the base case scenario. Second, the sharp hike in MSP prices of close to 15 per cent against last four year average of 4 per cent could impact inflation. As the average inflation for FY 2019 could be 4.75 per cent against 3.8 per cent last fiscal, there is room for 25 bps hike in rates either pre-emptively now or in October, beyond that oil prices should drive the reaction function of the policy makers, said Kunal Shah, Debt Fund Manager, Kotak Life Insurance.
Naresh Takkar, Managing Director and Group CEO, ICRA, said, “while the cuts in rates of the GST on various items may modestly subdue inflation, they would add to fiscal concerns. Moreover, the uptick in the core-CPI inflation in June 2018 and the risks associated with the trend of expenditure announcements by state governments, suggest that the MPC may opt for a pre-emptive rate hike in August 2018.”
“Depending on the impact of inflationary and fiscal risks on the inflation outlook, the MPC may raise the repo rate by 25-50 bps in the last three-quarters of FY2019. However, it may retain the neutral stance of the monetary policy instead of a shift to withdrawal of accommodation, to signal that the timing and extent of future rate hikes would remain data dependent,” Takkar said.
According to Crisil, though food inflation decelerated, what took the number higher was firming up of fuel and core inflation. The MPC had hiked its policy rate by 25 bps in June envisaging exactly such pressure. Crisil said sustained rise in core inflation would worry the MPC and may require one more rate hike down the road. Core inflation is becoming broad-based with almost all categories such as health, recreation and amusement and education showing a rising trend.


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India to surpass China to become 2nd largest oil demand centre in 2019

Press Trust of India

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New Delhi: India will surpass China to become the second largest oil demand growth centre globally in 2019 on back of buoyant auto fuel and LPG consumption, research and consultancy group Wood Mackenzie said on Tuesday.

In a report, Wood Mackenzie said India’s oil demand growth recovered strongly in 2018, overcoming the aftermath of the implementation of Goods and Services Tax (GST) and demonetisation, and contributed 14 per cent of the global demand growth or 2,45,000 barrels per day.

“We forecast oil demand to grow at the same level in 2019. This will result in India becoming the second largest demand growth centre globally in 2019, behind the US but ahead of China. Transport fuels – gasoline and diesel – and residential LPG will continue to be the two main drivers of oil demand growth,” it said.

 

According to the US Energy Information Administration (EIA), India is currently ranked behind the United States and China as the world’s third-largest oil consumer. It consumed 206.2 million tonnes (over 4 million bpd) in the 2017-18 fiscal year.

During April-December, consumption of petroleum products has been 157.4 million tonnes, up 2.5 per cent over year-ago period.

Last August, oil cartel OPEC projected India’s oil demand to rise by 5.8 million barrels per day (bpd) by 2040, accounting for about 40 per cent of the overall increase in global demand during the period.

Mackenzie said diesel, the most consumed fuel in the country, is projected to grow by 6.4 per cent or 1,12,000 bpd year-on-year in 2019 compared with 93,000 bpd in 2018.

This was because of “buoyant commercial vehicle sales facilitated by sustained infrastructure growth, and increasing demand from the construction, logistics, e-commerce and consumer goods sectors,” it said.

Also, the push will come from a demand-based approach instead of a tax-based approach in the logistics sector, following the implementation of the GST, which has led to the removal of inter-state taxes. “This is a structural shift, resulting in increased demand for heavy and medium-duty trucks to achieve economies of scale and operational efficiency.”

More importantly, general elections in May will lead to increased travel activity for campaigning and implementation of infrastructure projects, which will bolster demand in the first half of 2019, Mackenzie said.

 

“Key risks ensue as crude price volatility is expected to persist. Historically, short-term gasoline demand has been relatively inelastic to retail prices in developing economies such as India. Even though higher retail prices affect consumer sentiment for new vehicle purchases, we believe this trend will continue with income effects driving the demand, subduing the price effects,” it said.

LPG demand growth will remain robust in 2019 at 5 per cent (40,000 bpd) although it is lower than the 56,000 bpd growth achieved in 2018. “The number of new household LPG customers continued to surge, driven by the Ujjwala scheme to promote clean cooking fuel in rural areas. That said, there is a largely untapped market, as around 50 million households remain deprived of LPG,” it said.

On the use of electric vehicles, it said only 2,60,000 EVs have hit Indian roads, majority being two-wheelers.

“Electric car sales, for instance, declined by 40 per cent to a mere 1,200 units in the financial year 2018 over the financial year 2017, while electric two-wheeler sales rose 138 per cent to 54,800 units during the same period. In contrast, China had a stock of 1.8 million EVs and 258 million e-bikes at the end of 2018,” it said.

This year, it said, will be an important year as the final version of the National Auto Policy and the second phase of the FAME scheme will be released.

