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The Asian Development Bank (ADB) has agreed in principle to give an aid of Rs 1,700 crore to Uttarakhand for infrastructure development and creation of sewerage treatment facilities in urban areas.

This was conveyed to Chief Minister Trivendra Singh Rawat by the country director of ADB's India Regiment Mission Kenichi Yokoyama at a meeting between the two here today.

Thanking the ADB for the aid, Chief Minister Rawat said infrastructure development in the urban areas was one of his government's top priorities and 100 per cent of the aid given by the institution will be utilised for the purpose.

Institutional processes in the state are being made more transparent and outcome based, Rawat told the delegation and laid emphasis on forming stronger project management units and better inter-departmental coordination for the implementation of the ADB aided projects.

Yokoyama said the Rs 1,700 crore aid will be given for the creation of infrastructural facilities, sewer treatment plants and water supply facilities in urban areas of Uttarakhand.

He said the ADB can also run a reform programme to economically strengthen municipal corporations of the state and better management of the resources at their disposal.

IT-based billing and tax collection system should be encouraged in municipal corporations, he suggested.

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The Reserve Bank’s new rules on the resolution of non performing loans (NPLs) is finally getting the attention they deserve from the power ministry. The caustic opposition to it from Power Minister R K Singh was entirely on expected lines.

“RBI circular is not workable. If you follow that circular large number of additional assets will go into the red, they will also become sick. This is like somebody who has just started sneezing, you are driving him sick. This circular needs to be changed,” Singh told CNBC TV18 last week.

He continued: “If somebody’s asset goes into this resolution process then it is expected to be completed in 180 days, it is just impossible. A resolution process will take at least a year for it to be a real resolution process. So, that limit is also unworkable.”

Now first up, someone needs to tell the minister that the RBI would have been delighted if it had to wait only one year for stressed loans to be resolved. The 50,000 megawatts of power assets that look very likely to be taken to the NCLT (the National company law tribunal ) have been stressed for at least three years!

The former power minister tried hard for three years to make the gas-based plants work. They didn’t. Now the ministry itself has given up hope. Why should these projects not be taken to the NCLT. It’s possible the banks will recover something from some stressed asset funds who are prepared to wait it out for say the Reliance–BG alliance to generate gas by 2020. Why should these zombie assets be sitting in the books of banks.

Even if these plants get into liquidation and the banks get only 10% of loan value, there will be some write back of provisions and some lightening of deadwood in their balance sheets.

Secondly, the 19,723 megawatts of thermal capacity languishing for want of PPAs won’t get resolved until discoms sign power purchase agreements or coal India signs FSAs. But, discoms haven’t been doing that for want of money.

From 2012-2017 (the period that would have been the 12th five year plan), discoms signed power purchase agreements (PPAs) for only 7,168 megawatts, where as the private power companies added 53,664 megawatts of capacity.

In fact the RBI’s rule that will require stressed companies to be taken to the NCLT, may actually be a great catalyst for the industry to reset its demand-supply imbalance. The clock for already stressed projects started ticking on March 1 and six months later, i.e on September 1, they will have to be taken to the NCLT.

Already power rates in the overnight market and in the short term(merchant) market have risen sharply ever since the weatherman announced an unusually hot summer. The day-ahead market on the IEX saw rates average between Rs 4 and Rs 5 in April 20% higher than the previous month, while merchant rates for 3- 6 months are even higher.

Recently Gujarat tied up about 2,000-mw supply during April-June at tariffs ranging from Rs 4.79 per unit to Rs 8 per unit. The average price discovered was over Rs 5.5 per unit. Punjab tied up short-term electricity supply during June-September at an average of Rs 4.5 per unit, while Haryana discovered tariff in the range of Rs 4.94 per unit to Rs 8 per unit.

The point is, even as the power companies come to the NCLT, power rates in India may become high enough for stressed asset funds and other deep pocketed investors to consider buying these companies. Banks may get at least 20% of their loans back. If banks don’t find the offers attractive at all and a few plants go into liquidation, even that will be welcome, because as capacity exits, the demand-supply balance will shift in favour of demand and the remaining, less unviable plants may become viable and fetch better rates.

