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On July 11, the Reserve Bank of India created a stir in the financial markets. Its press release titled ‘International Trade Settlement in Indian Rupees (INR)’ permitted Indian banks and the international trade community to invoice and settle transactions in Indian rupee. The policy is quite significant, and is a major step towards internationalisation of the INR.

What is internationalisation of a currency? It means that the currency is accepted across the world as a medium of exchange. The US Dollar (USD) is a currency which has remained international for more than a century now. In early 20th century, the USD replaced the Great Britain Pound (GBP) as the dominant international currency. Post- World War II, this position was cemented further as all currencies were pegged against the USD. Even after the breakdown of Bretton Woods in 1971, the USD has maintained its pole position.

The dominance of the USD caused many an irritation in global politics. In most transactions across the world, the USD is usually the de facto currency of payment which ensures that Washington always plays a crucial role in world affairs. French Minister of Finance Valéry Giscard d'Estaing termed this as “exorbitant privilege”. European leaders gave up their own currency and joined hands to establish the Euro, mainly to counter USD’s hegemony.

Typically, the rise of an economy at the global stage leads to rise in the share of its currency in global transactions. But this has not been the case with the US. Over the last five decades, the share of the US economy globally declined from 25 percent to 15 percent. The USD’s share in foreign exchange reserves and international debt also declined, but at 60 percent it still remains dominant.

The US’ economic decline has coincided with China’s rise. China’s share in global output has risen from 2 percent in the 1980s to 20 percent, which is higher than that of the US. Yet the share of the Chinese Renminbi in the global forex reserves remains a paltry 2 percent while share of Euro has remained stagnant at 18-20 percent since its inception.

Gita Gopinath, First Deputy Managing Director, IMF, along with other researchers has termed this dollar hegemony as ‘Dominant Currency Paradigm’, which poses macroeconomic risks. Mike Carney, former Governor of the Bank of England, argued that in a multipolar world, we need to have multi-polar currencies. He even advocated digital currencies to counter the supremacy of the USD.

Where does the RBI’s July 11 press release fit in this world order of international currencies? The global share of India’s economy has increased from 2 percent in 1980 to around 7 percent currently. It has also become a popular destination for global portfolio flows, and foreign direct investment. The potential growth of the Indian economy pegged at 6-7 percent, much higher than most other countries. The government and the RBI have also opened both current and capital accounts, allowing foreigners to own Indian assets and Indians to buy foreign assets. So there is clearly potential for the growing internationalisation of the Indian economy.

The July 11 note is another major step in this direction of internationalising the economy. The RBI press release notes that “in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR.” This implies that hereon, exporters and importers have a choice to invoice their transactions in the INR, which was mainly in the USD till now. The RBI has also permitted banks to tender advance loans to exporters against invoices in the INR.

The policy will also help position the INR as an international currency. Shyamala Gopinath, former Deputy Governor of RBI, in a 2009 speech pointed to three factors for currency internationalisation. First, payments for international transactions can be made in that currency. Second, both residents and non-residents can hold financial assets/liabilities denominated in the issuing currency. Third, freedom for non-residents to hold currency balances, even beyond the territory of the issuing country. The current policy is a step towards the first factor. The RBI and the government have been working on the second and third factors as part of capital account management.

The above policy does not imply that we will see an immediate transition from the USD-based invoicing to an INR-based invoicing. It will at best be slow and gradual. Indian policymakers can start in a small way by encouraging the INR payments with neighbouring South Asian countries and other trade partners. Currently, most South Asian countries are facing a crisis, and requesting India for financial and humanitarian support. Giving aid in the INR and encouraging future invoicing in it will also be a winning preposition for these crisis economies, as they will not require the USD for payments. Having said that, few South Asian economies such as Sri Lanka and Nepal do use INR for payments. The new arrangement should also help India pay Russia for the oil which has been debarred from USD payments.

While the USD has remained a dominant currency, there is early research that economies are moving away from it to other currencies, mainly Chinese Renminbi. The INR could be part of forex reserves too. Isteatndia also has an edge over China in terms of a more open capital account and liberalised financial markets, which should help strengthen the status of the INR.

The international monetary order usually follows the international political order, with a lag. This time around, the duration of the lag has been high, as despite the decline of the US economy, the USD remains dominant. While the USD will still remain dominant in near future, it is fair to expect that its share will gradually decline. The question is which currency will dominate the world monetary order?