“The question is the timing – will it be before or after the elections? Will the Modi government change tack if it is not re-elected? Will this ambiguity continues to deter wider adoption? Automakers seem to have realised that EV adoption is not a question of ‘if’. For instance, Maruti Suzuki, the largest automaker in India, will launch an electric version of one of its best-selling entry-segment cars – the Wagon R – in Q1 2019,” Mackenzie said.

Another key challenge will be stakeholder management and coordination across the different ministries, government bodies and industry participants while the policy is formalised.

Stating that two-wheelers will dominate the electric mobility landscape in the personal transport sector, it said India offers huge potential for automakers as car ownership levels are very low (23 per 1,000 capita).

Rising income levels will increase car ownership and most global automakers are closely watching this lucrative market. At the same time, two-wheelers should not be ignored – with current ownership six times larger than four-wheelers.

“We believe that two-wheelers are the more effective option given their utility in intra-city travel, less need for public charging infrastructure and availability of battery technology. Two-wheelers will eventually leapfrog four-wheelers towards the goal of a greener and sustainable mobility future,” it added.

 

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Sensex snaps 5-day winning streak on weak global cues, profit-booking

Press Trust of India

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Mumbai: The domestic equity market took a breather on Tuesday after a five-day rising spree as investors booked profits in metal, financials and auto counters, amid weak cues from international markets after IMF lowered its global growth projections for 2019 and 2020.

The 30-share BSE Sensex dropped 134.32 points to end at 36,444.64, while the broader NSE Nifty finished 39.10 points lower at 10,922.75.

Participants were seen taking money off the table after the recent rally, even as the wider sentiment remained positive, underpinned by better-than-expected Q3 earnings by several bluechips.

 

The BSE Sensex, after resuming higher at 36,649.92, advanced to 36,650.47 on buying by domestic institutional investors (DIIs) as well as retail participants. However, market quickly slipped into the negative zone as investors chose lock in gains in recent outperformers, dragging down the key benchmark to a low of 36,282.93 before ending at 36,444.64 down 134.32 points, or 0.37 per cent.

The gauge had rallied over 725 points in the previous five sessions. Likewise, the 50-stock NSE barometer Nifty finished 39.10 points, or 0.36 per cent, down at 10,922.75 after hitting the day’s high of 10,949.80 and a low of 10,864.15.

Brokers said investors turned cautious and preferred to log profits in recent gainers, dragging down key indices.

“The market tracked other Asian markets following IMF’s weak forecasts of global growth prospects,” said Paras Bothra, President, Equity Research, Ashika Group.

“While India’s economic forecasts were retained, concerns were raised over the difficulties in containing the fiscal deficit. Continued weakness in the rupee favoured IT and Pharma stocks while majority of other sectors were under pressure,” he added.

The IMF lowered its global growth projections for 2019 and 2020 to 3.5 per cent and 3.6 per cent respectively, citing slowdown in several advanced economies around the world more rapidly than previously anticipated.

Meanwhile, India is projected to grow at 7.5 per cent in 2019 and 7.7 per cent in 2020, an impressive over one percentage point ahead of China’s estimated growth of 6.2 per cent in these two years, the IMF said Monday, attributing the pick up to the lower oil prices and a slower pace of monetary tightening.

The International Monetary Fund in its January World Economy Outlook update on Monday said India would remain the fastest growing major economies of the world.

 

Foreign portfolio investors (FPIs) continued their selling activity on domestic bourses here. They sold shares worth a net Rs 299.79 crore, while domestic institutional investors (DIIs) made purchases to the tune of Rs 520.80 crore on Monday, provisional data showed.

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Gold extends gains on jewellers’ buying

Press Trust of India

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New Delhi: Gold firmed up by Rs 125 to Rs 33,325 per 10 grams on Tuesday, largely on the back of sustained wedding season buying by jewellers even as it weakened to near three-week lows overseas.

Silver, however, turned weak due to reduced offtake by coin makers and consuming industries and lost Rs 250 to Rs 39,850 per kg.

Persistent buying by local jewellers, triggered by the ongoing wedding season, kept gold prices higher, bullion traders said.

 

Globally, gold fell 0.13 per cent to USD 1,278.90 an ounce in New York as a firmer dollar made bullion more expensive for buyers using other currencies. Silver also eased by 0.46 per cent to USD 15.26 an ounce.

In the national capital, gold of 99.9 per cent and 99.5 per cent purity advanced by Rs 125 each to Rs 33,325 and Rs 32,175 per 10 grams, respectively.

The yellow metal had gained Rs 40 on Monday. Sovereign, however, remained unaltered at Rs 25,500 per piece of eight grams on scattered enquiries.

In contrast, silver ready prices dropped by Rs 250 to Rs 39,850 per kg and weekly-based delivery slipped by Rs 264 to Rs 38,876 per kg.

Silver coins, however, were unchanged at Rs 77,000 for buying and Rs 78,000 for selling of 100 pieces.

 

 

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