Short point, the RBI’s circular must not be tweaked. It is not only good for banks, it is probably good even for the power sector as it may help the sector get healthier from a price perspective and from the point of view of weaker players giving way to stronger ones.

But perhaps the power minister is working to a different calendar – an election calendar. His refrain has been that not six months, but one year needs to be given to resolve stressed power companies.

As per his demand, the current NPA companies will be brought to the NCLT only in March 2019. By then the nation will be in election mode and the mess will eventually be his successor’s, not his. Strangely all of Mr Singh’s deadlines start only by March 2019. He had earlier announced that he would tweak the electricity act to penalise discoms for any disruption in electricity supplies post March 2019. Likewise discoms, he said won’t be allowed to recoup more than 15% of their losses through any tariff increase post March 2019. Looks like he is drawing up more plans for the next government in New Delhi than for the current one.

The minister may be moved solely by election calendar, but the RBI should be concerned only about the health of the banks. It has waited long enough for these power companies to become viable. It needs to stand firm by its February circular. Incidentally, the government may also benefit. By the time the polls are fought, Indian banks may be much healthier than they are today thanks to the RBI circular. The NDA can justly claim the cleaning up of banks are one of their best successes. They need to back the RBI.

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The Telecom Commission’s meeting on May 1, its first since the Budget session of the Parliament closed on April 6, has as many as ten items on the agenda, according to a source familiar with the development.

These include net neutrality, in-flight connectivity, administrative allocation of spectrum bands E and V, ease of doing business, cloud services, machine to machine communication and regulatory framework for internet telephony.

Telecom Commission, headed by the secretary of the department of telecommunications, is the apex decision-making body of the DoT. Not all decisions of the Telecom Commission have to be approved by the Union Cabinet. The Commission usually sets up panels to consider recommendations made by the telecom regulator or even otherwise and then decides whether to give approvals or not to a given panel’s suggestions.

Net neutrality is a sensitive issue world over and not just in India. The Commission will be taking up the suggestions already made by the Telecom Regulatory Authority of India that favoured not allowing Internet service providers to cut deals with content companies that would have otherwise enabled preferential treatment to a content company by providing its content at a faster speed compared to a rival’s.

In-flight connectivity for using data and voice services is a lucrative market being eyed both by telecom as well as airline companies. All stakeholders -- including ministry of civil aviation, home ministry, external affairs ministry, air safety regulator -- have given their approvals to allow in-flight connectivity. Issues of safety, jurisdiction and licensing have so far delayed the process. Companies like Lufthansa, Emirates, Etihad Airways and Qatar Airways already offer these services on their flights.

Allocation of spectrum bands E and V is something the telecom companies are looking forward to. These bands enable transmission of data at very high speeds of 1000 megabit per second. These bands are useful for short distance tower-to-tower data transmission and some industry say these frequencies could be used for 5G services as well once the rest of the ecosystem is ready.

There is a possibility of these bands be allotted to existing telecom companies as ‘administrative spectrum’ and not through an auction. Such an allocation of these bands will save the companies the cost of laying the expensive optic fibre, a tedious process that involves seeking permission from the local authorities.

The Commission will also discuss setting up a regulatory framework for Internet telephony, a service that already has the nod of the regulator. If the DoT accepts TRAI recommendations, Internet calls will be possible to any instrument, be it landline or mobile without the users needing to download any app.

Thus, entities like Whatsapp and Skype will also come under the licensing policy and be made to sign interconnect agreements with telecom service providers. It will also be possible to use an app to call on any mobile or landline, doing away with the need for the other user also to have the same app on her mobile.

It must be noted that once true Internet telephony comes to India, only the calling party will need a data connection while it will not be mandatory for the receiver to have a data connection. The receiving consumer will simply benefit from an interconnection pact between her own service provider and that of the calling party.

The Commission will also deliberate on the concept of ‘machine-to-machine’ communication – an emerging area where one device communicates with another, let’s say your mobile telling your washing machine to shut down or the server of your electricity supplier recording the reading of your meter from a distance. As per DoT’s earlier decision, all such machines will have a 13-digit number.

