Amazon challenges govt rule on entry tax for online purchases

Ahmedabad, Jun 16 (PTI) The Gujarat High Court has issued notice to the state government on a petition field by Amazon India against state's notification levying 6 to 21 per cent entry tax on goods that are being purchased through the e-commerce portal in Gujarat.

A division bench of Chief Justice R Subhash Reddy and Justice V M Pancholi posted the matter for further hearing on June 20, tagging it along with a similar petition filed by competitive e-commerce company Flipkart.

Amazon challenges the state government's amendment to the law to levy entry tax on goods purchased through e-commerce portals, which has apparently been done to provide a level- playing field to traders and retailers in the state.

Like Flipkart, Amazon has claimed that the tax is discriminatory, because no such tax is imposed on goods brought into Gujarat through other modes of sale.

It has held that it only provides an online platform to manufacturers, traders and buyers and itself is not involved in selling any product and hence the tax is unjustified.

The Gujarat Tax on Entry of Specified Goods into Local Areas (Amendment) Bill, was passed on March 31.

From April 1, any goods being purchased online are being subject to 6 to 21 per cent entry tax. While normal goods are being levied 6 per cent tax, specified goods are subject to up to 21.6 per cent tax, with majority of goods being levied around 12 per cent tax.

The government amended an Act of 2001, with the aim to cover e-commerce transactions in its ambit, as the government felt this was adversely affecting local traders.

The new law amends the word "importer" to cover those who "bring or facilitate to bring any specified goods for consumption, use or sale in Gujarat from any part of the country using online platforms".

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Microsoft Buys LinkedIn For $26 Billion

Short Bytes: Microsoft is buying professional social network LinkedIn for $26.2 billion. This is one of the biggest deals in Microsoft’s history that will be completed by the end of this year.

Microsoft has announced that it’s acquiring LinkedIn for $26 billion. The companies have entered into an agreement that values LinkedIn’s at $196 per share.

After this agreement, Jeff Weiner will remain LinkedIn’s CEO, reporting to Microsoft’s CEO Satya Nadella.

LinkedIn is the world’s largest professional network that is a well-known brand. The announcement also mentions that LinkedIn will continue to maintain its “distinct brand, culture, and independence”.

Here’s what Satya Nadella had to say about this deal:

The LinkedIn team has grown a fantastic business centered on connecting the world’s professionals. Together we can accelerate the growth of LinkedIn, as well as Microsoft Office 365 and Dynamics as we seek to empower every person and organization on the planet.

About the agreement, Jeff Weiner said:

Just as we have changed the way the world connects to opportunity, this relationship with Microsoft, and the combination of their cloud and LinkedIn’s network, now gives us a chance to also change the way the world works.

After this deal, LinkedIn’s share prices saw a hike of 50 percent. This deal, one of the biggest in Microsoft’s history, is expected to be completed by the end of this calendar year.

Why is Microsoft acquiring LinkedIn?

This answer could be easily found if we take a look at Nadella’s internal memo. By acquiring this key tool used by professionals, Microsoft has got access to more than 433 million members.

Keeping in view Microsoft’s stride in the enterprise world, this deals matches closely with the services it provides. This also gives Cortana the power to provide contextual services to professionals and making things easier.

fossbytes.com

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Tata Power To Acquire Welspun's Renewable Energy Arm

New Delhi: Tata Power on Sunday said it will acquire Welspun Energy's subsidiary, Welspun Renewable Energy Pvt Ltd (WREPL) for an undisclosed amount.

Tata Power's subsidiary Tata Power Renewable Energy Ltd (TPREL) will acquire WREPL through a share purchase agreement (SPA), it said in a statement.

"TPREL, a 100 per cent subsidiary of Tata Power, has signed an SPA with Welspun Energy to acquire its subsidiary WREPL," it added.

This represents the largest transaction in renewables space in India. WREPL has one of the largest operating solar portfolios in India spread across ten states. "It has about 1,140 mega watt (MW) of renewable power projects comprising about 990 MW solar power projects and about 150 MW of wind power projects," it added.

Market sources said the deal size could be in the range of Rs 6000 to 7000 crore.

Out of 1,140 MW renewable portfolio, nearly 1,000 MW of capacity is operational and balance capacity is under advanced stages of implementation.

