RBI may continue to hold rates, Indigo may sign a deal with Airbus for 500 jets and more

RBI may continue to hold rates

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has been in the spotlight as it gears up for the monetary policy review on June 8th. However, analysts and market watchers are in agreement that the MPC will hold the repo rate steady at the current level of 6.5 per cent.

What it implies: Under the direction of RBI governor Shaktikanta Das, the MPC had previously raised the repo rate, the rate at which the RBI lends to other banks, quite significantly. The rate moved from 4.0 per cent in May 2022 to its current level of 6.5 per cent by February 2023.

This substantial increase was part of the committee’s strategy to manage inflation. However, in the April 2023 review, the MPC decided to pause these rate hikes. This pause was seen as a temporary stop in the increasing rate cycle rather than a reversal. A critical factor in this decision could have been the recent decrease in the Consumer Price Index (CPI)-based inflation.

CPI, a crucial indicator for RBI’s monetary policy decisions, dropped to an 18-month low of 4.7 per cent in April 2023 from 5.7 per cent in March. This rate is comfortably within RBI’s 2-6 per cent inflation target. The downward trend in inflation, alongside previous aggressive measures to tighten monetary policy, may have given the MPC enough leeway to maintain the rates as they are for the time being.

That said, the MPC’s final decision would also consider other elements, such as prospects for economic growth, international economic conditions, and the government’s fiscal policy.

Also read: RBI’s interest rate decision, global trends to drive markets this week: Analysts

The RBI holds six bi-monthly monetary policy reviews throughout the fiscal year. Apart from the recent pause, the central bank has cumulatively increased the repo rate by 250 basis points since May 2022 to combat inflation. This strategy of raising interest rates is a common monetary policy tool used to decrease demand in the economy, which helps in lowering the inflation rate. However, retail inflation in India remained above the RBI’s target of 6 per cent for three consecutive quarters and only fell back into the central bank’s desired range in November 2022.

According to the RBI’s flexible inflation targeting framework, if CPI-based inflation stays outside the 2-6 per cent range for three consecutive quarters, the central bank is viewed to have failed in its task of controlling price increases.

Deepak Agrawal, CIO–debt, Kotak Mahindra Asset Management Company said, “India is in a Goldilocks situation with strong GDP data, cool-off in inflation. Therefore, the future decision of the MPC transcends the usual deliberations of interest rate hikes or pauses. Instead, it hinges on whether the MPC will pivot towards a “neutral” stance or persist with the current stance of “withdrawal of accommodation.”

“Considering the prevailing ambiguity surrounding the future path of the Federal Reserve’s rates in the coming months, our perspective leads us to anticipate a dovish message from the MPC, implying that the RBI has concluded it’s tightening measures, all while maintaining the existing monetary policy stance,” Agrawal added.

Airbus may sign a deal with IndiGo for 500 jets

A Reuters report has said Airbus is nearing a potential record-setting agreement to supply 500 narrow-body A320-family aircraft to IndiGo, quoting industry insiders. The European aircraft manufacturer has taken the lead for an order that could surpass Air India’s provisional purchase of 470 jets made in February, making it a historic deal.

Based on the latest Airbus list prices, such a deal would be valued at approximately $50 billion. However, aircraft analysts suggest that the actual cost would typically be less than half of this amount due to the common practice of offering significant discounts for large-scale purchases in the airline industry.

Also read: FPIs invest Rs 43,838 crore in Indian equities in May, highest in 9 months

What it implies: IndiGo wants to double its size and scope of activities over the next decade. With over 55 per cent market share in the domestic airline market, IndiGo now intends to focus on deploying its fleet on international routes, and the new order will be to increase its limited presence.

The airline already has 500 planes on order. Its fleet is 3.5 years old, making it one of the industry’s youngest and most fuel-efficient fleets. It expects to grow by the mid-teens in FY24, serves 100 million customers in FY24, and hire 5,000 new staff. It added 30 planes in fiscal year 23, with net additions of 40-50 planes projected in fiscal year 24. Instead of Pratt & Whitney engines, new aircraft will be outfitted with LEAP engines.

Govt plans ₹15,000 crore push for battery storage system

The government is working on a production-linked incentive (PLI) scheme worth as much as ₹15,000 crore to encourage the setting up of grid-scale battery storage, with the draft of the scheme expected to be released within a month, a report in business daily Mint said.

Grid-scale battery storage systems or battery energy storage system can store renewable energy and release it at times of high demand to maintain grid stability.

What it implies: India’s power ministry is advocating for a nearly $2.5 billion incentive scheme to boost domestic production of grid-scale batteries. The goal is to decrease energy storage costs to accelerate the country’s energy transition.

India, concerned about China’s lead in the lithium market, is in discussions with countries, including Australia, to secure supplies of this crucial battery component. Additionally, the government plans to advance other battery technologies. Lowering storage costs ensures consistent renewable energy supplies from intermittent sources such as wind and solar power. Until that becomes feasible, India is focusing on energy security, with plans to increase its coal power capacity by a quarter through 2030, unless more affordable storage options become available.

Large Indian corporations, including Adani Group and Reliance Industries Ltd., have committed to investing billions in energy storage. In addition, the government intends to require developers to include energy storage in future wind and solar projects to increase capacity. The proposed battery plan aligns with Prime Minister Narendra Modi’s “Make in India” initiative, which provides financial incentives to stimulate domestic manufacturing, reduce reliance on imports, and create local jobs.

A 2020 draft paper by NITI Aayog, a government think-tank chaired by Prime Minister Modi, suggested offering $4.6 billion in incentives to businesses establishing advanced battery manufacturing facilities. The paper proposed that the widespread adoption of electric vehicles could reduce India’s oil import bills by as much as $40 billion by 2030.

The Center’s fiscal position is under control in FY2024: Kotak

An analysis carried out by Kotak Securities shows a stable and controlled fiscal situation for the Centre, with a few potential risks to keep in mind for FY2024. The Gross Fiscal Deficit (GFD) to Gross Domestic Product (GDP) ratio for FY2023 was maintained at 6.4 per cent, and the expectation for FY2024 is around 6 per cent, which shows a controlled fiscal position.

• Tax revenues for FY2023 were higher than expected, leading to an 11 per cent increase in total receipts compared to FY2022. As a result, direct taxes grew by 18 per cent, and indirect taxes rose by 7 per cent.
• Expenditure was in line with predictions, with revenue expenditure increasing by 8 per cent and capital expenditure led by spending on roads and railways.
• The fiscal deficit was slightly lower than expected, and the reliance on small savings funds to finance the debt has reduced. Most of the deficit was financed by dated securities and treasury bills.
• The risks of fiscal slippages for FY2024 appear to be low. However, due to a shortfall in divestment, downside risks to customs duty receipts, or a need for higher spending due to an active election cycle, there could be risks.
• The bond markets are expected to be relatively stable due to factors like a peak in the global monetary tightening cycle, moderate domestic inflation, and a probable pause by the RBI’s MPC. However, factors like weak monsoons, geopolitical uncertainties, and increased supply of Statutory Liquidity Ratio (SLR) securities could pose risks.
• The 10-year Indian benchmark yield is expected to be 6.9-7.15 per cent in the near term.