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In a first bi-lateral visit by an Indian premier to a Nordic nation in 30 years, Prime Minister Narendra Modi on Tuesday arrived in Stockholm, where he was received by his Swedish counterpart Stefan Lofven.

PM Modi's visit to the India-Nordic Summit is likely to strengthen ties with Sweden and increase bilateral trades between the two nations countries. He is on the first leg of his five-day tour which will also take him to the UK where he will attend the Commonwealth Heads of Government Meeting (CHOGM).

Here's a look at India-Sweden ties so far: 

The bilateral ties between India and Sweden go back to the 1940s. Several companies have engaged in trade leading to the establishment of bilateral trade of more than USD 2.2 billion as of 2016.

Indian ties with Sweden reached new heights after the then President of India visited Sweden in 2015, followed by the Swedish Prime Minister Stefan Löfven's visit to India in 2016 for the ‘Make in India Week’ in

Mumbai. Former Prime Minister Fredrik Reinfeldt also visited India in November 2009 for the India-EU Summit and bilateral talks.

Political ties

Several inter-governmental Agreements or MOUs in the areas including sustainable development, education, health, space, identified defence, infrastructure, urban development, education, S&T, environment, railways and energy has been signed between the two countries.

During former president Pranab Mukherjee's visit, six MOUs in important areas, including sustainable urban development; micro, small and medium enterprises; visa exemption for diplomatic passports; polar and ocean research; ageing and health; and pharmaceutical products and 15 agreements between educational institutions, were signed.

An India-Sweden Business Leaders Roundtable was created in February 2016 during the visit of the Swedish Prime Minister to India, with CII and Sweden-India Business Council as its coordinating agencies. The first Roundtable took place on 11 November 2016 in New Delhi.

Strategic and Defence Cooperation

Both the countries signed an MoU for defence cooperation in 2009, under which an India-Sweden Joint Working Group was established with a focus to promote ‘Make in India’ programme in defence sector and to identify more areas for cooperation in research and development for coproduction.

After visits of prominent defence heads from either countries, India and Sweden noted the scope for further enhancing bilateral defence cooperation to a higher level. The Swedish side expressed its willingness to work with India under ‘Make in India’ initiative and to pursue defence equipment cooperation.

Economic and Commercial relations

India is Sweden's 19th largest export market and third largest trade partner after China and Japan in Asia.

The main Swedish exports to India are pharmaceuticals, paper and pulp products, chemicals, engineering products and telecom equipment, while the main items of Indian exports are chemical products, food products, and semi manufactured and manufactured goods.

Indian companies such as Aditya Birla Group, Wipro and Bharat Forge are among the other major investors in Sweden. According to rough estimates, the cumulative Indian investment in Sweden is in the range of USD 700-800 million. Similary, Swedish companies including Atlas Copco, Sandvik, Alfa Laval, Volvo, Astra Zeneca, SAAB, have invested in India.

Cultural and Educational Relations

Indian music, dance, art, literature, films and cuisine are promoted in Sweden by local associations and the Embassy with the support of the Indian Council of Cultural Relations.

Several Swedish universities have established links with Indian educational institutions and regularly send students to India for different programmes. The establishment of Chairs on India Studies at major Swedish Universities – Lund (now discontinued), Gothenburg and Uppsala – have given an impetus to the academic interest in India.

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India's wholesale inflation grew 2.47 percent in March as prices of vegetables and other food and beverages softened, latest price data released by the commerce and industry ministry showed.

Wholesale inflation rate, measured by Wholesale Price Index (WPI), is a marker for price movements in bulk buys for traders and broadly mirrors trends in shop-end prices.

WPI witnessed a growth of 2.48 percent in February. Also, January WPI inflation has been revised to 3.02 percent from 2.84 percent.

Index for in primary articles inflation, which account for more than a fifth of the entire wholesale price index, declined by 0.5 percent in March from 0.79 percent in February.

Index for prices of vegetables fell 2.7 percent.

The index for non-food articles group declined by 0.3 percent to 120.2 (provisional) from 120.6 (provisional) due to lower price of guar seed, niger seed, floriculture, raw cotton, cotton seed, skins (raw) and gingelly seed, etc.

