INDIAN RUPEE. Quarter April Prepared By: KCTL Research

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12 April 2010 INDIAN RUPEE Quarter 2-2010 The Indian rupee exhibited a

equity markets and better economic performance. The rupee appreciated by 3.

1 12 April 2010 INDIAN RUPEE Quarter The Indian rupee exhibited a stunning show during Q on account of strong capital inflows, steady equity markets and better economic performance. The rupee appreciated by 3.46% against the dollar in the last quarter --- a 19-month high. Prepared By: KCTL Research

2 INDIAN RUPEE The Indian rupee exhibited a stunning show during Q on account of strong capital inflows, steady equity markets and better economic performance. Although India wasn t untouched by the deepest ever recession looming across the globe, the economy was not in the dire straits the other economies were in USDINR Currency (Q1-2010) The year FY10 was quite an eventful one for the rupee. It has been recovering against the dollar ever since it made a low of Rs52.18 in early March The factors to trigger the turnaround in the currency were considerable inflows in the form of FIIs and FDIs, improving industrial production numbers, betterthan-expected corporate results, political stability, rising commodity prices, and revival in the exports front. Furthermore, the extreme volatility in the rupee over the last six months attracted market participants of all hues and colour. The rupee appreciated by 3.46% against the dollar in USDINR Currency (Monthly) the last quarter a 19-month high. Although the gains were slightly more than the gains of 3.29% in the penultimate quarter, they were less than the gains of 3.95% in the same period last year Overall, the currency strengthened by 11.46% in FY10 compared to a depreciation of 26.45% in FY09 (when the financial meltdown took a heavy toll and the dollar index was the only safe investment in the market). It is the highest Y/Y gain recorded in the past five years.

3 USD MIO x The penetration of currency futures in the market is noteworthy. Both the NSE and the MCX-SX witnessed a spectacular rise in currency futures trading (USDINR). The volume of trade on the NSE surged close to 300% in 2009 from US$1,100 thousand million dollars to US4, 530 thousand million dollars. The volume in MCX-SX gains close to 600% from US$930 thousand million dollars to MCX: 209 NSE: 212 US$6,640 thousand million dollars. Moreover, in Q1CY2010, the volumes in the NSE grew by 163% to US$1,191 thousand million dollars as on March Meanwhile, the volumes in MCX-SX grew by 115% to US$1,431 thousand million dollars. Currently, the MCX-SX holds a market share of 56% in the total currency turnover, while NSE holds the remaining 44% share. NSE MCX-Sx MCX: 1431 NSE: 1191 THE UNION BUDGET The most sought after event for the economy in the last quarter was the Budget The budget was basically aimed at achieving fiscal prudence, increasing investments in FDI and controlling inflation. It indicated that the reforms in FDIs would infuse more funds to the financial services industry. Furthermore, a lot of FII inflow is expected educational sector which would enable Indian students to avail international education at affordable costs in the country itself. These foreign investments would prevent the outflow of foreign exchange and also bring funds in the country. However, absorbing capital inflows from advanced economies could be a challenge for India as they might lead to overheating of the economy the inflows exceeds the domestic capacity to absorb them. SENSEX Q Q Q Q Q Dow Jones % 11.01% 14.98% 7.37% 4.11% Sensex 6.77% 49.29% 18.17% 1.97% 0.36% Shanghai 26.83% 24.70% -6.08% 17.91% -5.13% Hangseng -2.25% 35.38% 14.02% 4.38% -2.89% MSCI Index EX ASIA -2.10% 27.53% 14.32% 2.08% 3.87%

The stock market improved in the last quarter due to recovery in the global economy and stability in the world markets. The Sensex crossed 17000 levels by the end of September 2009.