TPREL currently operates 294 MW of renewable power capacity and 500 MW of renewable assets are being carved out of Tata Power into TPREL through a court process. In addition, almost 400 MW of solar and wind power projects are under implementation.

Thus, TPREL with all these assets, would have renewable assets portfolio of about 2,300 MW making it the largest renewable power company in India, Tata Power has claimed.

"The company is pursuing growth in renewable energy space to create value for its shareholders through various organic and inorganic growth opportunities," Tata Power CEO and Managing Director Anil Sardana said.

This acquisition will enable the company to deliver significant value for all stakeholders as most of the assets are revenue generating and operating assets. Tata Power can further enhance value of these assets with its operational experience and financial optimisation, he added.

The acquisition is also a significant step towards attaining the company's objective of having non-fossil fuel based capacity up to 30-40 per cent of its total generating capacity, Mr Sardana said.

JM Financial Institutional Securities Limited acted as exclusive transaction advisor to TPREL in relation to this transaction. KPMG India Private Limited was the accounting and tax advisor. AZB and Partners acted as the legal advisor for this transaction.

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Alphabet's CEO Larry Page is secretly building a flying car

Google co-founder Larry Page has been personally funding a pair of startups devoted to creating flying cars, according to Bloomberg Businessweek. Page has reportedly funded one startup, named Zee.Aero, with more than $100 million since its creation in 2010, and putting money into another, named Kitty Hawk, since last year. His interest in the companies is a personal ambition, says Bloomberg, and he even retained an office at once of the company's headquarters, where he was referred to pseudonymously as GUS — the guy upstairs.

Zee.Aero and Kitty Hawk have been developing designs for flying cars completely separately, says Bloomberg, with Zee.Aero conducting test flights of its prototypes at an airport about an hour's drive away from Google's Mountain View headquarters.Bloomberg reports that Zee.Aero has hired aerospace designers and engineers from organizations including NASA, Boeing, and SpaceX, and has been testing two single-seater prototype designs — one that looks like a "small conventional plane" and another with propellors dotted down its sides.

reviously known patents registered by Zee.Aero show a craft that matches this description, with a thin central fuselage and twin rows of propellors like outriggers. The patent, filed in 2012, says the aircraft is capable of vertical takeoff and landing (VTOL) and is described as a "safe, quiet, easy to control, efficient and compact aircraft." Not quite a flying car, then, but certainly a vision of personal aviation.

The other startup Page has been investing in, Kitty Hawk, has reportedly been building its own craft "that resembles a giant version of a quadcopter drone," according toBloomberg's sources. The startup is smaller than Zee.Aero, and kept separate from its older rival. Some of its engineers come from AeroVelo — a firm that previously won the $250,000 Sikorsky Prize in 2013 for building a human-powered helicopter that can stay aloft for more than a minute (see the video below). And Kitty Hawk wouldn't be the first firm to design a quadcopter-inspired aircraft; similar concepts have been floated by Chinese firm Ehang and even built by lone engineers.

But as Bloomberg points out, the dream of flying cars has long been one that's dear to tech types, and so Page's involvement in these two companies is not that unusual. Numerous firms — such as Volocopter and Aeromobil — are developing aircraft built for personal use, although it should be noted that not all of these designs function as cars as well as planes. It's not clear, though, whether Page's involvement signals an increased seriousness in the personal aviation game, or whether this is just another billionaire looking for a fun new toy.

-theverge

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Google’s Larry Page flying cars a reality?

Like the robber barons of the Gilded Age, some of the tech billionaires of Silicon Valley are using their vast wealth to try to transform the world according to their vision(s). Bill Gates has his foundation. Elon Musk wants us to ditch the fossil-fueled car. Both Musk and Jeff Bezos want space colonies. And Google's Larry Page? He wants those flying cars we were promised.

This week Bloomberg told us that Page owns not one but two flying car startups: Zee.Aero and Kitty Hawk. Both companies appear rather media shy, but they seem to be working on small passenger aircraft that can take off and land vertically, according to reports from former employees, patent filings, and eye-witness accounts from Hollister Municipal Airport in California (where Zee.Aero is testing). The vehicles are probably using electric motors as well. "When the aircraft take off, they sound like air raid sirens," Bloomberg wrote.