Prices of pulses continued to slump with the inflation falling at 20.58 percent in March compared to fall of 24.51 percent in February.

Fuel and power inflation, which has a weightage of 13.15 percent in WPI, declined by 0.1 percent in March, month-on-month.

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Public sector banks must become more agile with focus on low capital-high spread asset model along with low concentration risks and smarter delivery mechanism to benefit in the long run, said Bank of India (BOI) chief Dinabandhu Mohapatra.

According to him, the age-old system of asset and revenue-based growth model has caused problems for the banks today.

A career public sector banker, Mohapatra started his career with Bank of India in 1984 and came back to his home bank in May 2017 after a stint with Canara Bank as the Executive Director.

Bank of India’s turnaround plan, charted last year after he joined, paid off in just two quarters as its profits were back in black. However, profitability purged in the December quarter after the Reserve Bank downgraded Rs 13,645 crore worth of loans.

To a major respite, BOI saw recoveries to the tune of almost Rs 9,000 crore in the January to March period alone. Mohapatra pins hopes to come out of the PCA (Prompt Corrective Action) framework, imposed by RBI, that restricts expansion for the bank.

They managed to reduce the bank’s international book by about Rs 25,000 crore since March 2017 to help improve margins. As on December 2017, Bank of India’s foreign business (deposits + loans) has already declined to Rs 2.10 lakh crore, down by over Rs 13,700 crore.

You have been working on improving the bank but loss widened to Rs 2,341 crore in December. How has growth been in the March quarter?

We have capital challenges, so within that we have to generate more margins, the topline (total income) will remain more or less at same levels.

We have reduced around Rs 25,000 crore of international business from March 2017 and entire accretion has come to the domestic business. Rebalancing has to happen to the right kind of business. In percentage terms, their margins was 20-40 basis points and in India we get at least 2-2.5 percent margins.

It will take time to grow domestic but then later on it will be on autopilot. Credit is coming back...low capital consuming and low risk business that has come up, activation of branches is also happening, all distribution points are delivering now, and once you activate them recovery also becomes easy. Now, there will be less slippages because people (employees) are taking ownership.

When do you expect to come out of Prompt Corrective Action (PCA)?

We are currently looking at strengthening our bank get systems in place.  PCA is an enabler, it helps to go in the right direction, book right kind of asset, focus energy on compliance and we have also made a lot of provisions already. We will go for quality assets, minimise concentration risks and recovery should be more. We also have a focused vertical on stressed assets. So let us see, hopefully by this year (we come out of PCA).

Are banks likely to see more haircuts under the insolvency process at the NCLTs?

Initially, it was estimated to be high but with the kind of bids coming in, it gives confidence and we are hopeful, the hair cuts will come down. We hope the big accounts get results in Q1. Also, the new guideline (February 12) has come and all banks will look at them case-by-case. Now borrowers and promoters are also showing more interest to save the account. So it will take one or two more quarters.

Have processes changed after the Punjab National Bank’s fraud blow-up?

We have already started linking our systems to core banking solutions and should complete by April 30.

In terms of internal processes, earlier we observed, one vertical was handling 150 branches. Now, we established around 112 managers to handle 35 branches each. So, one branch will be supported by 5 to 6 officers, key areas like credit recovery financing will be supported by one leader and the area manager knows the branch manager by name and hence has full grip on the branch. They all report to the general manager.

We also want to target our good customers. We have started our separate vertical called Star Prime supported by six area general managers in key financial centres including 4 metros focusing on accounts over 5 crore.  All accounts are focused by these area managers, all their finance needs will be looked after by them, get more business from them and specific clients have specific requirements... This is  showing good results. We also started MDA - most desirable account - largely A graded accounts.

We also started Eklavya where employees are given handsome training and experience at their locations, without sacrificing their time. This will build the right knowledge and skill set as public sector banks have limited technological skills, with IT background.

What is your view on privatisation of public sector banks?

