📰RBI Weighs New Liquidity Tool, Hong Kong IPOs Overtake India, Google Tax

Good evening, 

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

• The RBI is thinking about bringing back a crucial tool to improve liquidity in the banking system,

• Hong Kong has overtaken India to become the world’s second-largest market for share sales this year,

• and India scraps a tax on advertising revenue made by foreign companies.

Then, we close with Gupshup, a round-up of the most important headlines.

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—Shreyas, [email protected]

Market Update.

RBI Weighs New Liquidity Tool.

The RBI is thinking about bringing back a system where banks can easily borrow a set amount of money overnight whenever they need it, called on-tap overnight liquidity. Banks have been pushing for this change after a trial run helped them deal with a cash shortage. The move could make it easier for lower interest rates to reach businesses and consumers, a crucial step in improving the transmission of dovish monetary policy.

What’s changed? The RBI’s primary tool for cash management has been the 14-day variable repo rate, which was introduced in 2020 to reduce banks' reliance on the central bank and encourage them to better predict their liquidity needs. However, the banking system's liquidity has fluctuated significantly in recent months, largely due to the RBI's heavy foreign exchange interventions and unpredictable government spending patterns. This volatility has prompted the RBI to reconsider its liquidity management approach, particularly since Malhotra took over as governor in December.

Between December and March, the RBI infused around $72.5 billion (₹6.2 trillion) into the banking system through a combination of tools, including cuts to the cash reserve ratio, foreign exchange swaps, and open market bond purchases. These interventions helped reduce the liquidity deficit to its lowest point in over three months. The newfound liquidity surplus is expected to play a critical role in a monetary easing cycle, as it aids in the transmission of monetary policy and provides banks with the comfort they need to issue loans. The central bank could also reactivate the Fixed Rate Repo (FRR) borrowing facility at a threshold of 0.25 percent of NDTL, which would provide smoother day-to-day liquidity management and potentially serve as an early indicator for further fine-tuning measures.

Third Party Ideas: Banks have also suggested that the RBI reconsider its reliance on the inter-bank borrowing market to track liquidity needs. This market no longer accurately reflects overall market conditions, as financial system participants such as mutual funds now use alternative signals like treasury bills repurchases and Clearcorp Repo Order Matching System. 

The most important shift in these proposals is simply to mitigate the adverse effects of dovish monetary policy and make sure that lower rates are widespread in the economy.

Hong Kong Overtakes India in the IPO Market.

In a dramatic shift, Hong Kong has overtaken India to become the world’s second-largest market for share sales this year. This marks the first time since 2021 that Hong Kong has reclaimed the position, driven by a resurgence in stock prices and an influx of Chinese tech giants tapping into that market rebound.

In the first quarter of 2025, Hong Kong's share sales — which include IPOs, block sales, and share placements — skyrocketed by 11 times y-o-y, surpassing $16 billion (₹1.4 trillion). This positions Hong Kong just behind the United States in terms of total share sale proceeds. Meanwhile, India's share sales nearly halved to $6.9 billion (₹590.1 billion), a stark contrast to Hong Kong’s performance. India’s dip has pushed it behind other Asian nations such as Japan and the UK in terms of market activity. 

China’s gain: The resurgence of the market can largely be attributed to the rally in Chinese tech stocks, with key players like BYD and Xiaomi leading the charge. The Hang Seng Index, which tracks the performance of major Hong Kong stocks, has been one of the top performers globally this year, providing a robust backdrop for new share offerings.

India’s issues: On the flip side, India’s IPO market has faced significant challenges. After nine consecutive years of growth for the Nifty 50 Index, the country’s stock market has begun to show signs of stagnation, with the index experiencing a downturn since September. This decline can be attributed to an unexpected economic slowdown and a series of downgrades in corporate earnings expectations, leading to a 37 percent drop in the number of IPO deals in India this year. 

As a result, India’s IPO market has been quiet compared to the last few years, where it consistently outperformed Hong Kong. Despite some expected large upcoming deals like LG Electronics raising $1.7 billion (₹145.4 billion), the overall sentiment remains subdued. For international investors, the shift in market dynamics is crucial. In Hong Kong, the frenzied demand for IPOs such as Mixue’s and the upcoming listings like CATL are clear signs of confidence in Chinese companies and the broader regional market. 

The larger worry: However, the outlook in India remains less clear. Despite a strong long-term potential, investors are becoming more cautious. An associate at Fidelity remarked that his fund avoided participating in any Indian IPOs this year due to the uncertain economic climate. This could slow the inflow of capital into its economy, impacting corporate expansion, infrastructure development, and other growth projects. This capital flow slowdown has the potential to affect FDI, making it more difficult for businesses to expand. For India, these shifts underscore the importance of restoring confidence in its stock market, particularly through improvements in the economic outlook and corporate earnings performance.