Page's companies are but two among a score or more working on flying cars. There are old doyens of the field like Moller, which has been at it for more than 40 years, as well as more recent upstarts like Terrafugia and Aeromobil. It's certainly a lofty goal, but will it succeed? At the very least, it feels like some of the necessary enabling technologies are getting closer to being ready. Battery powered flight is achievable, as last year's English Channel crossing(s) demonstrated. Electric motors are smaller, lighter, and much less complex than jets, and the drone explosion serves as evidence that we can make ungainly shapes fly well even in the hands of amateurs, thanks to software.

But like with the autonomous car, solving the technological hurdles in the way of flying cars is necessary but not sufficient to make them a reality. Aviation is an activity that's extremely, heavily scrutinized with much justification. If your car suffers a mechanical problem, you can pull to the side of the road and wait for AAA without worrying if you're going to drop onto a school, for example.

There are also the neighbors to think about. A hoverboard capable of levitating a single human beingis already extremely loud, so we don't doubt reports that Zee.Aero's vehicle sounds like an air raid siren. That's acceptable if you take off and land at already noisy airfields, but it seems unlikely to fly in residential areas.

If flying cars are finally going to take off, some careful thought is going to be needed.

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Celine Dion launching lifestyle brand

Los Angeles, Jun 10 (PTI) Singer Celine Dion is following in Gwyneth Paltrow and Reese Witherspoon's footsteps by launching a lifestyle brand.

The "My Heart Will Go On" singer is teaming up with bosses at licensing firm Epic Rights to create the line of home goods, active wear, beauty products, eyewear, travel products, and more.

The brand is yet to be named, but it will encompass the 48-year-old singer's passions for "family, music, entertainment and style", according to Billboard.

"In today's world, you need a coordinating and consistent branded approach to everything," CEO of Epic Rights, Dell Furano, said.

"On a global level, (artists) need to combine all areas - their music, performances, touring, website, social media - and launching a lifestyle brand was just a natural extension for Celine at this point in her career, particularly because it's all from her point of view." 

The products will hit stores next autumn and will roll out over a three-year period.

Gwyneth launched her lifestyle brand Goop in 2008, while Reese created Draper James last year (15).

Celine's new branding announcement comes five months after the death of her husband and longtime manager Rene Angelil in January.

Shortly after his passing she returned to the stage at Caesars Palace in Las Vegas for a tribute to the late music mogul and to resume her longstanding residency there.

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Mallya case: CBI changed nature of Lookout Circular

The info came as embarrassment to the agency which has been accused of going soft on Mallya. PTI File photo

• Mallya case: CBI changed nature of Lookout Circular
• 22:15 HRS IST
• New Delhi: The CBI, which is facing heat over allowing beleaguered businessman Vijay Mallya to go abroad, had changed the nature of lookout notice against him within one month of issuance from seeking his detention while leaving the country to that merely providing information about his travel plans.  The information came as further embarrassment to the agency which has been accused of going soft on Mallya, facing a CBI probe for defaulting on repayment of a loan of Rs 900 crore taken from IDBI.

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Liquor baron Vijay Mallya, under pressure from banks, left India on 2nd March, Location unknown

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• View Photo
  Vijay Mallya waves in the paddock during the third practice session of the Indian F1 Grand Prix at the Buddh International Circuit in Greater Noida, on the outskirts of New Delhi, October 27, 2012. REUTERS/Ahmad Masood/Files

By Suchitra Mohanty

NEW DELHI (Reuters) - Liquor baron Vijay Mallya, under pressure from banks to repay more than $1 billion of debt owed by his collapsed airline, left the country last week, a lawyer for the lenders told the Supreme Court.

More than a dozen state-run banks - led by the country's largest, State Bank of India, - had appealed to the Supreme Court asking that Mallya be stopped from leaving as they step up pressure on the one-time billionaire.

On Wednesday, Attorney General Mukul Rohatgi, representing the banks, told the Supreme Court he had been told by police that Mallya left India on March 2, and asked the court to demand his return. Mallya's exact whereabouts are not known.

The court has asked Mallya to reply to a notice issued to him within two weeks, after which it will hear the case again. Details of the notice were not made public.

Mallya, an extravagant, larger-than-life personality who billed himself as the "King of Good Times", has become one of India's most famous errant borrowers, with newspapers closely following the fortunes of his yacht, jet and properties.

