US Tax Reforms, GST Relief, and Moody's Upgrade of India's Rating

The much-awaited US tax reform took a step towards reality as the House Republicans passed a monumental bill to cut taxes on businesses and individuals. This is the biggest step in the GOP's once-in-a-generation effort to overhaul the American tax system.

The current bill will permanently trim the corporate tax rate to 20% from 35% and make other tweaks aiming to make businesses more viable yet competitive. It reduces the individual tax brackets to four from seven and make changes to several tax breaks.

The US federal deficit is projected to grow by US$ 1.5 trillion as a result of this tax overhaul.

The Republican Party-controlled House approved the bill by a margin of 227 to 205. At the US Senate, a finance committee voted 14 to 12 on a similar package.

The passage of the house bill, however, is just one step of many. The bill now goes to the Senate, where Republican leaders are looking at a similar tax measure that includes some significant differences to be worked out.

A vote on the Senate proposal is unexpected until December.

The plan also faces stiff opposition from the Democrats, who imply it is a give-away to the wealthiest Americans.

Market participants are widely tracking the US tax overhaul as it has a significant impact on both domestic and global financial markets.

Apart from this, US industrial production recorded its largest increase in six months this October as the hurricane related disruptions faded. The industrial production accelerated 0.9% in October from 0.4% in September. However, the underlying growth trend in output from the nation's factories, mines, and utility plants remained moderate at 1.3%.

Other data showed an unexpected rise in new filings for unemployment benefits. This was mainly because of the processing of a backlog of applications from Puerto Rico, as the infrastructure damaged by hurricanes Irma and Maria is being restored. The unemployment benefits increased 10,000 to a seasonally adjusted 2,49,000 for the week ended Nov 11. The claim remained below 3,00,00 threshold level for 141 straight weeks.

US import prices gained 0.2% in October from 0.8% increase in September. It rose less than expected. This is because an increase in the cost of imported petroleum and capital goods was offset by a decline in food prices. In the 12 months through October, import prices increased 2.5%, slowing after a 2.7% rise in September.

US retail sales increased 0.2% in October. The rise was on backdrop of an increase motor vehicles ownerships and other goods, which offset the decline in demand for building materials. Retail sales increased 4.6 percent on an annual basis.

US consumer prices increased rose 0.2% in October which edged up only 0.1% in September. The October's gain lifted the Y-o-Y increase in the core CPI to 1.8%. The Y-o-Y core CPI has increased by 1.7% for five months straight. The increase was seen on back of a pickup in rents and healthcare costs.

The recent disinflationary trend worried the Fed. But, the above data point comes in as a big relief for the central bank.

The reports are consistent with an economy growing at a steady pace and tightening labor market conditions. Inflation which was a major concern for the fed, has also started to show positive signs. This effectively clears the way for the U.S. central bank to raise interest rates next month. The US central bank has raised interest rates twice this year and has forecast three rate hikes in 2018.

It remains to be seen if the Fed will raise rates or not. We will keep you posted from the developments in the global economy. Stay tuned...

Global indices ended the week on a mixed note. European stocks traded on a negative note. Germany (DAX) ended with loss of 1.02%, France (CAC) ended 1.14% down, and the London market (FTSE) was down 0.70%. Asian markets ended the week on a mixed note. The Nikkei Index was down 1.25%, the Hang Seng Index ended up 0.27%, and the Shanghai Index was down 1.49%. US markets traded in the green and ended their session with a gains of 0.47%.

Indian Stock Markets Reacts to Moody's Upgrade

Back home, the Indian indices ended their weekly session on a tepid note. The BSE Sensex was up 0.08% for the week, while the NSE Nifty was down 0.37%.

Realty (+2.35%) and Banking (+1.11%) were the biggest gainers for the week. Telecom (-4.29%), Metal (-2.63%), and Oil & Gas (-1.65%) were the biggest losers.

