Thinkpad: Ghosts Of The Past
Big news week. News coming in from the government. From the central bank. From courts. From large corporates.
A common theme — ghosts of the past.
The government has decided to amend the income tax law to make the levy of tax on indirect transfers prospective. Think Cairn. Think Vodafone. Think Pranab Mukherjee.
The statement of intent which accompanied the change was a good one. As the economy recovers from the Covid crisis, it will need foreign investment. Many economies will be vying for investment in this period and the fear of an unfair approach to taxation won't help India's case.
As Menaka Doshi writes, the damage done by arbitral awards which went against India would have played a part. But the decision put a decade-old ghost to rest. It is a case of justice delayed but not denied, write Dinesh Kanabar and Ajay Rotti.
This is actually the second really good decision in the last some months. The first, according to Thinkpad, came in the budget when the government decided to clear the fiscal fog and come clean on the numbers. That, too, was a lingering ghost of years past.
On both counts, when we emerge from the Covid crisis, it helps to move forward on a relatively clean slate.
Speaking of ghosts, it is the ghost of inflation past that is keeping markets on edge even as the Reserve Bank of India insists that the current bout of inflation is "exogenous" and "largely temporary" while maintaining accommodative monetary policy to support a "nascent" and "hesitant" recovery.
The fear is that if the central bank is wrong and inflation does continue to surprise to the upside, the turn in policy could be abrupt. But as RBI Deputy Governor Michael Patra explained in great detail, the intention is to disinflate and move towards 4% inflation over a two-three-year period. Equally, the idea is to look through base effect-riddled high growth rates and watch levels of economic indicators compared to pre-pandemic years.
In short — they are willing to be patient.
Rahul Bajoria of Barclays expects that when normalisation comes, it will be relatively swift. No long gaps between communication and action likely here in India. The RBI is following its own policy of "least regrets", to borrow from the Reserve Bank of New Zealand.
For now, the market is building in some normalisation towards the final quarter of this year. And as we get closer to it, bond yields will rise. In this conversation, Neeraj Gambhir, head of treasury at Axis Bank, said benchmark yields could rise towards 6.50%, another quarter percentage points from current levels. The RBI ought to let them adjust. The central bank has, for now, given up on its attempt to keep the 10-year bond anchored at close to 6%. Reason has finally prevailed.
A brief mention of another set of exceptionally strong economic data from the U.S. The economy added a searing 9,43,000 new jobs in July with the unemployment rate ticking lower to 5.4%. All eyes now on the Jackson Hole conference later this month.
Over at courts, the Supreme Court has ruled in favour of Amazon in the ongoing legal tussle with Future Retail. There will be challenges and counter challenges but as the deal stretches out, what happens of Kishore Biyani and the Future Group's planned restructuring? We'll keep you posted.
We're also watching closely what happens with Vodafone Idea. After a letter surfaced from Kumar Mangalam Birla saying that he is willing to hand over Vodafone Idea to any government or private investor, many questions remain. Should the government step in to support a private enterprise? Will they? Will Vodafone Idea consider voluntary bankruptcy? What does this mean for the lenders?
Stay logged into BQ. We've got it covered.
Till next week.