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RBI Deputy Governor Michael Debabrata Patra on Friday exuded confidence that the monetary policy actions will be more moderate than the rest of the world, as inflation is expected to fall below 6 per cent in the January-March quarter of the current fiscal.

The Reserve Bank has already raised the key policy rate by 90 basis points in May and June to 4.9 per cent to tame high inflation, mainly due to supply disruptions on account of the ongoing Russia-Ukraine war.

Speaking at a session on 'Geo-Political Spill-overs and Indian Economy' at PHDCCI here, Patra said there are indications that inflation may be peaking.

"As monetary policy works through into the economy...inflation is expected to fall back into the threshold in the fourth quarter of 2022-23 and fall even further in the next year. This is only the baseline scenario," he said, adding that because of initiatives taken so far, the inflation may fall "sooner and faster".

"Therefore, in this world of global inflation crisis, it is possibly better to look at the change in inflation, not the level," said the Deputy Governor, who looks after the monetary policy department in the RBI.

He is also a member of the Monetary Policy Committee (MPC), which decides the key policy rate (repo).

The government has tasked the RBI to ensure inflation remains at 4 per cent with a two per cent deviation on either side.

While the retail inflation based on Consumer Price Index (CPI) moderated to 7.04 per cent in May from 7.8 per cent in April, it remained above the RBI's threshold of 6 per cent for the fifth month in a row.

"Against this backdrop, it is our hope that required monetary policy actions in India will be more moderate than elsewhere in the world and that we will be able to bring inflation back to target within a two-year time span. If the monsoon brings with it a more benign outlook on food prices, India would have tamed the inflation crisis even earlier," he said.

Observing that the decline in inflation will be very "grudging", Patra said India will "succeed in bending down the future trajectory of inflation and thereby it will win the war".

Earlier this 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.

The RBI had also raised the inflation projection to 6.7 per cent for the current fiscal year from its earlier forecast of 5.7 per cent.

The next meeting of the MPC is scheduled to take place during August 2-4, 2022.

Senior Congress leader P Chidambaram on Friday criticised the government over the state of the Indian economy, asking if it was in the "pink of health" after high fiscal deficit, inflation, and the depreciating value of the Rupee. He also questioned the government for "backsliding on the fiscal deficit target for the current year.

"Within months of setting the FD target at 6.4 per cent for 2022-23, government is backsliding. Now, Government is saying it will 'try to keep the FD at 6.7 per cent', same as the level in 2021-22," the former finance minister said on Twitter.

"High FD, high inflation, huge FPI outflows, depreciating rupee, depletion of forex reserves -- what do they point to? Is the Indian economy in the pink of health," he questioned.

The Congress party and its leaders have been questioning the government's economic policies and accusing the BJP dispensation of "mismanaging" the country's economy.

The finance ministry's Department of Expenditure has argued against extending the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) beyond September or announcing any significant tax cuts, warning of the consequences for the Centre's fiscal position, a news report said.

The government in March extended the PMGKAY, the free food ration scheme rolled out during the Covid-led lockdown, for six months till September. The Centre has allocated Rs 2.07 trillion for food subsidies in the current fiscal year, while the extension of PMGKAY till September is expected to increase the subsidy bill to nearly Rs 2.87 trillion, The Economic Times reported.

If the government decides to extend the scheme further, it would cost the Centre another Rs 80,000 crore for another six months, swelling the food subsidy amount for FY23 to Rs 3.7 trillion.

Also Read: 'One Nation, One Ration Card' programme implemented across India

More tax cuts or food subsidy extensions would adversely hit the fiscal math, the union finance ministry's Department of Expenditure said in an internal note. The department said, "In particular, it is not advisable to continue the PMGKAY beyond its present extension, both on the grounds of food security and on fiscal grounds," quoted ET.

The Centre's recent decisions to extend free ration, hike fertiliser subsidy, reintroduce cooking gas subsidy, excise duty cut on petrol, diesel and cut in customs duty on edible oils have created a serious fiscal situation, the department said.

The Centre's move last month to cut excise duty on fuel to soften the blow of inflation will cause a revenue loss of about Rs 1 trillion, the note said.

To curb inflation, the Centre last month announced a reduction of excise duties on petrol and diesel by Rs 8 and Rs 6, respectively. At the same time, it also announced a subsidy of Rs 200 per domestic LPG cylinder for up to 12 cylinders in a year.

For FY23, the government has budgeted a fiscal deficit of 6.4 per cent of GDP, while Fitch Ratings expect it to be 6.8 per cent due to higher subsidies and revenue loss due to duty cuts.

