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

(01/11/2007 - 15/11/2007)

News Items

> Bank Rate, Repo Rate and Reverse Repo Rate kept unchanged.

> The flexibility to conduct overnight repo or longer term repo including the right to accept or reject tender(s) under the LAF, wholly or partially, is retained.

> CRR increased by 50 basis points to 7.5 per cent effective fortnight beginning November 10, 2007.

> GDP growth forecast retained at 8.5 per cent during 2007-08, assuming no further escalation in international crude prices and barring domestic or external shocks

> Inflation to be contained close to 5.0 per cent during 2007-08 while resolving to condition expectations in the range of 4.0-4.5 per cent, with a medium-term objective of inflation at around 3.0 per cent.

> Moderating net capital flows so that money supply is not persistently out of alignment with indicative projection of 17.0-17.5 per cent.

> Covering of 'Short-sale' and 'When Issued' transactions to be permitted outside the Negotiated Dealing System - Order Matching (NDS-OM) system.

> Systemically important non-deposit taking NBFCs (NBFC-ND-SI) to be considered as 'qualified entities' for accessing the NDS-OM using the Constituents' Subsidiary General Ledger (CSGL) route.

> Reinstatement of the eligible limits under the past performance route for hedging facility to be permitted.

> Oil companies to be permitted to hedge foreign exchange exposures by using overseas over-the-counter (OTC)/ exchange traded derivatives up to a maximum of one year forward.

> Importers and exporters having foreign currency exposures to be allowed to write covered call and put options in both foreign currency/ rupee and cross currency and receive premia.

> Authorised Dealers (ADs) to be permitted to run cross currency options books subject to the Reserve Bank's approval.

> ADs to be permitted to offer American options as well.

> Working Group to be constituted for preparing a road-map for migration to core banking solutions (CBS) by Regional Rural Banks (RRBs).

> RRBs and State/ Central Cooperative Banks to disclose their capital-to-risk weighted assets ratio (CRAR) as on March 31, 2008 in their balance sheets.

> High Level Committee to be constituted to review the Lead Bank Scheme.

> Financial assistance to RRBs for implementing information and communication technology (ICT) based solutions.

> Working group to be constituted to lay down the road-map for cross-border supervision and supervisory cooperation with overseas regulators, consistent with the framework envisaged in the Basel Committee on Banking Supervision (BCBS).

> Besides general market risk, specific risk, especially the credit risk arising out of deficient documentation or settlement risk to be covered under the supervisory process.

> Action plan to be drawn up for implementation of National Electronic Clearing Service (NECS) with centralised clearing and settlement at Mumbai.

(Source: RBI website)

Securities and Exchange Board of India has with immediate effect halted issue and renewal of Participatory Notes with underlying derivatives by FIIs and their sub-accounts. SEBI said it was also reverting to the FII regulations of 2004 which allowed only 'regulated' entities to invest in India through the PN route. A later circular that had diluted this to allow registered entities to invest through PNs is no longer valid.

A regulated entity is one that is subject to oversight in its home country by the concerned sectoral regulator. However SEBI is considering exempting unregulated entities such as Pension Funds, Foundations, Endowments, University Funds and Charitable trusts or societies. Because of their nature, they may be permitted to be registered as FIIs as a separate category of institutions without imposing the requirement of their being regulated in their home countries.

Sub-accounts (both proprietary and corporate) may continue to issue PNs during the transitional phase while their letter of intent and applicatons with SEBI for FII status is pending. Current positions through PNs underlying as derivatives will be wound up within 18 months. Those entities with the notional value of their PNs constituting over 40 per cent of Assets Under Custody (AUC), shall make new issue of PNs only on redemption/cancellation/closing out of existing PNs of equivalent amount. Those with PNs of less than 40 per cent of their AUC are allowed only 5 per cent annual incremental issuance till they reach the 40 per cent ceiling.

The date for calculating AUC is September 30, 2007, the latest date for which monthly data provided by the custodians is available with SEBI. The SEBI Chairman said only a handful of FIIs are above the 40 per cent PN limit.

With a view to increasing the set of investors eligible for investment in India, the broad based criteria for fund will now be modified to include at least 20 investors (unchanged) with a single investor allowed to hold up to 40 per cent (against 10 per cent earlier). Also, since new funds cannot have a track record, the requirement of one year's track record will now pertain to the individual fund manager and not to the newly set up fund.

( Source: Businessline)

FOREX RESERVES UP $ 1.3 b

Forex reserves were up by $ 1.307 billion to touch $ 262.450 billion for the week ended October 26, according to figures released by the Reserve Bank of India. The rise was mainly on account of currency revaluation. The foreign currency assets went up by $1.305 billion to $ 254.629 billion. Foreign currency assets, as expressed in dollar terms, include the effect of appreciation or depreciation in non-US currencies (euro, sterling and yen) held in reserves.

( Source: Businessline)

INDUSTRIAL PRODUCTION INDEX TO GET NEW BASE YEAR

A new set of indices for measuring growth in industrial production, SSI sector performance and calculation of consumer prices in urban areas are on the cards. The fast paced change in income and consumption patterns was an important factor behind the Government's plan to come up with new indices. The new index of industrial production (IIP) is likely to be the first off the block and may cover over 800 item groups with a new base year of 1999-2000, according to the Central Statistical Organisation (CSO). The current IIP has 1993-94 as the base year and covers about 400 items.

Also under consideration is a Consumer Price Index that would help measure price rise in urban areas which would replace the existing consumer price index for urban non-manual employees.

( Source: Businessline)

US FEDERAL RESERVE CUTS FEDERAL FUNDS, DISCOUNT RATES

The US Federal Reserve's Federal Open Market Committee cut the benchmark federal funds rate and discount rate by a quarter point at its Oct 30-31 policy meeting. In announcing the decision, the Fed said "the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction." The Fed further added that this action, along with the policy action taken in September, should help forestall some of the advese effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

( Source: Reuters)

INR = RBI's efforts to moderate inflows might hurt INR appreciation but USD weakeness and stable growth projection should attract inflows. INR likely to appreciate and remain within the range of 38.80 - 39.80 in the next fortnight.

EUR = Euro also looks bullish and all eyes will be on forthcoming ECB meeting and post-meeting press conference which will give an insight into the interest rate expectations. Likely range for the fortnight 1.4330 - 1.4630.

GBP = US financial markets turmoil is finally taking its toll as big houses likely Citi and Bank of America also suffering from sub-prime issues. Many may be in the line. GBP looks very bullish and likely to remain within 2.0600 - 2.1130 in the ensuing fortnight.

JPY = Carry-trade resumption and/or unwinding and interest rate hike are the big questions likely to affect yen in the near future. Likely range 113.80 - 116.30.

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. 01.11.2007)						NRE(w.e.f.01.11.2007)
PERIOD	USD	GBP	EUR	CAD	AUD	NRE TERM DEPOSITS
1 Year & above but less than 2 years	3.89	5.40	3.86	4.01	6.74	4.64
2 Years & above but less than 3 years	3.71	5.02	3.78	3.79	6.57	4.46
3 Years & above but less than 4 years	3.78	4.96	3.75	3.86	6.57	4.53
4 Years & above but less than 5 years	3.88	4.90	3.74	3.90	6.58	4.53
5 years only	3.97	4.85	3.75	3.93	6.51	4.53
SB NRE - 3.50 % at par with domestic savings deposit

 

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