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FACTORS AFFECTING THEVOLATILITY OF FOREIGN EXCHANGE

RATE

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Factors affecting Exchange Rate

Slowdown in GDP growth

Balance of Payment

Index of Industrial Production

Market movements

Price Movements

Liquidity

Reer and Neer

Conclusion and Forecast

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Slowdown in GDP growth

Economic

indicator Q1 Q2 Q3 Total

GDP 783052 773687 873246 2430165

Growth rate in

% 7.9 7.6 5.3

The GDP of Indian economy grew by mere 5.3% in the 3rd quarter of financial year 08-

09, in sharp contrast to 8.9% growth in the similar period of corresponding year. Theslowdown can be directly attributed to negative growth in the manufacturing and

agriculture sectors.

Rs In Crore

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What is scary about a shrinking agricultural sector is

that, though it contributes to less than 20 percent ofGDP, over 70 percent of the population depends on it.

One of the major reasons for manufacturing falling is

the automobile sector, which contracted sharply in

the past few months on account of tight credit.

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Balance of payment

Item April-June July-September

October-

December

2007-08 2008-09 2007-08 2008-09 2007-08 2008-09

1. Exports 34,356 49,120 38,273 47,700 40,985 36,707

2. Imports 56,346 79,637 59,510 86,213 67,038 73,0143. Trade

Balance (1-2) -21,990 -30,517 -21,237 -38,513 -26,053 -36,307

4. Invisibles,

net 15,310 21,521 16,940 25,684 21,522 21,663

5. Current

Account

Balance (3+4) -6,680 -8,996 -4,297 -12,829 -4,531 -14,644

6. Capital

Account

Balance 17,880 11,231 33,533 8,095 31,269 -3,237

7. Change in

Reserves -11,200 -2,235 -29,236 4,734 -26,738 17,881

US Million dollar

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Major Highlights

Export growth turned negative during Q3 of 2008-09 for the first

time after 2001-02 due to global economic slowdown.

The current account deficit at US$ 14.6 billion during Q3 of 2008-09

was the highest quarterly deficit since 1990.

For the first time since Q1 of 1998-99, the capital account balance

turned negative during Q3 of 2008-09 mainly due to net outflows

under portfolio investment, banking capital and short-term trade

credit.

The foreign exchange reserves on BoP basis (i.e., excludingvaluation) declined due to widening of current account deficit

combined with net outflows under the capital account.

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Sluggish Export growth remains a

major concern

-14000

-12000

-10000

-8000

-6000

-4000

-2000

00

5000

10000

15000

20000

25000

30000

35000

April

Ma

y

Jun

e

July

August

September

October

November

December

January

February

Marc

h

Export

import

TradeDeficit

-13140

-2900

Indias merchandise exports

during April-November 2008

increased by 18.7 per cent

while imports recorded a

higher growth of 32.5 per cent,

largely due to the rise inpetroleum, oil and lubricants

(POL) imports. The rise in oil

imports was primarily due to

the elevated international

crude oil prices, while the

volume of oil imports wasmoderate. Merchandise trade

deficit during April-November

2008 widened to US $ 84.4

billion from US $ 53.2 billion a

year ago.

US Million dollar

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Trade Deficit on tips and toes of Crude prices

-14000

-12000

-10000

-8000

-6000

-4000

-2000

0

0

20

40

60

80

100

120

140

160

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

JAN

FEB

MAR

AVG OIL PRICE

TRADE DEFICIT

-2900

-13140

The widening of trade

deficit during April-

December 2008 could be

attributed to higher import

payments reflecting high

international commodityprices, particularly crude

oil prices during the first

half of 2008-09. And then

when crude oil prices have

reduced trade deficit has

also reduced.

