Major events for the week include weak performance of core industries, passage of labour code by the parliament, changes in RBI norms for ECB, a breather for Essel group and in the international news, US Fed cuts rate after more than a decade.

Amidst continued domestic slowdown, core industries gave another shocker growing by barely 0.2% during month of June’19. The performance of core industries is even more important since it broadly gives a direction of the anticipated performance of other industries. Even though the performance is worrying, it may not be as bad as it appears. This is so as the decline is largely concentrated in crude oil, gas where the country doesn’t have sufficient reserves and refining segment which is prone to erratic performance. Refining segment is largely driven by mega industry and closure of even one refinery can cause significant change. Further, monthly figures are prone to higher volatility and data for some more months must be evaluated to gauge the extent of decline. Despite this slowdown, growth for April-June’19 quarter at 3.5% is higher than growth during Jan’March’19 quarter. Among other industries, steel and electricity recorded reasonable growth of about 7%.

In possibly a relief to the government, the parliament passed wage code bill which could be the begging of further reforms in the labor sector. The bill amalgamates four different definitions of wages into one and gives government the right to set the minimum wage. Most significantly, it brings labour in all unorganized sectors including agriculture, watchman within the ambit of law who would have to be paid the minimum wage as prescribed by law. Simplification of definitions would reduce confusion and thereby, litigation. Labour reforms have been among the top of the agenda for the government in its previous stint also but could not manage to do much due to complexity of issues involved with laws enforce dating back to pre-independence era.

RBI has relaxed norms regulating use of foreign funds allowing corporate to use these funds for virtually all uses against earlier restriction on capital purposes. It has further allowed banks to sell their NPAs and NBFCs to borrow under this route for their domestic lending needs. However, this would be restricted to funds with tenure of minimum 10 years only. Relaxation to NBFCs is significant as the risk aversion of overseas lenders could be much different from that of Indian banks. Indian banks could be exercising extra caution due to recent experience of high NPA and relatively weak balance sheet. Sale of NPAs is also important as market for stressed assets is quite huge globally and can bring more participants as asset reconstruction company (ARC). The move also carried significance from the sovereign perspective as it comes close of the heels of government’s decision to go for overseas borrowings and reflects policy makers’ confidence to service increased level of global exposure.

After several months of frenetic efforts, Essel group finally managed to sell a part of its stake in the group company, Zee Entertainment Enterprise Ltd (ZEEL). The transaction would help promoter raise close to Rs 4,200 crore and should come as a big relief to the lenders facing series of defaults from the borrowers. This should also boost the confidence of corporate world giving a signal that buyers are still there in the market if the asset in question is worth the price. ZEEL with revenue of Rs 7,000 crore and net profit of over Rs 1,600 crore in FY19 had been doing quite well. However, the group has been facing considerable resource constrains due to funds getting blocked in infrastructure projects such as road, power etc. The group recently sold majority stake in another group company, Essel Propack, and is under discussion to sell some more assets.

Even as domestic economy faces its own set of problems, global economy led by the US grapples with its own set of worries. US Federal Reserve cut interest rate this week, largely pre-emptive and the first in more than a decade. US had reduced the rate from a high of 3.5% in Jan’08 to 0.25% in December the same year and had kept the same at this level for as long as seven years, finally raising in Dec’15. However, neither the market was impressed with the cut nor does the Fed look convinced of the need to cut. This is reflected in its statement mentioning “strong labor market” and “solid job gains”. Yet, its action may be a prudent one as the longer term outlook for the economy does not look very rosy, even though the current state is not too bad. Yields on long term bonds some time back fell below the short term yield, a sign of imminent recession.

(To check Weekly Round Up for earlier weeks, please click here)

(Image courtesy of ddpavumba at

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