INDIAN BANK
HO/INTERNATIONAL DIVISION
66 Rajaji Salai, Chennai - 600 001
Website : www.indian-bank.com
FOREX NEWSLETTER
(FORTNIGHTLY)

Currency Outlook

The USD/INR opened the fortnight at 46.15 and moved lower to 45.80 before closing at 45.92. The factors that influenced the inflow last fortnight continued this fortnight too. Huge corporate inflows, higher stock market and lower oil prices also helping the trend.

Forwards were maintained in narrow range, vary of inflation and the resulting interest outlook. Six months forward moved in the range of 1.31% to 1.27%.

In the ensuing fortnight, 46.08 and 45.75 will prove very vital. A break on either side will see the pair going in that direction. However a test of 45.75 is a more probable scenario and a break there would take the USD/INR pair to 45.42. In forwards, range play is favored between 1.40% and 1.25% on 6 months.

Euro opened the fortnight at 1.2634 and touched a high of 1.2833 before dipping down to 1.2635 and closing the fortnight at 1.2683.

The Euro Zone purchasing managers´ index has remained on the same level as last month according to data broadcasted by market sources.

This stabilization on the PMI follows two months of declines in the index. To maintain the index on relatively high levels, it calls for a robust development on the manufacturing sector in the Euro area. At the same time, this expansion could inspire another rate hike on the side of the European Central Bank to 3.25% after the next meeting planned for Thursday.

In the ensuing fortnight, we expect Euro to remain above 1.2580 for a test of 1.2800 and above.

EUR/INR is expected to be in the range of 57.60 and 58.80

GBP opened the fortnight at 1.8785 and hit a high of 1.9075 before dipping down to 1.8633 and closing the fortnight at 1.8748.

As expected, the MPC voted 8-0 to leave rates unchanged at 4.75% in September. In the coming fortnight, GBP is expected to remain above 1.8595 for a move to 1.9079 and beyond.

GBP/INR is expected to trade a range of 85.00 and 87.99

USD opened the fortnight at 117.74 and moved higher to 118.39 before going down and closing at 117.68.

The Bank of Japan's widely awaited Tankan survey of business sentiment showed an unexpected sharp improvement in business sentiment in the September quarter as Japanese companies shrugged off worries about the prospects for the global economy.

In the coming fortnight USD / JPY is expected to get capped at 118.43 for a move lower to 116.00

JPY/INR is expected to trade a range of 38.40 and 39.90

 

Other News Items

The second Tarapore Committee on Capital Account Convertibility has submitted its report to RBI on 31st July 2006. At present rupee is freely convertible for almost all current account transactions except for a small list of prohibited items. The Committee has suggested a five-year course from 2006 - 2011 to move towards full capital account convertibility involving three phases.

The salient features would be:

For Individuals a) Indians can freely remit USD 50000 abroad in the first phase and Usd 200000 in the final phase. b) Resident Indians can have foreign currency accounts in overseas centers. c) Foreign individuals can invest in stocks through PMS and MFs d) Retention of 100 percent of inward remittances in EEFC to be allowed for all exchange earners

For business a) Mutual funds can invest can invest up to USD 3 billion in Phase I and USD 5 billion in Phase III in overseas markets b)Portfolio Management Schemes (PMS) to be allowed to invest overseas c) ECB upper limit to be gradually raised. Restriction on end use to be removed. No ceiling on long - term or rupee denominated ECBs. d) Companies can invest up to to four times their capital in overseas subsidiaries / JVs in Phase III e) Foreign companies can raise rupee loans, bonds in India.

For Banks a) Banks can eventually raise up to 100 % of their capital through overseas borrowing in Phase III b) RBI to evolve policies to allow, on a case to case basis, industrial houses to hold equity stakes in Indian Banks or promote new banks. c) Encouragement to be given to institutions to set up private sector banks, d) Pruning of Government’s equity holding in state owned banks to 33 %. d) A single banking law to be enacted to govern all commercial banks, including public sector banks.

Conditions a) Ban on Participatory notes b) Non Residents( other than NRIs) may also be allowed access to FCNR (B) and NR (E) RA deposits without Tax concessions. c) FIIs to set aside reserves in volatile times. d) Mauritius will no longer have tax haven status. e) Banks must consolidate and PSUs must reign in borrowings. f) Proposal for more moderate public sector borrowing and reining in liabilities such as small savings and un-funded pensions g) Center and states should graduate from the present system of computing fiscal deficit to a new measure of public sector borrowing requirement (PSBR).

India’s GDP growth rate is testing the 9 % mark. The economy has grown by 8.9 % for the April - July quarter of 2006 - 07, the highest rate of first quarter growth Since 2000 - 01. To add to this good news, the inflation rate is also southward bound (now at 4.56 %), making the macro picture look even better.

Finance Minister Mr. P Chidambaram said that with prudent policies and fiscal discipline, an average quarter growth of 8 % could be achieved. But this would need a sustained inflow of credit for the manufacturing sector at a reasonable rate of interest. The Finance Minister has said that now our economy can aim to be among the top three economies of the world. He also said that for further growth, India must be made a manufacturing hub highlighting IT, Semiconductors, Chemicals and Petrochemicals as potential manufacturing sectors that must be given a policy boost.

The growth rate has been spurred by the manufacturing sector, which has logged a 11.3 % in the first quarter of 2006 - 07. It was 10.7 % in the corresponding period of the last fiscal year. The GDP numbers come weeks after the monthly IIP growth figures have touched 12.4 %. Agriculture has also grown by a healthy 3.4 % unchanged from the corresponding period of last fiscal. Other propellers of GDP growth for the first quarter this fiscal have been the trade, hotels, transport and communications and construction sectors.

(Courtesy: Economic Times)

CURRENT ACCOUNT DIPS INTO DEFICIT IN THE FIRST QUARTER

After recording a surplus in the fourth quarter of 2005 - 06, the current account in the balance of payments has slipped into deficit during April - June 2006 on account of a surge in the import bill. In the capital account, the bulk of inflows during the quarter were on account of inflows through ECBs (USD 4 billion) and banking capital (USD 5 billion ), which has pushed the overall balance of payments to a much stronger position.

According to the latest Balance of Payments figures released by the RBI, the current account deficit in the balance of payments amounted to USD 6.2 billion, against a surplus of USD 1.8 billion in the previous quarter and a deficit of USD 3.6 billion in the same period a year ago.

With capital account surplus of USD 11.9 billion, despite the net FII outflows, the overall balance of payments ended in a surplus of USD 6.4 billion during the first quarter of the fiscal (April - June 2006).

In the current account, the invisibles ended in a surplus of USD 12.4 billion, against USD 10 billion in the same period a year ago, on account of strong inflows through software exports. However, strong growth in invisibles during the quarter was unable to contain the current account deficit on account of a steep surge in oil imports.

(Courtesy: Economic Times )

FCNRD(w.e.f. 01.11.2006)						NRE(w.e.f. 01.11.2006)
PERIOD	USD	GBP	EUR	CAD	AUD	NRE
1 Year & above but less than 2 years	5.34	5.44	3.86	4.27	6.57	6.34
2 Years & above but less than 3 years	5.17	5.37	3.94	4.24	6.47	6.17
3 Years & above but less than 4 years	5.11	5.33	3.94	4.24	6.43	6.11
4 Years & above but less than 5 years	5.11	5.27	3.93	4.27	6.45	6.11
5 years only	5.12	5.22	3.93	4.30	6.41	6.11
SB NRE - 3.50 % at par with domestic savings deposit

 

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