Thinkpad: The Detour

Happy Sunday.

Who saw this one coming? The week started with news that Vi, Vodafone Idea, has decided to convert interest on spectrum instalments and adjusted gross revenue dues into equity. The result—the Indian government owns nearly 36% stake in the carrier.

Much analysis followed on what this means for Vi and for the telecom sector. Equity analysts worried that a large government stake will spook investors and hurt fundraising efforts. Others said it ensures a three-way fight in the telecom sector as Vi will live to fight another day.

The government said upfront that it doesn’t intend to run the business. The equity will likely be parked in a SUUTI or SUUTI-like entity. Long live SUUTI. The government should find a way to induct professional management or sell its stake to maybe a private equity entity or a strategic investor, writes industry veteran Sanjay Kapoor in this piece.

But if Vodafone Idea wants to not just survive but prosper, then it must look beyond immediate issues and position itself for the future, writes R Chandrashekhar, former union telecom secretary.

By grabbing the government’s lifeline, Vi will buy itself time to fix operations and finances. But can it? Is Vodafone Idea a zombie company with a Modi put, Menaka Doshi asks in this piece. She compared the situation to the old Ajit joke — “Liquid use jeene nahin dega, aur oxygen use marne nahin dega.”

Elsewhere, Federal Reserve chair Jerome Powell pledged to tackle the surge in inflation being seen in the U.S. “We will use our tools to get inflation back,” he said at a congressional hearing. He also made it clear that the Fed will begin winding down its balance sheet this year. They hope to do all of this without doing harm to the economic expansion. Other Fed speakers this week also struck a hawkish note, with one saying that three rate hikes are a ‘baseline’ this year.

The market reaction to this coming normalisation has been timid so far. Equities haven’t fallen off a cliff, yields haven’t soared and the dollar has weakened.

Back home, though, bond yields have been on a steady rise. Fearing global and local normalisation of monetary policy, alongside another year of large borrowings from the government has pushed up the benchmark yield to 6.58%. This week saw the auction of a new 10-year bond devolve. Things are going to get tougher for the central bank in the year ahead.

For those interested in getting a macro overview of the economy, listen in to this conversation with JP Morgan chief India economist Sajjid Chinoy. There are a few important trends to watch according to him: Do jobs catch up with the pick-up in economic activity? Has the pool of excess savings depleted leaving the focus on income growth? And will internal terms of trade turning against agriculture? As for policy, Chinoy sees fiscal and monetary policy become substitutes from complements. Watch/read here.

Last week we promised you a conversation around the ‘hope trade’ of a capex cycle. What’s working in favour of that expectation and what’s working against it? Watch/read here.

Till next week.

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