The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.
India’s government has finally thrown its hat into the inflation-fighting ring, giving company to the Reserve Bank of India which hiked rates mid-cycle in May and has set its sights on more rate hikes to lower prices. Read what the RBI governor Shaktikanta Das said on rate hikes and inflation in this interview with CNBC TV18. Sure, the government has been trying to douse localised inflationary fires such as wheat (banned exports), edible oil (lowered duties) and even in metals (lowered duties in the Budget).
But its latest measures go far beyond what it has attempted so far. It cut excise on petrol by Rs 8 a litre and on diesel by Rs 6 a litre, taking duty levels to their pre-pandemic levels. Oil marketing companies passed these cuts in full, bringing smiles at the pump. It also provided relief to the farm sector, by increasing subsidies on fertilizer. A Rs 200 cylinder subsidy will give relief to poor households.
The objectives are multiple. The moves will allow households to save and hopefully spend more, spurring consumption. Reports of consumers shying away from buying even Rs 5 or Rs 10 packs of detergent or biscuits indicate the level of stress in lower income households. If consumption picks up, then growth could get a leg-up, which as the CEA pointed out recently in an interview, is the best method to achieve fiscal consolidation.
Growth could also lead to higher tax revenues which could then offset the revenue lost to some extent. But growth could also mean higher imports, leading to a higher current account deficit. We discuss how much inflation could decline by, the effect on the fiscal deficit and government borrowing and more in today’s edition. Do read to know more.
Among the measures being taken to calm down prices are some steps that will see input costs for making plastics decline. While this is good for plastics’ producers, it’s not so for those making these inputs such as naphtha and PVC. But the steel industry came in for special treatment. Steel prices were rising sharply for several reasons, with the most recent one being the war in Ukraine. But they had weakened due to slowing growth in China. Iron ore prices had declined, too.
But it appears that the government was convinced that more was needed. It did provide some relief to producers by lowering import duties on imported inputs such as coking coal. It also imposed higher export duties on iron ore, negative for iron ore miners. But the highlight of these measures was a harsh 15 percent export duty on a wide range of steel goods, which in effect erodes the companies’ net earnings. The objective is to get them to sell in the domestic market at a lower rate. My colleague Nandish Shah has written about the impact of these measures on steel stocks. Steel stocks fell sharply today, Monday, with Tata Steel declining by 12 percent, JSW Steel by 12.4 percent and SAIL by 10 percent at 12.50 pm.
Another sector where the government has signalled it may take steps to curb exports is cotton. The situation has reached a flashpoint with spinning mills in the South shutting down, citing unviable prices. What has caused this flare-up in price and what’s the outlook? Do read my colleague Vatsala Kamat’s take in today’s edition.
Tailpiece: Export bans or punitive duty hikes seldom work, especially when the problem lies elsewhere. Indonesia’s high profile bid to calm domestic palm oil prices by a ban on palm oil exports was one such example. Prices did not cool down as much as expected. Producers filled storage tanks with output instead of flooding the market. Smaller units which did not have capacity even stopped crushing. Farmers were suffering. The situation had reached a level where even the big companies’ storage capacity was going to become full. The next step would be to stop production. The government had little option but to remove the ban on exports.
What else are we reading?The Eastern Window: Will China really relax monetary policy? And will it work?
Ruchir Sharma writes: This realm beyond regulators is where the next crisis will arise (republished from the FT)Technical Picks: Coal India, USD-INR, Adani Enterprises, Reliance, Gold futures and HDFC (These are published every trading day before markets open and can be read on the app)