📰Liquidity Challenges Persist, Tax System Problems and Tesla Continues Expansion

Good afternoon, 

Welcome to the best way to stay up-to-date on India’s financial markets. Here’s what’s in today’s newsletter:

• RBI rejects bids for Indian treasury bills (and what this means for the banking system),

• Modi proposes a new tax system, and people aren’t happy,

• and, Tesla starts shipments to Mumbai

• Finally, we’ll close with Gupshup, a round-up of the most important headlines.

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—Shreyas, [email protected]

Market Update.

Less Treasury Action, More Liquidity Challenge.

The RBI declined all bids for 91-day and 182-day treasury bills in an auction held on Thursday, reflecting ongoing liquidity challenges in the country’s banking sector. The RBI rejected bids amounting to $3 billion (₹260 billion) but managed to sell $807 million (₹70 billion) worth of 364-day treasury bills at a yield of 6.5638 percent.

Signs of failure: Despite recent efforts to bolster liquidity, including injecting $11.5 billion (₹1 trillion) through open market bond purchases across three auctions and conducting a $5 billion (₹433.5 billion) forex swap (swapping dollars into rupees to provide more local currency), India’s banking system continues to face a cash shortage. Banks have borrowed approximately $23 billion (₹2 trillion) from the RBI in short-term repo positions. The risk from this cash crunch is fewer loans, higher rates, and a contracting economy to boot.

Experts suggest that the RBI's decision might be linked to the government’s improved cash position following recent tax collections. The RBI’s move could be aimed at supporting banking liquidity by limiting further cash outflows from treasury bill sales. 

Additionally, the RBI appears to be prioritizing liquidity provision through open market operations (OMOs) and longer-term variable rate repo auctions, rather than short-term treasury bill sales. The strategy should help maintain or restore adequate liquidity levels in the banking system while not harming the Indian government materially. 

Following the auction results, India’s five-year government bond yield remained stable at 6.65 percent. The RBI had previously signaled lower treasury bill borrowing in May, shortly before transferring a large dividend to the government — a measure expected to enhance banking liquidity over time since government cash should diffuse into the banking system through spending, subsidies, or other programs. 

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The Tax System Might Just be Pushing Problems Forward.

India’s newly proposed income tax bill has sparked widespread debate, with critics arguing it offers superficial changes rather than meaningful reform. The Modi government’s attempt to modernize the six-decade-old Income Tax Act of 1961 focuses more on improving readability than addressing substantive issues affecting businesses and individuals.

Design over substance. While the revamped bill is shorter and better organized, it fails to reduce the compliance and litigation burdens that plague India’s tax system. Experts voice disappointment, describing the effort as mere "housekeeping" when more profound "renovation" was needed. Various analysts criticized the bill for not tackling critical, often-litigated issues like complexities surrounding employee stock options, corporate restructuring, and the frequent reopening of tax assessments. 

Senior lawyer Arvind Datar pointed out that the new law merely relocates existing provisions, such as the controversial Section 147 for reassessing taxes, without offering meaningful improvements. Former tax official Akhilesh Ranjan echoed these concerns, calling the bill a missed opportunity that fails to support Prime Minister Modi's 2047 development vision. In essence, the most major change was relabeling ‘assessment year’ to ‘tax year’. 

Actually, expect more cases: The transition to the new law will also be costly and time-consuming. Drafting the bill required 60,000 hours from 150 tax officers, and businesses will now need to invest significant resources to adapt. Moreover, subtle language changes in the draft could lead to fresh rounds of litigation, further complicating the tax landscape.

Tesla Starts Its Shipments.

Tesla is gearing up for its highly anticipated debut in India, with plans to ship a few thousand cars to a port near Mumbai in the coming months. The company intends to begin sales in major cities like Mumbai, Delhi, and Bangalore by the third quarter of this year, according to sources familiar with the matter.

Insane tariffs and import caps: The models Tesla will introduce and the factories they’ll come from — whether in the US, China, or Germany — will depend heavily on the outcome of ongoing tariff negotiations between India and the US. Currently, India imposes an effective import tax of 110 percent on cars priced above $40,000 (₹3.5 million), a major hurdle that previously deterred Tesla’s entry into the market.

Tesla’s progress accelerated after Elon Musk met with Modi in Washington. The company has since listed numerous job openings in India for roles related to showroom management, orders, and deliveries. India is also reportedly considering easing restrictions on electric vehicle imports as part of a broader trade agreement with the US. This could include raising the import cap for EVs under a concessional tariff from 8,000 to 50,000 vehicles or potentially lowering import taxes altogether.

While there has been speculation about Tesla setting up local manufacturing or assembly operations in India, the company’s initial approach is expected to be import-only. Prashanth Menon, a long-time Tesla executive, is leading the local operations from an office in Pune, Maharashtra. Tesla also plans to launch a booking portal soon as part of its market entry strategy.

Red tape removal: For Tesla, a successful launch in India could help offset recent global challenges, including declining deliveries and intensified competition from Chinese automaker BYD. However, the arrival of Tesla vehicles could pose risks for domestic car manufacturers, potentially impacting local employment in India’s automotive sector. Of course, a benefit for India is the reduction of red tape around various industries and more prevalent EVs for consumers to use and competitors to learn from.

Gupshup.

Macro

• Indian pharma stocks dropped sharply after Trump announced plans to impose tariffs of 25 percent or higher on pharma imports. The Indian pharma index fell by 2 percent to a seven-month low as the U.S. is a crucial market for Indian pharmaceutical exports.

• Slowing corporate earnings growth and foreign investor exodus have caused Indian equity markets to experience a prolonged decline with the Nifty50 down 13 percent since September. Analysts expect this weakness to persist as India's economic growth slows to a four-year low of 6.4 percent. More risk-off market tendencies have also taken hold after volatile tariff implementation from the US. 

• The central bank forecasts 6.7 percent GDP growth for 2025-26 and expects inflation to ease to 4.2 percent, while cautioning about potential global and domestic risks. The RBI predicts a boost to the Indian economy led by a boom in rural demand and a pick-up in urban demand. While rural areas have been steadily increasing with the proliferation of UBI, urban demand has slowed in recent years. The new budget is expected to help middle-class earners in cities spend more.

• The Indian rupee is expected to open relatively unchanged on Thursday as traders evaluate new U.S. tariff threats and a cautious Federal Reserve rate outlook. The 1-month non-deliverable forward suggests the rupee will open around ₹86.94-86.95 to the U.S. dollar.

• Indian drug and auto exporters expect minimal impact from President Trump's proposed 25 percent tariffs on imports. Industry leaders suggest strategies to mitigate potential effects, including removing existing tariffs and finalizing a US-India trade deal.

Equities

• Dixon Technologies India, which assembles Google's Pixel smartphones, expects to more than double its revenue this fiscal year due to rapid growth in local electronics manufacturing. The company's growth reflects the broader trend of global tech giants expanding their supply chains in India, moving away from China.

Alts

• ONGC is seeking joint venture partners to build and operate large ethane carriers for transporting feedstock to its petrochemical plant. They aim to source 800,000 tons of ethane annually from 2028. They are currently looking to partner with any companies producing VLECs (very large ethane carriers) to create a JV where ONGC will be responsible for all sourcing.

Policy

• India's space regulator, IN-SPACe, has launched a $57.58 million (₹5 billion) Technology Adoption Fund to support early-stage space technologies. The fund aims to boost India's market share in the global space industry by offering financial support to startups and businesses.

See you Friday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.