The debt at the heart of his troubles is owed by his Kingfisher Airlines, but was personally guaranteed by Mallya.

A spokesman for Mallya's UB Group did not respond to calls and email seeking comment.

In a statement on Sunday, Mallya said he had no intention of running away from creditors and was in talks with them for a one-time settlement of the Kingfisher debt.

Mallya was last month ousted as the chairman of top Indian spirits maker United Spirits, a unit of British spirits giant Diageo Plc.

A separate tribunal on Monday temporarily blocked a $75 million settlement Mallya is due to receive from Diageo.

Kingfisher, once India's second-biggest airline, collapsed in 2013, leaving creditors, suppliers and employees unpaid. The airline owed banks 69.63 billion rupees ($1.03 billion) as of the end of January 2014.

Including interest and other expenses, its liability is about 90 billion rupees ($1.34 billion), Rohatgi told the Supreme Court.

($1 = 67.2900 rupees)

(Writing by Devidutta Tripathy; Editing by Clara Ferreira-Marques and Mark Potter)

By By Suchitra Mohanty | Reuters – 17 hours ago

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Adani Enterprises reports Rs 557 crore profit in Q1

"The acquisition of the Dhamra port was also completed in the quarter and it handled 4.20 MMT cargo during that period, a growth of 36 per cent over the corresponding quarter last year," the statement said.

Adani Enterprises, the flagship company of the Adani Group , reported a profit after tax of Rs 557 crore for the first quarter ended June 30, 2014 on the back of a 43 per cent jump in revenue.

The company had posted a loss of Rs 278 crore in the corresponding quarter of the previous financial year, Adani Enterprises said in a statement.

"Our improved performance has set the direction of growth as we see greater contribution from completed projects in our ports, power and mining verticals," said Gautam Adani, Chairman of Adani Group.

Consolidated total income for the period increased by 43 per cent to Rs 16,524 crore as compared to Rs 11,547 crore in the same period last fiscal.

"With efforts from new government to address the concerns of fuel availability, rail infrastructure, transmission constraints, project approvals and debottlenecking of mining sector, we see greater growth opportunities in the sectors we operate," Adani said.

The company said in the statement that it expects to achieve thermal power generation capacity of 9,240 MW soon.

"The acquisition of the Dhamra port was also completed in the quarter and it handled 4.20 MMT cargo during that period, a growth of 36 per cent over the corresponding quarter last year," the statement said.

The capacity expansion work is already in progress. Also, Dahej port volumes grew by 28 per cent and the Hazira port volumes increased by 85 per cent on a year-on-year (YoY) basis," it added.

France-based CMA CGM Group has signed an agreement with Adani Ports and Special Economic Zone (APSEZ) for development of a new common user Container Terminal at Mundra Port.

"The JV with CMA CGM will result in an additional capacity of 1.4 million TEUs (Twenty-Foot Equivalent Unit) and the terminal will be operational in the next 24 months, the construction work has already started," the statement said.

This will make Mundra the country's largest container port with a total capacity of 5.5 million TEUs, the statement added.

Shares of Adani Enterprises, on Friday, closed at Rs 453.90, down 1.87 per cent on the BSE.

BT

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Khandelwal set to head SAP Labs India

BANGALORE: SAP has appointed Dilipkumar Khandelwal as managing director of SAP Labs India. He succeeds Anirban Dey, the 15-year-old SAP veteran who quit the company in June under controversial circumstances. 


Khandelwal will be responsible for driving customer-led innovations and operations across SAP Labs India facilities in Bangalore, Gurgaon %and Pune. His new role will be in addition to his current global role as the senior vice president and head of suite engineering at SAP. 

Khandelwal has been with SAP for over 13 years in various roles. He began his career as a technology consultant. He has handled roles in consulting, development, quality & partner enablement. 

SAP Labs India contributes to all areas of the SAP product value chain — research & breakthrough innovation, product development, global services & support and customer solutions & operations. 

TOI

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Former Infosys officers call for $1.8 billion buyback

Employees of software company Infosys walk past Infosys logos at their campus in the Electronic City area in Bangalore September 4, 2012.

CREDIT: REUTERS/VIVEK PRAKASH/FILES

(Reuters) - Concerns over the pace of change at India’s second-biggest software services company have spurred three former officers of Infosys Ltd (INFY.NS) to seek 112 billion rupees (1.83 billion US dollars) in the form of a buyback for all shareholders.