Public sector banks have played a major role in the economy.  We participated in the Green Revolution, White Revolution, Telecom, infrastructure, airports, etc... all this was driven by credit from public sector banks. Today every household has a banking account that is because of public sector banks. We also quickly adopted to the CBS model, IT systems are improving.

But there are lot of weak PSU banks.

Agreed. But a lot of banks are age-old institutions that have niche geographies to cater to, differentiated products and service offerings.  Public sector banks can play a differentiated role with product-specific, need-specific model, targeting a niche area and segment. We do need banks take care of the large population.

Do you think banks need to change their systems as well?

The asset and revenue growth model has caused problems for banks today. Banks must have smart banking strategy, must focus on less capital and high spread asset model, diversified and low concentration book, aim at non-interest income, utilise the non-fund based assets re-price them, become more agile, should become lean and smart in delivery mechanism to prevent frauds, more ownership oriented than employee oriented — all those who practice this will benefit going ahead. This will strengthen public sector banks.

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The government is in the process of finalising regulations that may soon be released for public comments for foreign universities to set up campuses in India. At present, laws do not allow international educational institutions to set up India campuses without tying up with local players.

“We are considering the bill seriously and are open to views from relevant experts,” said a source close to the development.

Eight years ago, the UPA government had received Cabinet approval for the Foreign Educational Institution (Regulation of Entry and Operation) Bill, 2010. This bill was to look at the entry and India operations of institutions. This nod had also come after stiff opposition for four years. However, it could not be passed due to lack of consensus.

This bill is still pending to be taken up. Once the final draft is released, this may be open to suggestions from relevant stakeholders before it is tabled in the Parliament. The final decision could be taken in the next 3-4 weeks.

Sources said that around 50-60 international educational institutions have expressed their interest to set up a campus in India. However, extant laws do not permit them to do so.

Some institutions are already operating in India by tying up with local partners. For instance, Canada-based Schulich School of Business has an MBA programme in its India campus in Hyderabad being offered in partnership with the GMR School of Business.

Currently, there are more than 700 foreign education providers operating in India providing courses through partnerships, offer blended programmes or offer pure executive education for senior management of companies. There are also a handful who are operating without an All India Council for Technical Education (AICTE) go ahead which technically means that they do not have the right to offer degrees or diploma certifications in India.

Early beginnings

The UPA government had made several attempts to enable foreign educational institutions to set up campuses in India by getting the Bill passed. However, there was a lack of consensus that led to this proposal being left hanging.

Later, the University Grants Commission (UGC) had also prepared and notified rules that would allow certain foreign universities (not-for-profit ones) to set up campuses in India. But there were differing views between UGC and the law ministry because they had sought specific laws to be enacted for the same.

Modi government tries again

In mid-2014, former Minister of Human Resource Development Smriti Irani had made an attempt to introduce regulations on allowing foreign university campuses in India. However, no further move was made on this front and the proposal died within a few months.

However, sources said that the current government wants to build a proper structure of guidelines that will guide foreign players on the entry, exit and capital requirements to set up shop in India.

“There have been cases wherein some foreign institutes have a complex structure of having one year of education in India while the second and third year could be in some other location and the degree awarded will be from abroad. These are grey areas that we are looking to resolve so that the student’s future career prospects are not impacted,” said a senior official.

Way forward

Once the norms are finalised, the MHRD will look at the pros and cons of the suggestions. Once this is done, this will be forwarded to the Cabinet. Once it receives a cabinet nod, this can be introduced in the Parliament.

On area to watch out for is if the ministry will look for institutions with at least 20-30 years of minimum history before they can set up an India campus. Institutes may also have to register ‘twinning programmes’ at the very outset to clarify that the courses will be offered across different locations of the world.

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Senior officials of India and Peru will hold next round of negotiations for a proposed free trade agreement (FTA) in the South American nation this week to boost two-way commerce between the countries.

"Officials from commerce ministry are there in Peru for the second round of negotiations for the pact," a government official said.

In an FTA, two countries significantly reduce or eliminate duties on most of the goods traded between them besides relaxing norms and rules to promote trade in services and increase bilateral investments.

With growing uncertainties in its traditional markets, including the US and Europe, India is looking to enhance its engagements with regions like Africa, South America and Central Asia.

