Major events of the week are RBI conducts successful dollar-rupee swap to inject liquidity, the first of its kind, lenders take control of Jet Airways, sale of stake by GMR in its airports business, ‘inversion’ of bond yield curve in the US market, historically signalling a recession and continued crisis around “Brexit”.
In an untried and untested measure to inject liquidity, RBI bought $ 5 billion dollars from the banks this week in a swap. RBI offered rupee in return, about Rs 35,000 crore at the current exchange rate, adding to the liquidity in the system. The liquidity scarcity becomes particularly more severe at the end of the year and dollar sale would help banks meet their cash needs. Banks would buyback the dollars at Rs 7.76 extra per dollar after three years implying dollar-rupee premium of 3.6% annually. While the scheme has received tremendous response, it is still entering into the unchartered territory. The exchange rate remains significantly volatile and if rupee remains firm (does not depreciate as much) after three years, banks would have to pay more than the market rate. The scheme may become even more attractive if banks are given the option to forego buyback which would protect the banks from downside risk.
Corporate India appears to have started the year on a good note with several companies entering into deals, primarily to reduce their debt burden and improve profitability called deleveraging. The news this week is of GMR Infrastructure entering into a deal with a consortium led by Tata Group to sell a part of stake in its Airports business. The deal involves giving nearly 45% stake to the consortium for which GMR would receive Rs 8,000 crore. Funds infusion would come as a big relief to the company and would be used to reduce its debt currently at about Rs 20,000 crore. GMR group had taken big bets during infrastructure boom of 2008-12 with huge investments in roads, power etc. However, many of these projects got stuck for variety of reasons leading to significant blocking of funds. It had been divesting a number of its businesses such as stake in energy business, road projects over last few years.
As anticipated in the last WRU, chairman of Jet Airways and another member from the promoter group resigned from the board. This paved the way for lenders to convert a part of their debt into equity acquiring 50.1% stake in the company and provide emergency funding of Rs 1,500 crore. Lenders are now in control of the airlines and would appoint a professional team to look after its operations. This would be followed by invitation of bids from interested parties to buy lenders’ stake and take charge of the airline. However, whether any company shows interest is tough to anticipate and may involve lenders to forego a part of their loan called ‘haircut’. Interestingly, Mr Naresh Goyal is also free to submit a bid, a condition and get back his airlines if he manages to find a partner and necessary funds.
US woke up to the frightening possibility of another recession late last week when yields on ten year bonds fell below the three month bonds, called yield curve “inversion”. Historically, US economy has entered recession 12-24 months after an inversion, the last time being in 2006-07. A recession would lead to sharp decline in interest rates from the current level. This is what gets factored in the ten year bond whose yield falls below three month bond leading to inversion. While the logic may not look very strong, a deeper analysis would give better understanding of the dynamics at play. Impact of last inversion which took place in 2006-07 was a lot more severe causing jitters as to what could be the fallout this time. However, US Fed may have to take part of the blame as it raised interest rate thrice in 2018 which was probably a little too much for the market to absorb and has caused more dampening than projected. While it has paused the interest rate hike in its last two meetings, that may not be sufficient and it may have to resort to a rate cut if economic conditions further deteriorates.
Brexit continues to haunt not just the British nationals but even global citizens as the British Parliament remains undecided on future course of action. While they voted against a “no deal” Brexit in a series of ‘indicative votes’, how they would ensure that remains unanswered. As things stand, EU has given a deadline of 12th April, less than two weeks from now, when UK would be officially out of EU. UK needs to ratify the withdrawal deal to get an extension till 2nd May which has been rejected twice in the parliament. The bill, in fact, cannot be presented now as the British Parliamentary conventions stipulate that there has to be ‘meaningful’ change in the bill before it is put up again for vote. It is still not clear if there is a way out to meet this guideline. (Read the previous article to know more about this).
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