Former officers V. Balakrishnan, T.V. Mohandas Pai and D.N Prahlad are seeking 3,850 rupees a share, which is a premium of 9.6 percent over the company's closing price of 3,513 rupees on Tuesday.

Both Pai and Balakrishnan are former chief financial officers at Infosys and served as directors, while Prahlad was a senior vice president.

The demand comes at a time when Infosys is in the middle of the biggest leadership transition in its history. On Aug. 1, former SAP AG executive Vishal Sikka took charge as the first non-founder CEO at the company, while all founders, led by N.R. Narayana Murthy, either retired or took up non-executive roles with the board.

"Infosys today is seeing a major transition from a founder-driven company to a non-founder driven company...While the change is inevitable, the abrupt nature of the change raises some serious concerns not only in our minds but also with many stakeholders," the three said in the letter dated June 29.

They've also suggested Infosys should announce an ongoing buyback program to the extent of 40 percent of the previous year’s net profits on a consistent basis.

The buyback, if executed, will be the company's first since Infosys went public in 1993.

"The Infosys board and the management receives requests on a variety of subjects from shareholders and investors on an on-going basis...Should there be any development that will impact our shareholders, we will immediately inform the regulatory bodies and shareholders on priority," Infosys spokesperson Sarah Gideon said in an emailed statement.

In the letter to the board, the investors said while Infosys has close to 300 billion rupees in cash and cash equivalents, the company has not articulated its strategy for use of its cash effectively.

"Given this massive net cash position and robust net income generation, Infosys is perhaps the most over-capitalized company in the Indian corporate history, from our perspective.

"Irrespective of the liquidity Infosys may require with respect to any investment in innovation or M&A going forward, we strongly believe that the company is clearly over capitalized," the letter said.

Infosys shares were trading up 1.2 percent at 3556.15 rupees

at 0417 GMT.

(1 US dollar = 61.1525 rupees)

(Reporting by Nivedita Bhattacharjee in Mumbai; Editing by Matt Driskill)

Reuters

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Hero MotoCorp Falls 2% As Q1 Disappoints

Hero MotoCorp fell over 2 per cent to Rs. 2,525 on Tuesday as the company disappointed the Street on its first quarter number.

The company reported a net profit of Rs. 563 crore on net sales of Rs.6,999 crore as against estimates (NDTV analysts poll) of Rs. 635 crore of net profit on sales of Rs. 7,020 crore.

The company had posted a net profit of Rs. 549 crore during the same period of previous fiscal.

Its ebitda margin declined 141 basis points on year-on-year (y-o-y) and 27 basis points on a quarter-on-quarter (q-o-q) basis to 13.5 per cent due to higher input cost.

Input cost of Hero MotoCorp as a percentage of sales increased 30 basis points y-o-y and 53 basis points q-o-q in the reporting period.

Kotak Securities said the company's EBITDA was below its estimates.

Kotak has cut its price target to Rs. 2,800 from Rs. 2,850, while maintaining a "hold" rating on the stock.

As of 9.40 a.m. shares in Hero MotoCorp traded 1.68 per cent lower at Rs. 2,540.90 as compared to 0.31 per cent fall in Nifty.

(With inputs from Reuters)

NDTV

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RBI keeps policy rate unchanged, sounds tough on inflation

Reserve Bank of India (RBI) Governor Raghuram Rajan attends a joint news conference in New Delhi March 7, 2014.

CREDIT: REUTERS/ADNAN ABIDI/FILES

(Reuters) - The Reserve Bank of India (RBI) kept its key policy repo rate unchanged on Tuesday as widely expected, and voiced a commitment to bringing down inflation that convinced many analysts that markets will have to wait until next year for the next cut in rates.

The RBI left the repo rate at 8.00 percent, as expected by nearly all 43 economists surveyed by Reuters for a poll published last week.

The repo rate has been unchanged since January, when the RBI increased it by a quarter percentage point.

"The upside risks to the target of ensuring CPI inflation at or below 8 percent by January 2015 remain, although overall risks are more balanced than in June," Governor Raghuram Rajan wrote in the RBI statement on its policy review.

"It is, therefore, appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged."

Rajan stressed that the next goal was to bring inflation down to 6 percent by January 2016, while warning of upside risks to that target also.