Exporters body Federation of India Export Organisations (FIEO) said that Peru holds huge potential for exports.

"The FTA would help boost our exports. India should look at South American market aggressively as Peru is also a member of MERCOSUR (a six Country trade bloc with Brazil, Argentina, Paraguay and Uruguay as its members)," FIEO Director General Ajay Sahai said.

He said that India should also look at increasing investments in these regions.

Peru ranked third amongst export destinations for India in the Latin America and Caribbean (LAC) region during 2015-16.

The bilateral trade between the nations increased to USD 1.77 billion in 2016-17 from USD 1.52 billion in the previous fiscal.

Among the top ten commodities of India's export to Peru are motor vehicle, cars, products of iron and steel, cotton yarn and fabrics. While the imports include bulk minerals and ores, gold, fertilisers crude and zinc.

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The questioning in the Nirav Modi case has now reached a few current and one former Reserve Bank of India (RBI) deputy governor. At the outset, one needs to distinguish between the Nirav Modi issue and the 80:20 gold scheme.

Nirav Modi, in cohorts with a couple of employees of Punjab National Bank’s (PNB) Brady House branch, took a large amount of loans without margins -- loans which, it now appears, he could repay only by taking more loans. His uncle Mehul Choksi appears to have benefitted by changing a decimal point in one of his loans and making off with a much larger loan than was sanctioned.

Nirav Modi is not at all connected to the 80:20 scheme. Mehul Choksi’s Gitanjali Gems was one of the Star Trading Houses that got a licence to import gold in May 2014, when gold was scarce in the country, but it is now well documented that of the 14 STHs, Gitanjali imported the least and hence probably benefitted the least. The questioning of the current and former officials of the RBI is hence in connection with the 80:20 scheme.

The question marks over this scheme emanate from both the timing of the relaxation and the Comptroller and Auditor-General’s remark that the STHs benefitted by Rs4,500 crore because of the policy.

What the Central Bureau of Investigation (CBI) and other investigating agencies need to note that policies intended for general benefit often tend to help some more than others. A policy to build say the golden quadrilateral pushes up prices of land in areas through which the road runs. But the policy was not intended to benefit those owning the land. It was meant for the entire nation. One ought to see the 80:20 policy in the light.

When the taper talk hit the Indian rupee in July 2013 along with the other four “fragile” currencies, RBI’s and the government’s effort was to control imports and increase the flow of dollars into the country.

The FCNR-B scheme was designed to attract NRIs into depositing more dollars in Indian banks, with the RBI agreeing to bear the swap cost. A number of NRIs made money hand-over-fist by leveraging nearly 20 times to benefit from the FCNR scheme. India got over $25 billion due to this scheme.

When the time came for the deposits to mature (in October-November 2016) the dollar had become cheaper, so the RBI didn’t lose any money buying back the dollars and repaying the NRIs. But that’s beside the point. In the pursuit of more dollar inflows, so that the rupee didn’t look fragile, the government and RBI started a scheme that enriched some NRIs hugely. Does this mean RBI and the government were in cohorts with some handpicked individuals? No. The scheme was policy decision to get more dollars.

The 80:20 scheme needs to be seen in the same light. The government banned gold imports because it was a large import item and was unimportant enough for the country to do without for some time. Both government and RBI were aware that anything rationed would benefit those who could lay hands on any amount of gold. Yes, the STHs made money when they were allowed to import from May 2014.

But one needs to note that from June 2013 to May 2014 as well, a lot of jewellers made tonnes of money on gold imported by the banks. This was how the scheme was designed: only four banks and two government trading companies MMTC and STC were allowed to import gold.

Jewellers who had a record of imports and exports until May 2013, were sold this gold at the landed price on promise they would use 20% to export jewellery. They had the licence to sell the remaining 80% in the domestic market which earned them a massive premium. If the CAG’s office tries to find out how many jewellers benefitted before the policy was liberalized, the will find that a clutch of jewellers made even more money than the Rs4,500 crore the STHs did after May 2014. But that’s how rationing works.

