INDIAN BANK
HO/INTERNATIONAL DIVISION
and
Treasury & Investments
66 Rajaji Salai, Chennai - 600 001
Website : www.indianbank.in
FOREX NEWSLETTER
(FORTNIGHTLY)

MARKET OUTLOOK FOR THE NEXT FORTNIGHT

(01/09/2007 - 15/09/2007)

News Items

> Bank Rate kept unchanged.

> Reverse Repo Rate and Repo Rate under LAF kept unchanged.

> Withdrawal of the ceiling of Rs. 3,000 crore on daily reverse repo under the LAF with effect from Monday, August 6, 2007.
The Reserve Bank, however, retains the discretion to re-impose a ceiling as appropriate. The second LAF, conducted between 3.00 p.m. and 3.45 p.m. on a daily basis, is withdrawn with effect from Monday, August 6, 2007.

> Cash Reserve Ratio to be increased by 50 basis points to 7.0 per cent with effect from the fortnight beginning August 4, 2007.

> GDP growth projection for 2007-08 retained at around 8.5 per cent, barring domestic or external shocks.

> Holding inflation within 5.0 per cent in 2007-08 assumes priority in the policy hierarchy, while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4.0-4.5 per cent on a sustained basis.

> While non-food credit growth has decelerated, the acceleration in money supply and reserve money warrants an appropriate response.

> Recent financial market developments in India and potential uncertainties in global markets warrant a higher priority in the policy hierarchy for managing appropriate liquidity conditions at the current juncture.

> Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy in the period ahead will broadly continue to be:

* To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum.

* To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion.

* To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations, financial stability and the growth momentum.

(Source: RBI website)

Two important economic data made public on Aug 30 show that the country's economy continues to be in fine fettle. The Central Statistical Organisation (CSO) puts the estimated gross domestic product (GDP) growth in the first quarter of the current fiscal at 9.3 per cent. Separately, the inflation rate for the week ended August 18 fell to a 15-month low at 3.94 per cent. The GDP growth in the first quarter of the current fiscal was driven by strong performance in agriculture and services, along with support of the manufacturing sector, whose performance was marginally lower than last year.

At 9.3 per cent, the GDP growth is being considered good, though it is a shade lower than 9.6 per cent recorded in the previous fiscal's first quarter. Overall, there is an expectation that 2007-08 would close with nine per cent growth. Sector-wise break-up of the GDP data shows that agricultural growth in Q1 this year is estimated to be 3.8 percent (2.8 per cent), manufacturing at 11.9 per cent(12.3 per cent) and construction at 10.7 per cent (10.5 per cent).

The first quarter GDP expansion by 9.3 per cent comes on top of 9.4 per cent GDP growth recorded in full fiscal 2006-07, which was the best performance in the last 18 years. The growth performance had a positive impact on the benchmark Sensex, which climbed up by 200 points at close on Aug 31.

The Union Finance Minister said that although the 9.3 per cent growth was a bit below the growth in same period last year, given the circumstances on account of external situation, they are quite satisfactory. According to the CSO, the quarterly GDP at factor cost at constant (1999-2000) prices was estimated at Rs 7,23,132 crore in April-June 2007 against Rs 6,61,335 crore in the same period last year. The economic activities that registered significant growth in the first quarter of current fiscal are electricity, gas and water supply at 8.3 per cent (5.8 per cent), trade, hotels, transport and communications at 12 per cent (12.4 per cent), financing, insurance, real estate and business services at 11 per cent (10.8 per cent) , community, social and personal services at 7.6 per cent (11.3 per cent) and mining and quarrying at 3.2 per (3.7 per cent).

( Source: Businessline)

FOREX INTERVENTIONS SUCCESSFUL: RBI REPORT

The Reserve Bank of India made net market purchases of $ 26.8 billion from the foreign exchange market in 2006-07, significantly higher than $ 8.1 billion in the previous year. The central bank's intervention in February 2007 alone touched $ 11.9 billion. The rupee appreciated by 2.3 per cent in 2006-07 and ended the year at 43.60 against the dollar.

