RBI Maintains Status Quo

Tue, 7 Jun 11:30 am

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After opening the day on a positive note, the Indian stock markets have added to their early gains. Sectoral indices are trading on a positive note with stocks from the banking, FMCG and metal sectors leading the gains.

The BSE Sensex is trading up by 142 points (up 0.5%) and the NSE Nifty is trading up by 51 points (up 0.6%). The BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index is trading up 0.7%. The rupee is trading at 66.83 to the US$.

The Reserve Bank of India (RBI) kept the benchmark repo rate untouched in its third bi-monthly monetary policy review today. It kept the repo rate unchanged at 6.5% and Cash Reserve Ratio (CRR) at 4%. This was largely on the back of strong economic tailwinds.

The RBI further said that its policy stance continues to remain accommodative. However, the central bank warned that inflation risks were on the upside even as it retained the inflation targets set out in the April policy. One of the articles from The 5 Minute WrapUp explains what can be your best bets against the monster of inflation.

One shall note that since the rate-cutting cycle began in January 2015, the key policy repo rate has been cut by 150 basis points (bps) to 6.5%. However, on the lending side, only about 75 percent basis point cut has been passed on to customers by the banks. The reason why banks are not willing to cut their lending rates is because it will reduce their income from interest charged. Further, the concern is that public sector banks (PSUs) are staring at a huge amount of corporate bad loans. And in order to handle this, banks are hoping to make a greater profit by cutting their deposit rates, but not cutting their lending rates at the same rate.

Moving on to the news from e-commerce space... As per a leading financial daily, India's e-commerce marketplaces such as Flipkart, Paytm, and Amazon are moving towards standardized commission charged from sellers for the products sold on their platforms. Flipkart has raised commission for sellers across categories and has scrapped a zero commission experiment it was running with 350 reputed sellers. Further, Amazon has also increased its commission and Paytm is planning to change its commission model.

The move is undertaken to cut losses and improve margins of these e-commerce majors that are hit due to deep discounting practices.

The above development is followed by the Flipkart's recent move to postpone the joining date of fresh MBAs it had recruited from the various IIMs.

This clearly shows us that e-commerce companies in India are sailing through troubled times. While there are many factors that support the growth potential for e-commerce in India, not all companies in this space will benefit from this megatrend. This is because what ultimately matters for e-commerce firms is profitability. Without profits the ecommerce business model cannot be a long-term success.

Up until now the ecommerce companies have managed to survive because of private equity and venture capitalists that bring in fresh money into the company at regular intervals. This fresh money being brought in essentially funds the huge losses that these companies make, in order to drive up their revenues. From what is seen at present, most of these businesses are mired in losses. If these losses keep getting bigger, there will be a point when venture capitalists and private equity funds will re-assess their investments and start thumbing down valuations of these firms.

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