Analysts said the RBI statement could put to rest any prospect of rate cuts for a while, with many ruling out the chances of any reduction this year.

"I think we will be in a pause mode for an extended period of time," said Mohan Shenoi, treasurer at Kotak Mahindra Bank.

The RBI did, however, announce steps to free up resources for banks to lend, a priority for Prime Minister Narendra Modi's government as it seeks to encourage investment in order to put momentum back in sluggish economic growth.

The central bank said it would continue to focus on spurring more lending and lowered banks' minimum bond holding requirements, known as the statutory liquidity ratio (SLR), by half a percentage point to 22.0 percent of deposits to free up more money for lending, effective from Aug. 9.

The RBI also cut the ceiling on debt that must be held-to-maturity (HTM) by lenders half a percentage point to 24 percent.

It did not provide an estimate on how much credit growth that could spur.

The measures come after the RBI had also cut the SLR by half a percentage point in June.

India's benchmark 10-year bond fell, sending its yield up 9 bps to 8.82 percent, as cuts in both the SLR and HTM are likely to pressure bond prices due to new supply.

The partially convertible rupee strengthened to 60.73/74 per dollar versus Monday's close of 60.93/94, partly due to the RBI's caution over the prospects for rate cuts.

Rajan again reiterated a commitment to developing money markets after introducing term repos, or cash for loan transactions in 7- and 14-day increments, this year.

INFLATION TARGETS

The RBI retained its economic growth forecast of 5.5 percent for 2014/15, depending on whether monsoons or geo-political tensions intensify.

The crucial goal for India is the creation of enough jobs to absorb its rapidly increasing workforce, and growth of below 5 percent in each the last two years was far below what was needed. Industrialists have been calling for lower interest rates, but for sustainable growth, inflation has to be conquered first, and the RBI said there were upside risks.

In June, the retail inflation rate was the lowest since the government started publishing the data series in January 2012, with the consumer price index (CPI) showing a 7.31 percent rise from a year earlier.

Following a weak start to the monsoon rains, food price inflation remains one of the biggest challenges for India, despite government measures to curb hoarding of food articles and setting limits on the export of onions and potatoes, two staples in Indian cooking.

Rajan said the pressure was on to meet both inflation targets for 2015 and 2016.

"We are getting close to the end of the year when our first target has to be met," Rajan told a news conference after the review. "We need to also be confident in reaching the 6 percent (target)."

(Editing by Simon Cameron-Moore)

in.reuters.com

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Rupee extends fall to 4-1/2-month low tracking broad dollar rise

A street side restaurant owner holds a bundle of currency notes as he sits outside his restaurant in New Delhi November 22, 2013.

CREDIT: REUTERS/ADNAN ABIDI/FILES

(Reuters) - The rupee extended falls to a four-and-half month low on Wednesday morning as broad gains in the dollar versus other majors and Asian units hurt, while weaker local shares also raised foreign fund outflow worries.

At 9:28 a.m. (0358 GMT), the partially convertible rupee was at 61.21/22 per dollar, after hitting 61.2250, its lowest level since March 21.

The Nifty was trading down 0.2 percent. Most other Asian currencies trading weaker.

(Reporting by Swati Bhat; Editing by Anupama Dwivedi)

http://in.reuters.com/

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BJP MPs to broadcast govt's WTO stand

New Delhi, Aug 5, 2014, DHNS:

With an eye on the Assembly elections, the BJP wants to capitalise on the stand the government took at the World Trade Organisation (WTO) owing to concerns on food security. 

BJP MPs have been tasked with spreading a message in the electorate that the Narendra Modi government stood by farmers despite pressure from developed economies to sign the global trade treaty. 

At the parliamentary party meeting attended by the prime minister, Finance Minister Arun Jaitley informed the MPs that the government is voicing the concerns of the country’s farmers at various international fora. 

Jaitley said that the government will not allow global players to determine the Minimum Support Price (MSP) for farmers as at times it is higher than the 10 per cent of production value cap on domestic support proposed at the WTO. The subsidy beyond the proposed cap is construed as trade-distorting under WTO rules.  