Credit rating agency Moody's Investors Services upgraded India's sovereign ratings to Baa2 from its lowest investment grade (Baa3), crediting the Narendra Modi government for its "wide-ranging program of economic and institutional reforms". It has now changed the outlook for India's rating to stable from positive.

Interestingly, the last time the global rating revised it was when the BJP government led by Atal Bihari Vajpayee was in power. Moody's has also upgraded India's local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.

The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential.

A rating upgrade for India comes at a time when rating agencies Standard and Poor's (S&P) and Moody's have cut China's sovereign rating. Moody's cut China's long-term local and foreign currency issuer ratings to A1 from Aa3 on 24 May on concerns that the country's financial strength would erode in the coming years.

Here's news from the goods and services tax (GST) space...

Providing a big relief to India Inc and consumers alike, the GST Council on Friday decided to lower the tax rate on 178 items, leaving only 50 items in the top 28% rate slab under the Goods and Services Tax.

The feel-good package from the council, which comes into effect from 15 November, is likely to boost consumer demand, reduce disquiet over compliance costs, and lend fresh momentum to the tax reform initiative.

Additionally, in a further relaxation to small and medium enterprises (SMEs) facing a huge compliance burden under GST, the Council has decided to increase the threshold for the composition scheme to an annual turnover of Rs 15 million.

The GST Council also took a stern view of restaurants that had not passed the benefits of input tax credit to customers. It has now decided to do away with the distinction for AC and non-AC and levy a flat 5% tax with no input credit on all eateries.

Days after announcing a Goods and Service Tax (GST) rate cut for over 231 items, the Union Cabinet approved the setting up of the anti-profiteering authority, under the GST regime, in a bid to ensure that the benefit of lower rates are passed on to consumers.

This institutional framework comprises the National Anti-Profiteering Authority (NAA), a Standing Committee, a Screening Committee in every state and the Directorate General of Safeguards under the Central Board of Excise and Customs (CBEC).

Crucially, the authority has been granted wide-ranging powers, including power to cancel the registration of offending firms in extreme cases.

The GST is a much-needed economic reform, and measures, such as setting up of the NAA in order to ensure its efficacy, are a step in the right direction. It should eventually expand India's narrow tax base and increase government revenues.

That said, every coin has two sides. GST is no exception. It has had its fair share of chaos in the months immediately following its implementation on 1 July 2017. Many businesses reported depressed earnings due to the transition to GST.

Our colleague Vivek Kaul has studied the finer aspects of the GST and predicted what could go right and wrong.

Download his special report - The Good, the Sad, and the Terrible (GST).

In news from stocks in the IPO space, shares of The New India Assurance Co. Ltd (NIA) IPO debuted 10% lower on the bourses this week, after the general insurer saw its Rs 96 billion initial public offer (IPO) get subscribed 1.19 times earlier this month.

Khadim India also made a weak debut on the bourses this week. The Kolkata based footwear company's shares opened at a discount of over 4% at Rs 727 compared to its issue price of Rs 750. The IPO was subscribed about 1.9 times.

On other hand, HDFC Standard Life Company Ltd. (HDFC Life) came out with its initial public offering (IPO) on 7-9 November and made a strong debut on the share markets this week. HDFC Life share price got listed at Rs 311, a premium of over 7% to the issue price and went on to trade up more than 20% on day one. The 86.95 billion IPO was oversubscribed by 4.9 times.

Apart from this, Seven Islands Shipping has received SEBI's go-ahead to raise an estimated Rs 4.5 billion through an initial public offering (IPO). Seven Islands Shipping is a liquid sea-borne logistics company and operates under two categories - crude oil trade and liquid products trade.

In another development, the IPOs of United India Insurance and Oriental Insurance which were in the process of shoring up their capital to 150% are likely to be deferred to the end of the next calendar year.

With so many new IPOs set to hit the market, it is prudent to be ready with a strategy to take advantage of the frenzy.