US Million dollar

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Index of Industrial

Production

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Index of Industrial production

Mining Manufacturing Electricity General

Year 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09

Annual

growth 5.40% 2.46% 9.24% 2.45% 9.30% 19.75% 8.73% 2.47%

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Industrial growth showing signs of

recovery

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Mining Manufacturing Electricity General

Sectorwise Growth

2007-08 2008-09

Growth started to slacken from

the second half of 2007-08,

which has continued since

then. The slowdown in

manufacturing was largely on

account of food, textiles and

metals.

The electricity sector recorded

higher growth on account of

increase in power generation in

nuclear and hydro-plants.

Mining growth also

decelerated.

Source: http://www.mospi.gov.in

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Use based Classification

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Basic goods Capital goods Intermediate goods

2007-08

2008-09

Growth rate of march

Basic goods: 1.4%

Capital goods: -8.2%

Intermediate goods: -4.4%

Basic goods include mining

and electricity sector.

The performance of basic

goods reflected subdued

growth in electricity and a

fall in production of

phosphates fertilizers, steel

and aluminum products,and deceleration in

production of caustic soda

and structurals.

.

Source: http://www.mospi.gov.in

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Use based Classification

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Consumer Goods Consumer durable consumer non

durable

2008-09

2007-08

Consumer goods -0.8%

Consumer durables 8.3%Consumer Non-Durables -3.6%

The factor that has slightly

improved the IIP performance in

January are consumer durables;

consumer durables were -12.8%for the month of December, they

have come in +2.5% for the month

of January, so the excise cuts and

the small changes in interest rates

appear to have improved the

output, appear to have improveddemand and therefore improved

output maybe the de-stocking of

inventories was over. So, its a

consumer goods lead

improvement in the IIP.Source: http://www.mospi.gov.in

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Market Movement

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EQUITY MOVEMENT DIRECT RUPEES DIRECTION

Indian stock marketposted its biggest

historical downfall

during the year 2008-

09. While Indian rupee

depreciated nearly 19

percent during thesame period.

A major chunk of FII

selling of over $3 billion

had taken place in

October (2008) alone,which saw the Sensex

going to its lowest level

in the last three years

35.00

37.00

39.00

41.00

43.00

45.00

47.00

49.00

51.00

53.00

0

5,000

10,000

15,000

20,000

Date

18-Apr-08

9-May-08

30-May-08

20-Jun-08

11-Jul-08

1-Aug-08

22-Aug-08

12-Sep-08

3-Oct-08

24-Oct-08

14-Nov-08

5-Dec-08

26-Dec-08

16-Jan-09

6-Feb-09

27-Feb-09

20-Mar-09

10-Apr-09

1-May-09

Sensex

Dollar

rupee

17320.4

8400.9

39.8

51.7

42.3

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35.00

37.00

39.00

41.00

43.00

45.00

47.00

49.00

51.00

53.00

0

50000

100000

150000

200000

250000

300000

350000

Date

18-Apr-08

9-May-08

30-May-08

20-Jun-08

11

-Jul-08

1-

Aug-08

22-

Aug-08

12-Sep-08

3-Oct-08

24-Oct-08

14-Nov-08

5-

Dec-08

26-

Dec-08

16-Jan-09

6-Feb-09

27-Feb-09

20-Mar-09

10-Apr-09

1-May-09

ForeignExchange

reserve

Dollar rupee

51.71

Foreign Exchange Reserve

Indias Foreign

exchange Reserve

have peaked during

the FY 08 to $316.171

billion due to heavy

inflows entering into

India. However SinceOct 2008, sudden fall

have been seen

mainly on account of

Central Banks

offloading dollars in

Spot FX market in

order to provide

Foreign Portfolio

Outflows.

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Foreign Capital Inflows- Foremost Step to Study

38.00

39.00

40.00

41.00

42.00

43.00

44.00

45.00

46.00

47.00

48.00

49.00

50.00

51.00

52.00

53.00

-1700

-1200

-700

-200

300

800

Date

18-Apr-08

9-May-08

30-May-08

20-Jun-08

11-Jul-08

1-Aug-08

22-Aug-08

12-Sep-08

3-Oct-08

24-Oct-08

14-Nov-08

5-Dec-08

26-Dec-08

16-Jan-09

6-Feb-09

27-Feb-09

20-Mar-09

10-Apr-09

1-May-09

Total FII Dollar rupee

Foreign Capital inflows are of primeimportance having an immediate

impact on Indias Balance of

Payment.