In war time, nations ban a bunch of unnecessary imports, or impose price controls. Black markets flourish and those who have the goods make money. Nevertheless during wars, governments continue to impose rationing. In all these cases one assumes the larger good that is served by controlling prices or imports is more than the evil of some people making money.

Likewise in 2013, the extra bucks made by some FCNR-B depositors and some jewellers was considered a price the nation had to pay to control the exchange rate from a free fall. It may be recalled, at that time the United Progressive Alliance (UPA) government also decided to raise the price of petrol and diesel by 50 paise every month.

This was political suicide for the UPA because raising prices on the eve of an election would have hurt the ruling party. But, the government went ahead and raised prices so that at higher prices, fuel consumption would fall and the country’s trade deficit would correct. This act of the UPA government of raising fuel prices even on the eve of an election to serve a larger good is an act of statesmanship.

Short point, in the face of a massive current account deficit and a run on the rupee many actions were taken by the government and the RBI to rebalance the deficit. Some policies benefitted some persons. But witch-hunting, of all people RBI officials, is unfair and even dangerous.

The next time the country’s currency is in danger, RBI officials who so far have been in the forefront of the firefighting, may simply want to play safe instead of serving the country.

This column had pleaded in the past, and pleads again: controlling the exchange rate is a delicate task. Questioning RBI’s motives on hindsight can be a costly blunder.

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As expected, the Reserve Bank of India (RBI) MPC kept the policy repo rate unchanged at 6 percent in the April 4-5, 2018 meeting. Given that this was the first meeting of FY19, the RBI’s estimated inflation trajectory forms the nub of the policy.

The Monetary Policy Report (published biannually) outlined that the inflation trajectory would hover around the 4.5 percent mark, not just in FY19 but in FY20, too.

With headline CPI inflation expected to be in a ‘no-man’s land’ for an extended period and growth seeing some nascent recovery, the RBI is likely to remain on an extended wait-and-watch mode.

While the policy should provide some cheer to the bond market, further downward move in yields will be contingent on the fiscal situation and sustained lower inflation prints.

The RBI revised its inflation forecast lower to 4.7-5.1 percent (earlier estimate of 5.1-5.6 percent) for 1HFY19 and 4.4 percent (earlier 4.5-4.6 percent) for 2HFY19.

However, the RBI remains wary of the adverse impact on inflation from
(1) a revised formula for MSP for Kharif crops,
(2) staggered impact of HRA revisions by state governments, specifically second-rounds impact,
(3) further fiscal slippage either in FY19 or in the medium-term path,
(4) adverse temporal or spatial distribution of monsoons,
(5) surveys indicating that input and output prices could rise going forward, and

(6) recent volatility with hardening bias in crude prices.

The MPC noted that growth has been recovering and the output gap is closing. There has been some recovery (especially in the investment cycle) as indicated by the recent pickup in credit offtake, sustained growth in capital goods production and higher non-oil imports.

However, caution should be exercised as global growth could swiftly move lower on the back of rising trade protectionism and volatile global financial markets. We estimate FY19 GDP growth at 7.3 percent, in line with RBI’s estimate of 7.4 percent.

We expect headline inflation to trend towards 5.2 percent by June 2018 partly led by unfavorable base effect, before moderating towards 4.5 percent by end-FY2019. This trajectory would neither provide comfort to the RBI (being above 4 percent on a sustained basis) nor convincingly warrant a rate-hike cycle (not significantly higher than 4 percent).

We remain cautious on the core inflation part, which could stay high as the economy undergoes a gradual cyclical recovery and corporates possibly gain pricing power through the year.

We expect headline and core inflation to average 4.6 percent and 4.9 percent in FY19 (3.6 percent and 4.5 percent in FY18). As highlighted above, there are various upside risks to the inflation trajectory. A nascent cyclical growth recovery is underway.

The RBI will take cognizance of this dynamics. Also, a change in stance would be warranted when a series of rate actions seems necessary rather than a token rate action.

In the current scenario, the conditions necessitate a wait-and-watch policy with a hawkish bias. However, any sharp deviation from the RBI’s estimated inflation trajectory on account of non-transitory causes may prompt the RBI to revisit its neutral stance.