It's prudent to be selective when investing in IPOs. Carefully analyse each company for its own merit and don't give in to the hype surrounding the public offering.

That's Ankit Shah's approach at Equitymaster Insider. He keeps a sharp eye on developments in the IPO space and keeps his readers up to date on the big-ticket IPOs.

Ankit and his team of researchers constantly reference this handbook on investing in IPOs. You can download a copy for yourself. It's free. Just click here.

In the news about the economy, according to data released by the Central Statistics Office (CSO), retail inflation as measured by the Consumer Price Index (CPI) rose to a six-month high of 3.58 % in October 2017, up from 3.28% in September.

Similarly, wholesale inflation, as measured by the Wholesale Price Index (WPI), rose to 3.59% in October; a sharp rise from of 2.6% in September 2017.

Rising inflation could lower hopes of a rate cut by the Reserve Bank of India (RBI) in its next policy meet due in December.

Nifty 50 Index Ends in the Red
Nifty 50 Index Ends at Life High

The Nifty 50 Index traded on a negative note during the week. Opening higher on Monday, it slipped sharply to end the session 97 points down. The selling pressure dominated the index as it fell an additional 131 points over the next two days. But, on Thursday, it opened gap up and rallied 97 points. The bullish momentum continued on the final day of the week as well where the index opened 110 points gap up after Moody's upgrades India's rating. But, it finally ended its weekly session 0.37% down.

Last week, we observed that the index formed a hanging man candlestick pattern and a bearish engulfing pattern on the daily chart. Both of which were an indication of a short-term reversal. We also observed a negative divergence in the RSI indicator, another sign of correction. As a result, it corrected 228 points during the week to hit a low of 10,094.

But the index found a strong support there from 50 day exponential moving average (EMA), and horizontal support level (previous resistance now support).

Does this indicate a resumption of the uptrend or can we see some more correction? We'll get back next week. So, stay tuned...

COMMODITIES

Gold Trades on a Positive Note

Gold traded on a positive note during the week. On Monday, it opened the session lower, but recovered sharply to trade positive until mid-week. The yellow metal then witnessed buying interest due to firm global trends and fresh buying by local jewellers. The commodity witnessed some profit booking towards the end of the week. Finally, the metal continued its up move and ended the weekly session 0.67% up.

Gold Ends in the Green

Crude Oil Witnesses Selling Pressure

Crude oil traded on a negative note during the week. It opened its session lower on Monday, but immediately recovered immediately to close the session positive. However, the buying interest did not last for log as the commodity witnessed some selling from next day itself. The selling was seen on the backdrop of rising US production and inventories. The downward pressure on prices was also seen after International Energy Agency (IEA) raised doubts about the demand outlook for 2018. The black gold recovered a bit on the final day of the week and ended its weekly session 1.21% down.

Crude Oil Trades in a Downtrend

CURRENCIES

Dollar Trades on a Volatile Note

The dollar traded on a volatile note during the week. It opened its session gap up on Monday and continued to trade up to close the session positive. After witnessing minor profit booking for the next two days, the currency continued to trade north. The fresh dollar demand from importers and banks was seen after the US data raised prospects of rate hike by the Federal Reserve by year-end. This could trigger outflow of foreign capital from India. Finally, on Friday, the greenback witnessed some selling pressure and ended its weekly session 0.30% down against the rupee. The rupee recovered as Moody's upgrades India's credit rating.

Dollar Ends in the Red

Commodities 10th Nov 17th Nov % Change
Gold/10 gms 29,491 29,690 0.67%
Silver/kg 39,507 40,013 1.28%
Crude Oil/barrel 3,712 3,667 -1.21%
Natural Gas/mmBtu 209.30 203.30 -3.01%
Currencies 10th Nov 17th Nov % Change
USD / INR 65.31 65.11 -0.30%
EUR / INR 76.12 76.87 0.98%
GBP / INR 85.90 85.97 0.08%
JPY / INR 57.59 57.85 0.45%

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