The Google Tax Has Been Scrapped.

As the world braces for April 2, which the Trump administration has dubbed “Liberation Day,” describing a mass implementation of tariffs, the Indian government is making significant concessions. In the latest move, India has decided to scrap a 6 percent tax on digital ads placed by local businesses with foreign search engines, social media platforms, and e-commerce companies. This gesture is Modi's attempt to demonstrate that India is not in the same league as China when it comes to trade disputes.

Known as the Google Tax, the 6 percent levy was introduced in India’s 2016 budget as a way to ensure that foreign tech companies paid their fair share of taxes for the advertising revenue they generated in the country. The tax required local businesses to withhold money spent on advertising through platforms like Google and Facebook, which typically book their revenue through foreign subsidiaries in places like Ireland.

However, the tax proved problematic for domestic advertisers, who had to absorb the additional cost rather than the tech platforms. While it was intended to target foreign digital giants, it ultimately added to the burden of local businesses that had few alternatives for online advertising. Critics argued that the move led to confrontations with global tech companies and further complicated India’s relationship with the US.

A win-win: The scrapping of the Google Tax is undoubtedly a win for Trump but also India. The Indian government collected approximately $500 million annually from the tax, but over time, advertisers came to accept the added cost. In the end, the tax did little to deter foreign tech companies from operating in India.

Other tax changes: India's next area of compromise could involve the VAT system. The 28 percent VAT in India is among the highest globally and has become a point of contention in trade talks. While the government has not linked any tax reforms to trade negotiations, Trump has previously criticized high VATs as non-tariff trade barriers. Sitharaman has hinted at making critical decisions regarding VAT reforms, signaling a willingness to discuss this issue further. However, any changes to VAT would require approval from India’s 28 states, making it a complex and time-consuming process. 

India will also be pushed to further reduce its 12 percent trade-weighted average tariff closer to the 2.2 percent rate enjoyed by the US. India’s negotiators will likely try to protect sensitive sectors, such as agriculture, which are politically powerful in the country. Concessions on agriculture could lead to compromises on other taxes and trade barriers.

Gupshup.

Macro

• ​​India predicts a hot summer, a threat to growth due to a higher risk of water shortages and strain on the electricity grid. Peak power demand will rise to 270 gigawatts and beat the all-time high of 250 gigawatts last year. The government is looking for ways to distribute coal around the country to limit losses. 

• India is raising gas prices by 4 percent to $6.75 per mmBtu. This will increase profits for ONGC and Oil India while raising costs for industrial buyers and companies involved in agriculture and distribution services.  

• India is considering scrapping an import tax on US LNG, making $25 billion (₹2.1 trillion) of imports more realistic. There is a 2.5 percent customs duty and a 0.25 percent social welfare tax on LNG, unless it is sourced from the UAE or Australia. China has placed a 15 percent tax on US LNG, making India a natural larger importer for US LNG given India is the 4th largest global importer.  

Equities

• JSW Steel and Trafigura cannot import met coke. The courts did not allow for imports of met coke, an important steel component, by the JV. JSW was challenging an order that forbade a $90 million (₹7.7 billion) import before a ban went into place in April. Local firms are worried about local met coke quality, which could impact steel production. 

• Renault is to buy out Nissan's stake in their joint Indian manufacturing arm. Renault owns 49 percent but is buying the remaining 51 percent in RNAIPL to fully own the manufacturing plants.  

Alts

• The government is upping its stake in Vodafone Idea to 48.99 percent. They are converting $4.3 billion (₹367.7 billion) of outstanding spectrum dues into equity. This allows the government to double its stake from 22.6 percent, making the government the largest single owner. Vodafone Idea is a JV from British firm Vodafone and Birla’s Idea Cellular.  

• Haldiram's announced that two more investors joined Temasek to invest. Temasek invested $1 billion (₹85.5 billion) for a 10 percent stake, and now IHC and Alpha Wave have also invested undisclosed sums into the snack company. The company is planning on expanding into the Middle East and Asia, using the investment proceeds for expansion.  

Policy

• Indian courts ruled that Google's App Store billing was punitive for developers. The company was fined $110 million (₹9.4 billion) in 2022 for the same issue, with courts citing antitrust discrimination. Since then, the fine has been cut to just $25.3 million (₹2.2 billion) by a different tribunal. India is a very important market for Google, given that 90 percent of its 700 million smartphone market uses Google.   

• India is making progress towards an US Free-Trade Agreement by looking at illegal immigration and non-tariff trade barriers.  

• India is criticizing X for calling a tech compliance website a censorship tool .The government says the site is intended to swiftly notify tech companies of their due diligence obligations and that no blocking orders have been issued. X argues that countless government officials have been given censorship powers.  

See you Tuesday.

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.