4 The stock market improved in the last quarter due to recovery in the global economy and stability in the world markets. The Sensex crossed levels by the end of September It recouped 81% Y/Y in 2009 and closed at Moreover, it recovered close to 100% from the yearly lows of GDP The RBI raised the GDP growth projection for the current year to 7.5% from 6% projected earlier. Moreover, the growth rate is expected to remain constant for The IMF expects the Indian economy to grow at 6.75% in and 8% in , due to expected increase in private consumption (better employment prospects from the manufacturing sector) and investment (boosted by robust corporate profits, rising business confidence, and favourable financing conditions). 10 GDP India Q/Q GOVERNMENT BORROWINGS The Deputy Governor of RBI, Mr. Subir Gokarn, and the Deputy Chairman of the Planning Commission, Mr. Montek Singh Ahluwalia, stated that the Government borrowings for the coming fiscal will not be a cause for concern to the Indian economy. The government borrowings are expected to rise to Rs4.57 trillion (US$100.5 billion) in the FY11-12 from a record Rs4.51 trillion in the previous year India 10-year GOI Yield

5 Moreover, the Deputy Governor further said that the RBI needs to deal with issues such as distribution of bonds over different maturity periods so that the pressure is not on a single maturity. The yield on the benchmark 10-year bond reached a near 17 month high in March, INFLATION The inflation has been rising sharply ever since it came into positive territory. India's WPI rose Monthly WPI Weekly Food Inflation to 9.89% in February from 8.56% in the penultimate month, due to rise in food inflation and high prices of energy (petrol, diesel and coal). Moreover, the food price 4 inflation was at 17.79% until February end. Food prices are expected to moderate in the near future due to good Rabi crop. -2 However, the overall inflation may hit double digits by the end of fiscal as prices of fuel (diesel and petrol) and manufactured goods are going to get costlier FOREX RESERVES The global financial turmoil and the cut in interest rates by major economies led to a significant decrease in the country s forex reserves. Interest rates in many countries like the US, the UK, the Euro-zone, and Japan plunged in the last one year to their historical lows. Economy Australia 4.25% Canada 0.25% EMU 1.00% Japan 0.10% England 0.50% US 0.25% Interest rates The Reserve Bank of India states that the foreign currency assets include the effect of appreciation or depreciation on non-us currencies (such as euro, the pound and the yen) held in reserves. The overall Forex reserves declined 1.87% to US$278 billion. One of the reasons of the fall could be rupee appreciation against other major currencies.

Particulars (in USD MIO) Mar-10 Dec-09 % Change Foreign Current Asset 253845 253845 0.00% Special Drawing Rights 5039 5172-2.57% Gold Reserves 17920 18182-1.44% Positions in IMF 47307 53008-10.

6 Particulars (in USD MIO) Mar-10 Dec-09 % Change Foreign Current Asset % Special Drawing Rights % Gold Reserves % Positions in IMF % Total FOREX Reserves % FISCAL DEFICIT The finance minister, Mr. Pranab Mukherjee, expects the fiscal deficit to be at 5.5% of the GDP for FY11. The total expenditure is expected to be at Rs11.09 lakh crore while the total tax and non-tax revenues are estimated to be at Rs6.82 lakh crore for FY11. The fiscal deficit is expected to decrease when compared to that of FY10 which was revised to 6.8%. Year Fiscal Deficit (A: Actual, E: Estimated) % A % A (revised) % E % E % E % E Although the government s stimulus measures came at a right time for the rapidly slowing economy, the government spending may be permanently increased Fiscal Deficit (in Rs. Crores) The government s estimated borrowing of Rs4.88 lakh crore for fiscal higher than the past year s Rs4.01 lakh crore to meet the shortfall. However, the report of the 13 th Finance Commission said that the fiscal deficit would come down gradually over the next few years due to moderate spending, especially on higher wages and unemployment benefits as well as a modest lowering in the government's interest burden.

GOVERNMENT CREDIT POLICY Although the RBI kept the repo rate and reverse repo rates at record lows of 4.75% and 3.75%, respectively, during CY2009, it both of them by 25 basis points each to 5.