Government of India has increased

the ceiling of FIIs investment in

the Corporate Debt from the

earlier cap at US $ 6.00 billion to

now US $ 15.00 billion. This is also

called the Corporate Bond (CB)

investment. The yields are generally

higher in case of CBs vis a vis GoIsBonds. The spreads are higher. FIIs

flows will increase into Corporate

Bonds as the Indian interest rates

are still higher than interest rates in

USA , UK and EC.

US Million Dollar

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Price Movement

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Crude Oil Prices and Inflation moves hand in hand

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

0

20

40

60

80

100

120

140

160

Date

18-Jan-08

8-Feb-08

29-Feb-08

21-Mar-08

11-Apr-08

2-May-08

23-May-08

13-Jun-08

4-Jul-08

25-Jul-08

15-Aug-08

5-Sep-08

26-Sep-08

17-Oct-08

7-Nov-08

28-Nov-08

19-Dec-08

9-Jan-09

30-Jan-09

20-Feb-09

13-Mar-09

3-Apr-09

24-Apr-09

Crude oil prices WPI index

12.63

Corr = 0.74

The increase in inflation duringMarch-August 2008 was

mainly on account of some

pass-through of high

international crude oil prices

to domestic prices aswell as

elevated levels of prices of iron

and steel, basic heavyinorganic chemicals,

machinery and machine tools,

oilseeds/oil cakes, raw cotton

and textiles. Inflation

decelerated sharply as

international energy and

commodity prices declinedsubstantially and demand

pressures eased following the

impact of global financial

crisis.

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First Stimulus Package

Govt. of India on 5th December 2008 announced the

First Stimulus Package.

RBI cut Repo Rates by 100 bpts to 6.50 %.

RBI announced a 100 bpts cut Reverse Repo Rates

to 5.00 %.

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Second Stimulus Package

The Second Stimulus Package was announced by RBIon Friday 2nd January 2009.

RBI cut key Repo Rate further by an aggressive 100bpts to 5.50%. An eight year low and a surprise move

by the RBI. RBI announced a further 100 bpts cut in Reverse Repo

rates to only 4.00 % now. An eight year low.

RBI in a surprise move slashed "CRR" by another 50

bpts to now at 5.00 % - a two year low. This addsfurther liquidity to the financial markets. RBI is worriedthat due to liquidity crunch the Indian GDP growthshould not suffer in this fiscal.

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Third Stimulus Package

Govt. of India announced a surprise third Stimulus

Package on 24th February09 cutting excise duty

and service tax by 2.00 % on majority of bulk

products and select services.

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Results of cut in Rates.

A cut in reverse repo rates will discourage banks from parking

surplus funds with RBI through the liquidity adjustment facility and

encourage them to boost lending to the commercial sector.

The cut in Repo Rates signals commercial banks in India to lower

their PLR for corporate and individual customers. A direction to theeconomy Interest rates are going to be lowered by the

commercial banks.

The central bank has also lowered the cash reserve ratio, or the

proportion of deposits that banks set aside, by another 400 basis

points to inject Rs 1,60,000 crore into the system.

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Key Policy Rates

0

1

2

3

4

5

6

7

8

9

10

Mar'04

Oct'04

Oct'05

Jun'06

Oct'06

Jan'07

Mar'07

May'07

Nov'07

Apr'08

Jun'08

Aug'08

Oct'08

Dec'08

Mar'09

Repo Rate

Reverserepo

CRR

Repo rate- 4.75%Reverse Repo- 3.25%

CRR- 5%

Through the cut in rates,RBI has provided Rs

3,88,000 crore of primary

liquidity to the system.