Rice bran has become a sought-after commodity in India as the world's biggest importer of vegetable oils tries to overcome an edible oil shortage caused by global supply disruptions.

A by-product in rice milling, rice bran has been traditionally used for cattle and poultry feed. In recent years, oil mills have started extracting rice oil, which is popular among health-conscious consumers but historically more expensive than rival oils.

Rice bran oil accounts for a small portion of overall vegoil consumption in India but is one of the fastest-growing among edible oils, industry officials say, and production and imports are set to increase to meet the demand.

The recent rally in global edible oil prices fuelled by Indonesia's restrictions on palm oil exports and disruptions to sunflower oil shipments from Ukraine has wiped out rice bran oil's traditional premium over rival oils. That has triggered a surge in demand for bran oil which has similar taste properties to sunflower oil.

As sunflower oil imports plunged from Ukraine, consumers started replacing it with rice bran oil, said B.V. Mehta, secretary general of the International Association of Rice Bran Oil (IARBO). India usually fulfills more than two-thirds of its sunflower oil requirements through imports from Ukraine.

"Because of COVID-19, I was looking for healthier food options. I first used rice bran oil for health benefits six months ago and since then I've been using it," said Aditi Sharma, a Mumbai-based homemaker, who switched to rice bran oil from sunflower oil.

"It tastes good and is good for health as well," Sharma said, referring to the oil's cholestrol-lowering and anti-oxidative properties.

In India, rice bran oil is now trading at 147,000 Indian rupees ($1,879) per tonne compared with sunflower oil at 170,000 rupees.

Rice bran oil usually commands around a 25% premium over other oils, but in recent months has been cheaper than imported vegetable oils, making it more affordable for the masses, according to data compiled by Solvent Extractors' Association of India (SEA).

Competitive prices boosted rice bran oil consumption since March and has encouraged companies to extract more oil.

Sharma said that even if premiums returned, she would still buy rice bran oil for her family of four.

FROM BY-PRODUCT TO MAIN

The demand for rice bran oil has become so strong that it has flipped the economics for rice millers, who are now prioritising bran oil output.

"For rice mills, instead of by-product, now rice bran has become a main product," said Puneet Goyal, chief executive officer at Ricela Group, the country's biggest producer of rice bran oil.

To meet rising demand Ricela is planning to increase oil refining capacity to 750 tonnes per day in the next two months from 600 tonnes, Goyal said.

With a vegetable oil shortage, oil mills are ready to pay record high prices for bran, said B.V. Krishna Rao, president of the All India Rice Exporters Association.

Rice bran prices have jumped to 30,000 rupees to 36,000 rupees per tonne compared with paddy prices of around 19,000 rupees, which is milled for rice extraction.

However, a shortage of oil processors in all rice milling areas remains a key limiting factor on bran oil supply, as rice bran must be processed into oil within 48 hours of being separated from chaff in order to be fit for human consumption.

Only 55% of bran is currently processed, with the remainder going to the lower priced feed market.

Even so, with several oil processors maximising output, the country is on course for record bran oil production of 1.05 million tonnes this year, up from around 950,000 tonnes in 2021, which should help India reduce imports of rival oils.

GROWING DEMAND

Edible oil consumption in India trebled over the past two decades as the population rose, incomes increased and people started to eat out more.

The country consumes around 23 million tonnes of vegetable oil per annum, with nearly 13 million tonnes coming from imports. Locally-produced bran oil can meet about 5% of overall vegoil consumption.

Companies such as Adani Wilmar, Emami and Cargill's Indian unit have launched their own rice bran oil brands to meet rising urban demand.

Rice bran oil brands have become popular and consumer acceptance has been rising, said Himanshu Agarwal, executive director at Satyam Balajee, India's biggest rice exporter.

"This new segment is just growing," Agarwal said, adding that companies previously offering mainly palm, soybean, sunflower and rapeseed oils were now launching rice bran oil products

Even institutional buyers such as PepsiCo and Haldirams are increasing use of bran oil for frying, said Goyal of Ricela.

But local supplies are not enough to cater to rising demand.

"A few companies are importing rice bran oil from Bangladesh, but even Bangladesh has limited surplus for the exports," said IARBO's Mehta.

Vodafone Idea (Vi) has opted for a four year moratorium on payment of Rs 8837 crore in AGR dues in addition to one exercised last year. Similarly, the telecom company has the option to convert interest on deferred amount into additional equity to government.

The government is set to own 33 per cent stake in Vi following an earlier decision to convert interest with net present value of interest worth Rs 16,000 crore into equity.

