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

MARKET OUTLOOK FOR THE NEXT FORTNIGHT

(30/12/06 - 15/01/07)

The USD/INR opened the fortnight at 44.72. Rupee continued its strengthening trend in the wake of strong dollar inflows and general USD weakness, hit a high of 44.16 before closing at 44.26 on corporate demand.
Due to CRR hike and tight liquidity conditions forward premia further went up and touched high of 4.5% during the fortnight. Six months premium closed the fortnight at around 3.5%. Call money touched eight years high of 20%.

In the ensuing fortnight, we expect the rupee to trade a range of 44.10 - 44.60 with sell on upticks being the preferred move. 6 month forward premia is expected to trade around 3. % and move in tandem with movements in call market.

Eur opened the fortnight at 1.3078, and moved in the range of 1.3045 to 1.3239 before closing the fortnight at 1.3204.

Despite better than expected US economic data like payrolls and consumer confidence USD suffered losses across the board with the market expectation of US Federal Reserve's interest rate cuts materializing next year, while the EUR continue to gain on the expectation of European Central Bank rate hike in the near future.

In the forthcoming fortnight, we expect Euro to get supported at 1.3145 levels and try earlier highs of 1.3485. EUR / INR is expected to be in the range of 58.50 and 59.60.

GBP opened the fortnight at 1.9473, touched a low of 1.9433 before steeply rising to 1.9749 and closing the fortnight at 1.9603 levels.

GBP made significant gains due to favourable interest rate expectations and gained maximum of 14% against the USD during 2006. Market expects that BOE may hike rates some more, to bring inflation in line with expectations and this has pushed GBP to new highs.

In the coming fortnight, GBP is expected to get supported at around 1.9450 levels for a move towards 1.9850 first and then targetting the psychological 2.00 against USD.

GBP/INR is expected to trade a range of 87.60 and 89.60

USD opened the fortnight at 117.92 moved higher to 119.25 before dipping lower to 117.71 and closing the fortnight around 119.05 levels.

As the market increasingly discounted the talk of BOJ hiking overnight rates, JPY was bearish against both USD and EUR and touched an all time high of 157.03 against EUR.

In the coming fortnight USD / JPY is expected to move in the range of 117.50 to 119.50

JPY/INR is expected to trade a range of 37.00 and 38.50

 

Other News Items

The Union Government is committed to create an enabling and conducive milieu for the Indian textile to modernize and expand capacities, as it constitutes the "backbone of our manufacturing sector".

The recent vision statement of the Govt is more ambitious compared to the one made in 2004 to make investment of Rs: 1,94,000 crore by 2012. The Union Ministry has urged the industry to focus more on manufacturing value-added items since the higher growth in value would flow from manufacture of more valued products and a rise in use of diversified textile products such as technical textiles. Investments in the sector had picked in the last two years after several policy initiatives of the government.

Implementation of 25 textile apparel parks scheme has been proceeding satisfactorily as the Government was providing a grant of Rs: 866 crore. It was also proposed to expand the scope of the scheme in the 11th Plan.

(Courtesy: The Businessline)

The mid-year review of the economy for 2006-07 was tabled in Parliament. The Finance Ministry has attributed a large part of the current inflationary pressures on "commodity-specific supply problems related to products such a wheat and pulses".

According to the review, "a durable solution to the price-rise problem has to be found in increasing yields and domestic output of such products". As long as investments remained buoyant and efficiency levels in the economy were improved, "the problem of overheating may turn out to be less real and more imaginary".

The review drawn attention to "several instances" in recent history where economies have grown at 8-9 per cent or high annual rates for years on end. Japan grew at an annual average of 10.4 percent between 1960 and 1970. China has grown at above 8 per cent in 14 out of the 19 years since 1987 despite routine concerns of overheating.

The overheating of some economies in the past were associated with speculative debt flows through the balance payments leading to excess liquidity expansion and a sharp real appreciation of the exchange rate. While the net foreign inflows have driven the growth of money supply in India in recent times, such flows have been of the non-debt creating variety and orderly conditions have prevailed in the exchange rate market of the rupee, the review noted.

Besides tackling the supply-side problems, the Ministry is of the view that the simultaneous macro-economic policy responses have to be prospective rather than retrospective. Another point in the context of the "overheating debate" relates to the buoyancy in the stock markets relative to some other economies. The price-earning ratio of the BSE sensex rose from 20.92 at end-March 2006 to 21.34 at end-September 2006 suggesting that a part of the increase in stock valuation may be because of higher corporate earnings and higher growth expectations in the economy, the review said.

(Courtesy: The Businessline)

RUPEE APPRECIATES 1.7 % IN 2006

The rupee has appreciated by around 1.7 % against the USD at the end of 2006. The domestic currency was at 45.08/09 in January 2005 and closed at 44.25/26 in December 2005. Going by the Real Effective Exchange Rate, it is estimated that the rupee is overvalued by around 8 %.

The rupee lost ground in between due to strong demand for crude oil from importers. The price of global crude oil touched $ 80 per barrel during May-June and subsequently eased to around $ 60 per barrel in November. However FII flows of $ 8.33 billion in the domestic stock market helped the rupee gain against the dollar. The movement of rupee was basically driven by demand of dollars from importers (oil companies) and supply of dollars through FII inflows. During 2006, supplies ran ahead of demand.

The second half of the year also saw the dollar weakening against other major currencies with the perception of US Federal Reserve going easy on interest rates in 2007. Unlike last year, market participants are now debating on a rate cut in the US.

OUTLOOK BUOYANT - Strong inflows are expected to keep the rupee buoyant and is likely to appreciate as the USD may extend it's weakness against other currencies. An interest rate hike is expected in Japan and the UK as well as Europe. However, any corrections in the stock markets could weaken the rupee.

(Courtesy: The Businessline )

FCNRD(w.e.f. 01.01.2007)						NRE(w.e.f. 01.01.2007)
PERIOD	USD	GBP	EUR	CAD	AUD	NRE
1 Year & above but less than 2 years	5.33	5.58	4.02	4.24	6.62	6.33
2 Years & above but less than 3 years	5.16	5.53	4.12	4.19	6.53	6.16
3 Years & above but less than 4 years	5.08	5.51	4.13	4.19	6.53	6.08
4 Years & above but less than 5 years	5.07	5.47	4.11	4.20	6.55	6.08
5 years only	5.09	5.41	4.11	4.20	6.52	6.08
SB NRE - 3.50 % at par with domestic savings deposit

 

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