Source:http://www.rbi.org.in/home.aspx

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Liquidity Indicators

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Liquidity Indicators

0.00

0.501.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

0

10000

20000

30000

40000

50000

60000

6thFeb09

27thFeb09

6thMar09

27t

hMar09

3rdApr09

24thApr09

1stMay09

21stMay09

CALL VOL CBLO VOL REPO VOL

CALL WAR CBLO WAR REPO WAR

The Volumes of CBLO is high

mainly because it has less

regulation then call market.

No CRR has to be kept aside

and Mutual funds, Primary

dealers, Insurance companyand other banks can also

participate in CBLO.

CBLO is regulated by CCIL

whereas Call market

depends upon thewillingness of borrower and

lender.

Source:http://www.ccilcertification.co.in/ocm/

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Arbitrage Process

Banks

Borrow at 4.47% in call money market

Park their funds in reverse repo at 4.75%

Spread of 28 basis point RBI

Banks RBICCILLend at

0.38%

Park at 3.5%

Banks make profit by this arbitrage around 3.12%

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Government Financing through T Bills

3

3.5

4

4.5

5

5.5

6

6.5

7

7.5

12-Nov-08

26-Nov-08

10-Dec-08

24-Dec-08

7-Jan-09

21-Jan-09

4-Feb-09

18-Feb-09

4-Mar-09

18-Mar-09

1-Apr-09

15-Apr-09

29-Apr-09

13-May-

91-DayT-Bill

182 -DayT-Bill

364 -DayT-Bill

7.21

7.31

7.19

The Central

Government borrows

funds to finance its

'fiscal deficit'. The

market borrowing ofthe Central Government

is raised through the

issue of dated securities

and 91, 182 or 364 days

treasury bills either by

auction or by floatationof loans.

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Spread shrinks on improved risk

appetite

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1-Jan-09 1-Feb-09 1-Mar-09 1-Apr-09 1-May-09

Spread 10-yr Corporate Bond Yield 10-yr Government Bond Yield

If market condition is bad,

Risk appetite would be low.

Buy

at 5

Sell

at 1

Buy

at 5

Sell

at 15

Corporate Government

-4

10

Net gain of 6

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6 Currency REER And Nominal

Exchange Rate

The 6-currency trade-based REER

which stood at 112.16 in April

2008, indicating an overvaluation

of 12.2 per cent, gradually

declined to 100.07 in February

2009 mainly on account ofsignificant depreciation of the

rupee against the US dollar and

against other major currencies

like the euro, the Japanese yen

and the Chinese Yuan during

2008-09.

112.16

100.07

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Conclusion And Forecasting

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Pros

Foreign capital inflow from Mar to May is $5.5 billion

Indias foreign exchange reserves went up by $4.24billion to $255.94 billion during the week ended May15, 2009, mainly due to revaluation of currencies.

Foreign currency assets increased on account of theappreciation of euro, sterling and yen against the USdollar held in the reserve.

Liquidity is sufficient to pay for imports

As cement, automobiles and steel sectors haveimproved so we can say that infrastructure andmanufacturing would recover due to increase indemand

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Cons

The Indian rupee has lost close to 25 percent of its value inless than a year, yet its exports have been fallingconsistently month-on-month since August 2008.

The slowdown in international demand is forcing exporters

to give discounts to buyers denting their profits. Also, as most exporters had hedged around 30-40 per cent

of their receivables when the rupee was stronger, therecent fall in the rupee may not prove much lucrative.

Hence, Slowdown in Export resulting in threat to ForexReserve

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Sustaining

Crude oil prices have remained stable for

nearly 2 months ranging between $50 to $65/

barrel, so there is no direct threat to inflation.

Oil rose towards $62 on 22nd May 2009.

Demand for crude oil is moderate

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Forecasting

Hence we have concluded that USD/INR

would be stable at Rs 44 for the 1st quarter for

2009-10.