In a stock exchange notification Vi said that it received a letter from government on June 15 offering four year moratorium for all AGR dues upto financial year 2018-19.

The company's board decided on Wednesday to defer the AGR dues of Rs 8,837 crore. That amount is subject to revision on account of disposal of various representations and final amount has to be paid in six equal instalments after end of moratorium in March 2026.

Vi has to decide on conversion of interest on these AGR dues in 90 days.

Last September the government gave telecom companies an option to defer AGR payments for four years as a part of its telecom reforms package. These covered dues upto 2016-17 which were a part of the Supreme Court order. Vi opted for a moratorium on these dues last October.

According to official data, telecom operators owe over Rs 1.65 trillion to the government in adjusted gross revenue up to financial year 2018-19.

The fresh calculation shows AGR liability on Bharti Airtel was Rs 31,280 crore, Vodafone Idea Rs 59,236.63 crore, Reliance Jio Rs 631 crore, BSNL Rs 16,224 crore, MTNL Rs 5,009.1 crore up to financial year 2018-19.

The company in a separate filing said that its board has approved raising of Rs 436.21 crore from Vodafone Group company Euro Pacific Securities through issue of preferential share at a unit price of Rs 10.2 apiece or warrants at the same price.

India is opposed to providing any capital gains tax waivers to overseas debt investors even if it delays its goal of getting its bonds included in global bond indexes, two sources familiar with the matter said.

The Indian government had initiated the process of listing its debt in global indexes in 2019, and has been in discussions with J.P.Morgan and Bloomberg-Barclays while also talking to Euroclear with regards to clearing and settlement.

Under existing rules, an overseas investor is required to pay a short-term capital gains tax of 30% if a listed bond is sold within 12 months.

The global bond index listing plan was widely expected to be announced early this year but the government's insistence on capital gains has slowed talks with index operators, officials privy to discussions told Reuters.

The finance ministry did not immediately reply to a mail and a message seeking comments.

In October last year, Reserve Bank of India Governor Shaktikanta Das said the index inclusion was in an advanced stage of discussions with major index providers and should happen "maybe in the next few months".

"The taxation part of it is the only thing that is yet to be resolved. But there is no rationale to tax citizens and not tax overseas investors," a senior source aware of the discussions said.

Domestic investors have to pay short-term capital gains tax on debt investments as per their prevailing tax slabs and additional 4% cess.

"The risks of such index inclusions have always been there and though India is in a much better shape now, globally things are fairly volatile and it may not necessarily be the best time to go for this," he added.

Index inclusion will aid sentiment in the near-term and incremental foreign investment inflows over the medium term would help policymakers to buy some time until the global market conditions become somewhat easier to navigate, Deutsche Bank said in a recent note.

"Global bond index inclusion is not a panacea for all the challenges faced by India at this juncture, but at least it can help on the margin," the bank said.

India’s current account deficit (CAD) for FY22 widened to $38.7 billion or 1.2 percent of gross domestic product (GDP) from $23.7 billion (0.9 percent of GDP) in FY21.

The wider deficit is on expected lines as a surge in global oil prices inflated the petroleum and oil bill for the economy during the year. As a result, the trade deficit widened sharply by $185.5 billion.

Since oil prices are likely to remain elevated, economists expect the CAD to widen further in the coming year. What’s more is that the odds of a recession in the US have risen which could dampen the prospects for exports as the country remains the biggest export destination for Indian goods and services.

A supply glut is set to hit India’s government bond market, and drive benchmark yields toward 8 per cent by year-end, according to Standard Chartered Plc.

The lender estimates that excess supply of sovereign and state debt may total as much as Rs 6.3 trillion ($81 billion) this fiscal year. That’s likely to further upset a market that’s struggling to cope with rising interest rates and dwindling surplus liquidity, said Parul Mittal Sinha, head of India financial markets at the bank.

“It may keep becoming incrementally more difficult for supply to be absorbed by the market,” said Sinha, who has spent more than a decade trading currencies and rates in London, Singapore and Mumbai. “Supply worries will increase from July and with interest rates normalizing to a higher trajectory and liquidity surplus decreasing –- all these three factors can come together.”

Rupee bonds have maintained a semblance of stability amid the selloff in global debt, with recent auctions drawing decent demand as the central bank vowed to ensure the orderly completion of the government’s borrowing program. Still, there are signs that the calm may be shattered after benchmark 10-yields soared to the highest since 2019 last week.