The finance minister also told members that the government preferred to go ahead with the trade facilitation agreement only after categorical assurance on public stockholding of food grain, procurement of food grain and a public distribution system. These are essential to run the food security scheme, he added.

deccanherald

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No end in sight for RBI’s inflation battle: Markets will have to wait longer for rate cut

The striking feature of the RBI credit policy is that there is consistency in stance, and the noise element has been eliminated. This has been an issue for long until the Urjit Patel Committee made the stance clear on the drivers of monetary policy. The critic’s argument was that there was a tradeoff between inflation and growth and that by keeping rates high in the face of high inflation which is caused by supply side factors, we were irrational in thwarting growth.

But the RBI has made it clear that it is not against growth but believes that growth will not be possible unless inflation is under control and that is why we are targeting inflation. Therefore, a target of 8 percent CPI inflation has been set for January 2015 and 6% for January 2016.

The markets, however, have always been irrational and expected a rate cut, because it always wants one irrespective of the macro conditions. It is actually now a no-brainer that rates will be lowered only when CPI inflation comes down and remains within acceptable levels – whether or not one agrees with the rationale.

The RBI does have real interest rates in mind and as long as inflation is above 8 percent (which is also the repo rate) the intuitive real rate is negative. Therefore, one should not read too much into the choice of words of the policy and attribute adjectives as dovish or hawkish, as inflation targeting appears to the revealed goal.

While it may stimulate intellectual debate, the RBI logic and stance is transparent and simple. The corollary is that if inflation comes down in a sustained manner, then rates will be cut and if inflation moves up, we can be prepared for a rate hike.

As a placatory measure the SLR has been lowered by 50 bps. Will this work? Not really, except at the fringe where individual banks are just about holding on to this ratio, will benefit from this cut. For the system as a whole the SLR holdings are around 26.5%, which means that there is voluntary holding of such paper.

While the RBI has explained that it has done so to afford flexibility to banks to use these resources for lending, one should see why banks are holding on to excess SLR paper.

Today returns on government paper are good at around 8.5-9%. Add to this the quality of such assets which is good. In fact, if we use the ratio of stressed assets (NPA plus restructured) as a proxy for non-performing assets, then the probability of lending going bad could be 10%. Investing in government paper makes imminent sense under these uncertain conditions.

Further, the risk weight used for reckoning capital for investment is negligible and hence this kind of narrow banking is attractive. In case, conditions do look up and the demand for credit improves along with the economic climate and hence quality of assets, then banks can still easily liquidate their excess SLR holdings which is 4% above the pre-policy stipulation of 22.5%.

Is there something different that the RBI could have done? Yes, if the idea was to provide liquidity, the repo window should have been opened up further. Right now banks can take 25 bps of NDTL as recourse through the RBI by pledging SLR paper. Another 75 bps can be through term repos where auctions are held periodically.

If the purpose was to help banks with liquidity, the overnight repo window could have been enlarged. But then, the RBI is not apparently concerned with current liquidity and has hence looked at SLR more as a tool for releasing resources for lending rather than to ease liquidity in the money market – which will work in the very short run.

A miss has also been given to the targeted growth in bank credit, deposits and money supply. This normally comes in an annual policy. It was skipped in June and it was felt that with the budget still to come to gain an idea on the deficit and hence the borrowing programme, the RBI would announce the same this time. The numbers are useful for individual banks to plan their own course. But the stance presumably taken is that such targeting is not required from the RBI and the number would unfold through the market play.

How will the markets behave? It will really be business as usual as there is no reason for any of the demand-supply side forces to be affected significantly by any of these measures and therefore, the course of movements would be driven by the existing and emerging dynamics.

Banks are unlikely to alter rates as their overall cost of funds is unlikely to change and given a cautious outlook on the economy, lending rates will tend to remain unchanged. The GSec market will see some traction as the HTM ratio has been lowered which means more release of securities for trading by banks. But this will not quite alter the GSec yields and the 10-year paper will continue to range between 8.6-8.8% for most of the time.

The focus will evidently be on the next policy, but practically speaking the conundrum will arise only if the two inflation releases for July and August show declining CPI inflation. September end is just the beginning of the harvest and the impact of a sub-normal monsoon on kharif farm output will be witnessed in October and November.

If inflation remains high in July and August, it will be a status quo from RBI, but a decline in inflation and uncertainty with the farm outcome and resulting impact on prices, will be a tough call for Mint Street. We have to wait till then.

The author is chief economist, CARE Ratings. Views are personal.

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