Government cuts corporate tax

Indian Economic Update

  • In a major fiscal booster, the Government on Friday slashed the corporate tax to 22%, subject to the condition that these domestic companies will not avail of any exemption/incentive.
  • The effective tax rate for these companies shall be 25.17% inclusive of surcharge and cess. In addition, such companies shall not be required to pay Minimum Alternate tax (MAT). The relief measures will cost Government INR 1.45 lakh crore annually.
  • The Goods and Services Tax (GST) Council on Friday reduced tax rates on a number of goods and services, including on hotels, in a bid to boost the hospitality sector. Other tax cuts involved job works for diamonds and supply of machine jobs. The Council, however, more than doubled the tax on caffeinated beverages.
  • The Indian Finance Minister said that the service sector is showing a high appetite for loans and that consumer demand is expected to pick-up, which could push economic growth up in H2FY2020.
  • The Reserve Bank of India (RBI) released its liquidity framework report that indicated the current framework should be maintained while some flexibility should be provided. The current system requires liquidity to be in a small deficit, some flexibility should be provided to allow a surplus if financial conditions demand. The report recommended that longer-term repo operations at market related rates along with open market operations and forex swaps should be used for liquidity management.

Global Update

  • The US President said that a trade agreement with China is getting closer and that there is a good chance that a deal can be reached. Trade tension between the world's largest two economies also seen easing after reports said Chinese firms had ramped up their purchases of US soybean and pork. Risk sentiment also improved after following Mr Trump and Japan Prime Minister Mr Shinzo Abe signing the "first stage" of an initial pact after a meeting at the United Nations General Assembly.
  • Concern over impeachment proceedings against the US President eased as the US administration released a summary of the call between Trump and Ukraine President Mr Zelenskiy.
  • The Bank of Thailand maintained status quo, but signalled that it could ease policy to curb currency appreciation if required.
  • The UK Supreme Court ruled that the UK PM broke the law when he decided to suspend Parliament for a five-week period. The UK PM accepted the verdict, but hit back saying that he will deliver on his mandate for the UK to leave the European Union (EU) by Oct 31, 2019.
  • German manufacturing activity for September dropped to its lowest level since 2008, data showed. Manufacturing activity fell to more than a six-year low, while the services sector grew at its slowest pace in eight months.

Equity

Indian equities ended higher. Markets have been bullish after Finance Minister Ms Nirmala Sitharaman announced reduction in corporation tax rate last Friday.

 

During the week Sensex gained 2.13% to close at 38822.57 while Nifty advanced 2.11% to close at 11512.4.

Debt

Indian bonds ended higher today as market players bet on RBI rate cut next week. Sharp fall in Overnight Index Swap (OIS) rates spilled over into bond market. Profit booking ahead of Oct-Mar borrowing calendar capped the gains.

 

The 10Y benchmark yield ended at 6.73% as compared to the previous week’s close of 6.79%.

Oil

Oil is trading weaker as prices came under pressure from Saudi Arabia’s moves to restore output quickly after attacks on its oil installations, however optimism that US and China are resolving their trade dispute could eventually boost fuel demand. Meanwhile, firmer Dollar that registered its sharpest daily gain in three months overnight is also weighing on oil as it makes Dollar-traded fuel imports costlier for countries using other currencies.

Gold

Gold is trading steady as weak US consumer confidence data ratcheted up concerns over the global economy, but bullion’s gains were limited as the Dollar remained firm.

Currency

The Indian Rupee remained steady. Lack of significant triggers kept traders on the sidelines. Weak sentiment after impeachment inquiry into US President Mr Trump weighed on the Rupee. Fall in crude oil prices supported the domestic currency.
The Dollar index rallied to a 3-week peak at 99.04 level as the US 2-year Treasury yields climbed.
The Euro weakened as European Union’s top economic commissioner Mr Valdis Dombrovskis stated that economic growth in the EU is slowing down as the bloc faced increasing risks from global trade tensions and the unclear outcome of Brexit.


Source: ICICI Bank Research, Private Banking Investment Strategy Team, Bloomberg and CRISIL.