The government on Tuesday will release the key data on June retail inflation which will be factored by the Reserve Bank in its next bi-monthly monetary policy to be announced in early August.

The retail inflation has remained above 6 per cent since January this year forcing the central bank to go for two back-to-back hikes in policy rates (repo).

The Consumer Price Index (CPI) based retail inflation, which was at 7.04 per cent in May, is unlikely to reach the RBI's comfort zone of below 6 per cent soon amid high commodity prices due the ongoing Russia-Ukraine war.

The data on CPI is scheduled to be released at 5.30 in the evening by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI).

Last month, the Reserve Bank in its bi-monthly monetary policy review raised the benchmark repo rate -- at which it lends short-term money to banks -- by a sharp 0.50 per cent to 4.90 per cent to rein in spiralling prices. It followed an off-cycle meeting on May 4, when the central bank hiked the repo rate by 0.40 per cent.

RBI Governor Shaktikanta Das, while speaking at Kautilya Economic Conclave on Saturday, had exuded confidence that the price situation will gradually improve in the second half of the current fiscal.

He also said the central bank would continue to take monetary measures to anchor inflation with a view to achieving strong and sustainable growth.

The Governor said that price stability is key to maintaining macroeconomic and financial stability and the central bank will undertake measures for preserving and fostering macroeconomic stability.

The Reserve Bank, which factors in the CPI in its monetary policy, had in June raised the inflation forecast for the current financial year to 6.7 per cent from its previous estimate of 5.7 per cent.

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To protect businesses from harassment, the Central Board of Indirect Taxes and Customs (CBIC) will soon come out with an elaborate standard operating procedure (SOP) for serving summons and notices under the Goods and Services Tax (GST) regime, according to a report by The Economic Times.

The new SOP will permit the board to closely monitor the GST probe, the line of investigation adopted, and its progress. The officials will be more accountable and the entire process will become more transparent. The move comes after a significant increase in the number of complaints against the use of force and coercion by tax authorities for making recovery during the probe has been reported.

"We don't have any SOP under the GST for summons and notices, and these are two troublesome things," said one official, who did not wish to be identified. "Once there is an SOP in place, we can question any breach."

In the past few months, there has been a surge in the number of tax notices, which were served by the GST officials, summoning finance chiefs, CXOs, and even chief executives to be physically present. Several businesses also end up getting repeated summons.

The draft for SOP is almost final, the official said, adding that there have been elaborate discussions with field formations and stakeholders, including businesses.

The proposed SOP will also aim to ensure that there is no overlapping of notices between the central and state jurisdiction. Many businesses had complained that they received multiple notices for the same issue, thereby making compliance difficult for them.

In May, the board directed its field formulations that tax authorities would face action if a taxpayer is forced to make a voluntary payment of tax during a search and that recovery of dues should follow the due legal process after issuance of adjudication order, and not during searches.

Q1. The RBI is taking a series of steps to attract foreign flows and protect the rupee amid depleting forex reserves. It is acting across three channels – the banking deposit, the FPI debt, and the ECB. Will these measures be enough?

Ans:

>RBI signalling that world economic turmoil to last longer than expected

>RBI and govt ensuring that private debt repayments don’t go against India

>Creating framework for compensatory inflows

Q2. Of the 621 billion dollars of external debt, over 40 per cent is due for repayment in the next nine months. This will be equivalent to about 44 per cent of the country’s forex reserves. First, is this bunching up of repayments par for the course? And if not, how will this play out going forward?

Ans:

>The present situation is unusual

>Huge external commercial borrowings by India Inc after 2008 crisis

>Economy presently facing forex and inflation pressure

>RBI’s inflation targeting will address some of these pressures

>Pressure will emerge on growth front, instead of inflation or forex

Q3. Current account deficit is seen doubling to 3 per cent of GDP this year and the rupee hitting 82 a dollar by the third quarter before recovering. Given these, how has the RBI fared in managing the rupee’s fall and are its CAD measures adequate?

Ans:

>Rupee hasn’t depreciated against basket of currencies due to strong exports

>Global monetary tightening and likely recession in importing countries could change scenario

>People worried about rupee’s fall could be in for a shock in the near future

Q4. Do you get the sense that authorities like the RBI are behind the curve in tackling economic headwinds and are playing catch up?

Ans:

>RBI waited too long to express concerns on inflation

>Sudden off-cycle rate hike made it look like RBI was taken by surprise

>Worried about RBI’s image

Q5. I will have to press you on the current account deficit...