Indian authorities are looking to sell a record Rs 14.3 trillion of bonds this fiscal year as they boost spending to spur growth while tax cuts erode public revenue. To make matters worse, the central bank is expected to hike rates further after 90 basis points of increases in the last two meetings while also mopping up excess liquidity to tame prices that are running above its target band.

StanChart estimates that excess bond supply may total between Rs 3.8 trillion to Rs 6.3 trillion this fiscal year, according to a June 8 note.

All these negatives have fueled a six-month drop in benchmark 10-year debt, and analysts at Citigroup Inc. are among those who predict that yields may climb as high as 8 per cent from around 7.48 per cent now. They last reached 8 per cent in 2018.

Bear Flattening

The yield curve is likely to continue bear flattening, with shorter yields rising faster than longer rates, according to Sinha.

“As more and more hikes get delivered, the five-year part of the curve will remain under pressure,” said Sinha. “The longer end demand is growing at a good pace -- the 15- to 30-year part of the curve remains well-anchored with demand from insurance companies.”

Local investors who were sitting on excess cash have deployed some funds after yields climbed to the highest in over three years, said Sinha. She added that the RBI was unlikely to carry out another major bond purchase program like it did in the previous fiscal year, when it bought Rs 2.2 trillion of debt.

“We are not in the camp that expects any big bond purchases from the RBI,” said Sinha. “If inflation cools down and big rate hikes don’t happen, you won’t anyways need to do that kind of intervention.”

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The ongoing downturn in the domestic stock market has seen nearly 83 percent of the stocks forming the Nifty 500 index, a collection of the biggest companies in the country, deliver flat or negative returns in 2022 so far.

Many of these stocks are hovering below their 52-week lows and their 200-day moving average (DMA), data compiled by Moneycontrol showed.

So far this year, the Nifty 500 index lost 12 percent, while the BSE Sensex and Nifty 50 have declined nearly 10 percent each.

Companies that have seen the most erosion in their stock prices since the start of this year include Dhani Services, Solara Active Pharma, Brightcom Group, Indiabulls Real Estate, Metropolis Healthcare, Hikal, Indiabulls Housing Finance, Dilip Buildcon, Welspun India, Nazara Tech, One97 Communications, Zomato and Sterlite Tech, which have lost 40-80 percent.

Nifty 50 stocks such as Hindalco Industries, Tata Steel, BPCL, IndusInd Bank, Shree Cement, HDFC Bank, Asian Paints, Wipro, Infosys, HDFC, HCL Technologies, Bajaj Finance, Tata Consultancy Services, Tech Mahindra, and Grasim Industries hit one-year lows recently. All these stocks are down between 8-40 percent this year.

"The broader market has been under pressure mainly due to the heavy FII selling. Concerns of premium valuation and higher impact of inflation on their profitability led to sharper fall in broader markets" said Sneha Poddar, AVP, Research Analyst, Broking and Distribution, MOFSL

However, the sharp correction in the market is also being seen as an opportunity by some market participants.

“I think it's the right time for long-term investors to add to good growth stocks, which are available at attractive valuations,” Narendra Solanki, Head-Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers, said.

Solanki believes investors should continue to hold existing stocks in their portfolios, if growth prospects of the company are intact as the “current volatility is more in the short-to-medium term, while long-term prospects for our economy remain promising”.

Analysts attribute the negative or low returns in some popular consumer durables, auto, banking, realty and metal stocks that are actively traded in futures and options (F&O) on the perception that higher cost of borrowing and product prices will hurt demand at a time when companies are grappling with persistently high input prices.

Metal stocks have already been under pressure since the government’s decision to impose export duty on steel to cool domestic prices.

Among IT stocks, volatility in the global markets amid higher inflation and expectations of tightening by central banks, along with the Russia-Ukraine war, which is unlikely to end soon, may see a slowdown in order books. Most Indian IT companies are moving their operations out of Russia, while helping clients maintain business continuity by shifting work to other locations. This is likely to increase margin pressures further, analysts said.

Oil & gas stocks were under pressure as investors feared that interest rate hikes from major central banks could slow the global economy and cut demand for energy.

Vikram Kasat, Head-Advisory at Prabhudas Lilladher expects markets to remain volatile for the next three months as he believes inflation is likely to remain high and geo political tensions will not end soon.

"We believe that inflation expectations have run ahead of themselves and the scaling back of consumption through increasing interest rates and tightening liquidity would result in inflation softening. However, markets have typically moved either sideways or down during this process. Nifty is also currently trading at 19x forward assuming a 10 percent cut in earnings, which does not give a screaming ‘buy’ yet,” said Vinit Bolinjkar, Head of Research, Ventura Securities.

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