The RBI's annual report for 2006-07 said that the interventions in the foreign exchange market in India have been "by and large successful" in reducing volatility in the foreign exchange market. The central bank has cautioned that excess volatility in the foreign exchange market is a threat to financial stability. While large corporates may be in a position to manage increased volatility, a large section of the population in countries like India does not have the wherewithal to withstand volatility in the financial markets, it said. The RBI acknowledged that growing investor interest in emerging market economies along with foreign exchange convertibility restriction have led to the development of an offshore foreign exchange market called the Non-Deliverable Forward (NDF) market in several emerging market currencies. The RBI has said that while the volumes have not been large enough to affect the domestic onshore market under regular market conditions, in volatile market conditions they may impact the domestic spot market.

The enduring strength of foreign exchange inflows complicates the conduct of monetary policy. In the event of demand pressures building up, increases in interest rates could be advocated to sustain growth in a non-inflationary manner. It has also cautioned that higher interest rates would increase the possibility of further capital inflows and potentially reduce the efficacy of monetary policy tightening.

( Source: Businessline)

$ 160 BILLION EXPORT TARGET ACHIEVABLE

The Commerce Secretary said that the Centre was confident of meeting the export target of $ 160 billion set for 2007-08 if the rupee remains at 40-41 to a dollar and there was no need to revise the target. The Commerce Department is holding a series of meetings with various export promotion councils to work out ways to enhance exports, he said. In July 2007, exports grew by almost 16 per cent in dollar terms over the same period of last year, while in rupee terms it was about six per cent.

The Commerce Ministry is also looking at exports worth $ 300 billion by 2012-13 and imports of $ 400 billion on the back of increased emphasis on manufacturing.

( Source: Businessline)

BUSH, BERNANKE PLEDGE SUPPORT TO US CREDIT MARKET

US President George W Bush pledged to help people who have fallen behind in their mortgages keep their homes and to tighten safeguards against predatory lending, while rejecting a bailout for speculators. The Federal Housing Administration (FHA) which insures mortgages for low and middle income borrowers will guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favourable rates. The FHA plans to help 240,000 homeowners refinance during the fiscal year beginning Oct 1, compared to about 100,000 during the fiscal year ending Sept 30. Almost simultaneously, the Federal Reserve Chairman Ben S Bernanke affirmed that the "Fed continues to monitor the situation and will act as needed to limit the adverse affects on the broader economy that may arise from the disruptions in financial markets. Further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected." The stock markets reacted positively. The S&P 500 Index ended up 1.12% at 1473.99 while the DJIA rose 0.9% to 13,357.74.

( Source: Businessline)

INR = RBI restrictions on ECB inflows has produced desired results and exporters' interest has been looked into. But the growth momentum in which Indian economy has already entered will surely attract more foreign investments and INR is likely to appreciate but in a moderated way. Range for the fortnight likely 40.50 - 41.50. Once again stock market leading the way.

EUR = Credit market turmoil still haunting FX markets. Euro looks rangy to bearish during the ensuing fortnight. Range expected 1.3500 to 1.3760. Market is directionless and news driven. Against INR range likely 56.10 - 54.75.

GBP = Also looks directionless as Bush and Bernanke could not lift the market sentiment. Range trading within 1.9930 to 2.0390 expected. Against INR range likely 83.60 - 31.60..

JPY = The worst affected currency in the present fiasco and the root of carry trade due to it's interest rate advantage is likely to remain vulnerable during the next fortnight. JPY is likely to remain rangy to bearish within 114.50 - 117.35. Against INR range likely 36.30 - 34.50.

PS: Views expressed here are only indications. The Bank or any of it's officials will not be responsible for any consequences of any decisions taken on the basis of these indications.

FCNR (B) DEPOSITS (w.e.f. 01.09.2007)						NRE(w.e.f.01.09.2007)
PERIOD	USD	GBP	EUR	CAD	AUD	NRE TERM DEPOSITS
1 Year & above but less than 2 years	4.53	5.82	4.03	4.24	6.36	5.28
2 Years & above but less than 3 years	4.15	5.46	3.78	4.06	6.08	4.90
3 Years & above but less than 4 years	4.16	5.36	3.81	4.10	6.07	4.91
4 Years & above but less than 5 years	4.20	5.29	3.80	4.11	6.11	4.91
5 years only	4.26	5.23	3.81	4.12	6.08	4.91
SB NRE - 3.50 % at par with domestic savings deposit

 

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