Ans:

>3% CAD not that alarming by Indian standards

>Domestic inflation is of greater concern

>Controlling inflation will also correct CAD problem

India's retail inflation likely held steady in June, but well above the Reserve Bank of India's tolerance limit for a sixth month as lower fuel and cooking oil prices offset higher services and food costs, a Reuters poll found.

Despite a substantial recent increase in food prices, rising at the fastest pace in nearly two years, overall inflation was partly contained after the government cut taxes on petrol and diesel and imposed restrictions on food exports.

But most economists warned the near-term outlook was highly uncertain as a heatwave last month pushed up vegetable prices. The government has also cut estimates of wheat production because of dry spells in northern India.

The July 4-8 Reuters poll of 42 economists showed inflation as measured by the consumer price index (CPI) was steady at an annual 7.03 per cent in June, versus 7.04 per cent in May.

Forecasts for the data, due at 1200 GMT on Thursday, July 7, were in a 6.45 per cent-7.70 per cent range.

If realised, inflation would be above 7 per cent for the third consecutive month and above the RBI's 6 per cent upper tolerance target for a sixth month.

"While several goods and services categories are likely to report higher inflation in June, fiscal measures undertaken by the government…will help to cap the upside in domestic prices across food and other segments," noted Rahul Bajoria, chief India economist at Barclays.

"Still, services costs are trending higher, and a passthrough from higher commodity prices is evident across several sectors."

The Reserve Bank of India (RBI) has raised interest rates by 90 basis points so far this year to 4.9 per cent and is set to add more in coming months. RBI Governor Shaktikanta Das said recently inflation was unlikely to fall within the top end of its mandated target band until December.

Wholesale price inflation was seen only moderating slightly from May's three-decade high of 15.88 per cent to 15.50 per cent, the poll showed.

Although consumer price inflation seems to be stabilising, widening trade and current account deficits due to high global crude oil prices pushed the rupee to a recent record low of $79.375, raising concerns over higher imported inflation.

A separate question in a recent Reuters poll asking what the rupee's lowest point against the dollar would likely be over the course of the next three months gave a median of 80, with a range of 79.50-85.00/$.[INR/POLL]

Elon Musk’s attempt to walk away from his $44 billion Twitter Inc. buyout will turn on a three-word phrase that’s sometimes asserted in busted mergers -- but rarely passes muster with judges.

“Material Adverse Effect” was cited by Musk’s lawyers in a regulatory filing Friday which argued that undisclosed information about bots on the social media platform is “fundamental to Twitter’s business and financial performance.”

To escape the deal, Musk must prove the alleged omission amounts to an “unexpected, fundamental, permanent” negative development -- akin to blowing a hole in the transaction that can’t be fixed, said Larry Hamermesh, a University of Pennsylvania law professor.

In a 2020 case involving Boston Scientific Corp., a Delaware judge defined the term as an “adverse change in the target’s business that is consequential to the company’s long-term earnings power over a reasonable period, which one would expect to be measured in years rather than months.”

So far, Delaware courts have found only one case in which a clear MAE emerged -- Fresenius SE’s $4.3 billion buyout bid in 2018 for rival drugmaker Akorn Inc.

A judge blessed Fresenius’ decision to walk away from the deal after finding Akorn executives hid an array of problems that cast doubt on the validity of data backing up approval for some drugs and profitability of its operations.

The GST Council has set up a Group of Ministers, chaired by Haryana Deputy Chief Minister Dushyant Chautala, to suggest required changes in the law for setting up the GST Appellate Tribunal (GSTAT).

The GST Council, chaired by Finance Minister Nirmala Sitharaman and comprising state ministers, had last week decided to constitute a Group of Ministers (GoM) to address various concerns raised by states in relation to constitution of the GSTAT.

As per the Terms of Reference (ToR) of the GoM, the panel would recommend required amendments in the GST law to ensure that the legal provisions maintain the right federal balance and are in line with the overall objective of uniform taxation within the country. The 6-member GoM would also ensure that the amendments are in line with various court judgements relating to setting up the tribunal.

The GoM will consult legal experts for formulating its recommendations and will submit report to the Council by July 31. Besides Chautala, other members of the GoM are Andhra Pradesh Finance Minister Buggana Rajendranath, Goa Industries Minister Mauvin Godinho, Rajasthan Law and Legal Affairs Minister Shanti Kumar Dhariwal, Uttar Pradesh FM Suresh Khanna and Odisha FM Niranjan Pujari.

