FRONT RUNNING

The Monetary Policy Committee held policy rates steady. The Reserve Bank of India cut growth estimates and raised inflation projections. Gross Value Added is estimated to grow at 6.7 per cent for 2017-18, a downgrade from the earlier 7.3 per cent estimate. Consumer inflation is expected to run at 4.2-4.6 per cent in the second half (October 2017-March 2018).

Inflation worries centre around poor kharif estimates triggering higher food prices, farm loan waivers and the likelihood that states will hike employee salaries to line up with the seventh Pay Commission recommendations. There are also worries about currency volatility and lower portfolio inflows. The Brexit tamasha guarantees GBP volatility. The Catalonia agitation could, at some stage, affect the euro. Japan is headed into snap elections. Most importantly, the Federal Reserve is set to start “normalisation” by selling off bonds and hiking the Fed Funds rate.

There were some positive signals amidst the gloom. The September initial estimate for the Consumer Price Index (CPI) showed inflation at 3.28 per cent year-on-year. The September inflation number was lower than consensus estimates of 3.53 per cent yearon-year.

Growth may be headed for recovery. The Index of Industrial Production (IIP) was up 4.3 per cent year- on-year in August. Sequential (month-on-month) improvement was broad-based. All three sectors (mining, manufacturing and electricity) were up, and five of six use-based categories also rose (infrastructure and construction did not). However, 13 out of 23 sub-sectors of manufacturing contracted. Over April-August 2017, IIP grew only at 2.2 per cent as compared to 5.9 per cent growth in AprilAugust 2016.

Apart from goods and services tax (GST)-related effects, it will be hard to judge the September- October 2017 numbers due to festive season effects. The Puja holidays will reduce IIP in September 2017 versus September 2016. High-speed indicators such as auto sales, coal off-take and electricity also suggest moderation. Conversely, October 2017 may gain over October 2016 since the earlier month featured both Durga Puja and Diwali.

Higher exports in September narrowed the trade gap to under $9 billion. However, export expansion was largely driven by higher petro product prices and came off a soft base. Higher petro product prices were a big driver for Reliance Industries’ (RIL) excellent Q2 results.

RIL recorded the highest gross refining margins in its history. Analysts were even more interested in the financials of subsidiary Reliance Jio Infocomm (RJIL). The telecom operator beat all expectations by logging operating profits and its net losses of ~271 crore were way lower than consensus. The subscriber base is now 138 million and the average revenue per user is ~154 a month.

The recent 57 per cent cut in interconnection usage charges (ICU) should further benefit RJIL as it pays a large net IUC. But it will stress out every other operator. Consolidation is the name of the game across the sector. The Idea-Vodafone merger will make it the biggest operator in India, but Airtel (which is currently number 1) has just moved to take over the mobile businesses of Tata Teleservices and Tata Tele Maharashtra, giving it 40 million new subscribers. This is the second “free” takeover for Bharti Group after Telenor. But Reliance Communications failed to push through its merger with Aircel.

Financial pressures are mounting. The Department of Telecommunications has told the Ministry of Finance that revenue sharing accruals of ~29,500 crore will be 38 per cent less than Budget estimates of ~47,300 crore. Mergers will cause big layoffs, with 25,000 jobs disappearing in “right-sizing”. Industry insiders estimate that another 100,000 jobs may be at risk.

Several bankers have expressed concerns about the telecom sector’s ability to service ~4 trillion in debt. Over ~1.5 trillion owed by operators with interest cover ratios below 1. Sour loans across the banking system were already at a record ~9.5 trillion by June 30.

Stressed loans now amount to 12.6 per cent of total loans and around seven per cent of gross domestic product. Non-performing assets (NPA) and restructured assets together rose by 4.5 per cent in the January-June 2017 period. Bank recapitalisation could require a monstrous ~4 trillion or more.

There are fears that job losses caused by telecom mergers and the twin blows of demonetisation and GST will affect consumption. At the same time, political tensions are brewing, with a long cycle of Assembly elections starting in early 2018. The rationalisation of extremely painful compliance processes for GST has been driven by fears of an electoral backlash, but reducing rates on khakra and cutting down the number of filings don’t go far enough. Tax refunds, credits and offsets have to be reconciled much faster.

The next fortnght’s trading will be driven by Q2 results. Low expectations could mean positive surprises. The market continues to march north. The Nifty hit new highs by the weekend, mainly on the back of domestic institutional buying. The General Insurance Corporate mega-initial public offering (IPO) of ~11,300 crore went through, with LIC bidding for a large stake. Foreign portfolio investors stayed out of the much smaller IEX IPO (~1,000 crore) for legal reasons but it was also oversubscribed eventually.