Thinkpad: The Signal

Happy weekend.

For some of us, this weekend marks the end of Covid restrictions. Even masks are no longer mandatory. Ah, the relief! Yes, it's still prudent to wear them but don't play party-pooper. Let us enjoy the moment. Two years almost to the date when this whole mess started.

Now that we got that out of our system, let's move on.

BloombergQuint had a chance to catch up with chief economic advisor V. Anantha Nageswaran for what was a refreshingly candid conversation.

First, on the agenda was oil. With daily price hikes being announced, everyone has been waiting for the government to cut excise duties and bear part of the burden.

But the message from Nageswaran was that the government is watching for the persistence of higher oil prices. If prices stay above $110 per barrel for a quarter or so, the government will take a call on burden sharing, he said. Till then, the current arrangement may be appropriate, he suggested. Incidentally, oil prices eased to below $100 per barrel this week after the U.S. released oil from its strategic reserve. Of course, politics can always trump economics.

The government also appears a bit more worried about the fiscal situation and the bond markets than they let on post the budget. With the free food entitlements being extended and fertiliser subsidies shooting up, the government appears a little less sanguine about its finances for the year. Nageswaran said that implications of higher government bond yields, which push up funding costs across the economy, is one trade-off to consider when mulling a cut in excise duties.

He also, in theory, said that a weaker rupee should be part of the response to a supply shock. Is the RBI listening?

You can read the full interview here or watch here.

On the point about bond yields, the government issued its first half borrowing calendar this week. It stuck to the script in borrowing about 60% of its total requirements in the first half of the year. There was a case to be made to not front-load borrowings this year, but that option wasn't exercised. And so begins a year of record borrowings. As Vivek Kumar of QuantEco Research pointed out the first half borrowings of Rs 8.45 lakh crore are equal to the full year borrowing just two years ago.

It is going to take some work to push through some Rs 32,000 crore in borrowings each week. The market is fully expecting RBI support. How? Well, for one, the RBI said it will conduct a second $5 billion sell/buy swap in the dollar-rupee pair in April. While the primary reason is that this is being done to elongate the maturity of the central bank's forwards book, it also helps drain out some rupee liquidity and create some space for potential bond buying. How they will explain that bond buying given the prevailing macros is anyone's guess.

On the issue of macros, two data points to flag off. One, we got a strong number on GST collections at Rs 1.42 lakh crore for February, collected in March. That suggests economic activity has held up well. We also heard from rating agencies that corporate credit quality is looking the best it has in a decade. That cycle has finally turned.

Moving on.

Axis Bank bought out Citi India's retail operations this week. The deal has been in the works for about a year and finally closed at a price tag of over Rs 12,000 crore. With that, Citi, once a leader and innovator in India retail banking, calls it a day at least in this segment. We can't help but think back to a time when foreign banks were thought to offer competition to Indian private lenders. Then came a global financial crisis and a plethora of new regulations, taking down the most aggressive of foreign banking ambitions. Today, they are a pale shadow of Indian private banks in the retail banking space.

Axis Bank did well to pick up the portfolio, seems to be the prevailing view among analysts. But some questions remain on whether Citi customers will stay on to become Axis customers. If not, then....

Nevertheless, one of the bigger deals in Indian banking in recent times.

Another monetary policy review rolls around next week. The central bank will likely have to raise its inflation forecast and cut its growth forecast. But will it move on its monetary policy stance or rates? We all know what they should do; what they will do has become an entirely different thing.

We'll keep you posted.