The GoM is likely to address the concerns of states in light of the Madras High Court order which said that the number of technical members should not exceed the number of judicial members in the GSTAT. The CGST Act had originally envisaged that the GSTAT would have one judicial member and two technical members (one each from the Centre and states).

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Hetal Gandhi and Surbhi Kaushal

Inherent contradictions have long tangled the wires of India’s power sector, adding vulnerability to the Indian economy, and its commitment to clean energy.

To be sure, the government has drawn up an aggressive roadmap for the transition to clean energy. However, lack of infrastructure investments by bleeding distribution companies (discoms) are stymieing these plans.

As a result, states are not only underperforming on their central renewable purchase obligation (RPO) goals, but are also largely unable to meet the often-lower targets set for themselves

So, how can India meet its power needs, and energy transition goals?

Three things need to happen:

1. A sharp increase in renewable energy (RE) installations
2. Higher spending on grid infrastructure, and value chain to cope with the rising share of intermittent RE power
3. Effective, and consistent policies to win the confidence of investors, and attract professional capabilities

Let’s examine these intertwined necessities.

CRISIL Research’s transition modelling and analysis indicates that in the first decade of energy transition, 80 percent of capacity additions would be for non-fossil fuels, versus the opposite in the decade till 2020. Thus, reaching 50 percent RE generation by 2030, as targeted under COP26, is ambitious. However, tripling the RE share (excluding hydro) from 11 percent now to around 36 percent is possible — and will be a feat in itself.

For this to happen, investments in grid infrastructure, smart meters, energy storage, and new business models to handle intermittent power are inevitable.

Such expenditure will have to be driven by India’s 45-odd state discoms. But financial inefficiencies stemming from bad karma and operational logjams have left them with little ability to do so. Add policy U-turns, poor implementation of annual tariff revisions, and inadequate disclosure of financials, and what you have is high vulnerability.

All that has meant debtor days (receivables from customers of the top 15 states, accounting for 85 percent of India’s power consumption) rising to 130-140 days as compared to an ideal benchmark of 30-60 days, and payments outstanding of Rs 2.2 lakh-crore (see table below).

The discoms’ dues to power generators stand at ~Rs 110,551 crore as on June 2022. Further, debt requirements are increasing with interest payments surging, even as operations bleed.

Non-receipt of such monies is why generators haven’t been able to shore up coal stocks despite a sharp 7.9 percent uptick in power demand in fiscal 2022.

Attempts have been made to course correct. With UDAY, nearly Rs. 2.2 lakh-crore of discom debt was transferred in 2016 to corresponding state governments, paving the way for investments, and borrowings to trim system losses (see table below).

However, political interventions to keep subsidising power, alongside systemic inefficiencies have erased potential benefits. Further, low demand during the pandemic, especially from high-paying industrial customers, amplified the payment crisis.

It was the short-term liquidity infusion of Rs. 1.35 lakh-crore through the Aatmanirbhar package that prevented a ballooning of this crisis.

Fast-forward to 2022. The government has approved the Revamped Distribution Sector Scheme (RDSS) to give discoms another chance to take corrective actions, and gain funding access.

Some corrective steps have failed, some partially succeeded and the results of the rest are awaited.

However, the RDSS, along with amendments in the Central Electricity Authority (CEA), and the recent announcement of the Late Payment Surcharge (LPSC) waiver, can help the distribution sector build investor confidence.

Further, the recent open access rules will drive green power usage among commercial and industrial consumers. The LPSC waiver can enable discoms to regularise the significant dues to generators. It’s a win-win scheme — it prevents deterioration in discoms’ financials, and averts penalties, while assuring payments to generators over 48 months.

But there are several monitorables. How generators cope with the higher interest cost arising from receivables being staggered over 48 months, and how the government handles this funding bears watching.

For long, discoms have grappled with cash flows and dues. The ability to generate cash is crucial since subsidised electricity sales, systemic inefficiencies, and interest on legacy debt will not vanish overnight.

While the modalities of the LPSC scheme are awaited, funding for it would be a handy crutch for discoms. It will be the first step to transforming this segment of the power value chain.

Hopefully, it will lead to generation of ‘swachh’ power, paid for by ‘swachh’ discoms.