7 GOVERNMENT CREDIT POLICY Although the RBI kept the repo rate and reverse repo rates at record lows of 4.75% and 3.75%, respectively, during CY2009, it both of them by 25 basis points each to 5.00% and 3.50%, respectively, in the middle of March to combat inflation. The move followed the ones by Australia and Russia. Australia increased its interest rates by 25 basis points to 4.00% from 3.75%, in January. Meanwhile the Bank of Russia reduced its rates by 25 basis points to 7.50% in March. The RBI had earlier raised the CRR to 5.75% from 5% in January The RBI is widely expected to further raise both the repo and reverse repo rates by at least 25 bps each, respectively, on its Credit Policy Meet scheduled on April 20, INDUSTRIAL PRODUCTION The economic recovery gained 20 Industrial production 17.6 momentum in the last quarter 18 due to hefty stimulus measures India's industrial output climbed at its strongest pace in nearly two decades in December , boosted by robust 6 consumer spending, 4 government s stimulus efforts and low interest rates. 0 According to the data released by the Central Statistical Organization, The industrial production rose to 16.7% in January from a revised 17.6% in December 2009, because of continued growth in the manufacturing sector and low base effect. The strong data is expected to be followed by gradual roll back of stimulus measures. FOREIGN INSTITUTIONAL INVESTORS Budget 2010 proved to be a boon for the currency, as the FIIs increased investments in the domestic markets. The FIIs invested over US$2 billion in the domestic markets since the budget was announced. Moreover, they invested around US$4.2 billion for Q1CY2010. The FIIs invested a net US$17.5 billion in the year FII investments would continue in the near future if there are no negative developments on the global front.

According to the SEBI, the FDI in the equity markets rose to US$76.2 billion until March 22, 2010. Moreover, in 2009, FDI inflows have increased by 26.99% to $127,460 million.

8 According to the SEBI, the FDI in the equity markets rose to US$76.2 billion until March 22, Moreover, in 2009, FDI inflows have increased by 26.99% to $127,460 million. The FIIs equity investments were US$1,077 million in 2009, against outflows of US$512 million in FII daily equity in $MIO TRADE BALANCE As of December 2009, the current account balance was in deficit of US$12.63 billion, compared to a surplus of US$4.75 billion in June The imports are rising at a faster pace compared to the exports. The Y/Y exports figures rose by 11.50% in February 2010, compared to % in the corresponding period of Meanwhile, the imports jumped by 35.50%, compared to % in February Trade Balance (Deficit) in USD ONSHORE FORWARDS and NDF The premiums on the forwards market fell due to decrease in participation, as investors are shifting to futures market as a more reliable source of currency valuation. The one-month onshore forwards premium fell to 0.14 paisa in February 2010 from 0.52 paisa in the corresponding period last year. On the other hand, the one-month NDF premiums remained low in the range of paisa, recently compared Month NDF Month Onshore Forwards

9 to onshore forwards premiums of 0.09 paisa. This decreased the arbitrage opportunities wherein investors buy in NDF and sell at on-shore markets to earn riskless profits. Dollar V/S Euro The rupee appreciated not only against the dollar, but also against other major curriencies like the euro (9.08%), the pound sterling (9.53%), and the Japanese yen (4.12%). The fall in the economic outlook of the Euro-zone due to the Greek debt crisis caused the euro to slump against the dollar by 5.66%. Meanwhile, the Dollar Index strengthened by 3.93% Euro Dollar Q Q Q Q Q Dollar Index -0.93% -6.37% -4.43% 1.77% 3.93% Euro 4.40% 5.91% 4.33% -2.18% -5.66% EURINR 5.72% 0.00% 4.75% -5.40% -9.08% GBPINR -5.65% 8.51% -2.50% -2.14% -9.53% JPYINR -2.25% -3.02% 7.91% -6.73% -4.12% ASIAN PERFORMANCE Q Q Q Q Q Hong Kong Dollar 1.25% -5.58% 0.44% -3.35% -3.58% Indian Rupee 1.24% -5.57% 0.43% -3.29% -3.46% China Yuan 1.39% -5.54% 0.50% -3.31% -3.43% Singapore Dollar 0.59% -0.66% 3.11% -2.96% -3.05% Korean Won -0.55% -2.41% 2.49% -2.80% -2.76% Taiwan Dollar -0.55% -2.41% 2.49% -2.80% -2.76% Philippines Peso 2.80% -5.43% 2.13% -0.83% -1.34% Thailand Baht 1.34% -1.59% 2.29% -3.09% -0.36% Indonesia Rupiah 5.46% 8.46% 6.07% -0.60% -0.24% Myanma kyat 0.45% -2.09% 2.09% -2.30% 1.34%

10 The rupee is the second best performer among ten Asian currencies excluding the Japanese yen. It appreciated by nearly 3.46% in Q1CY2010. The top performer was the Honk Kong dollar which appreciated 3.58%. Only the Myanma kyat the currency of Myanmar fell against the dollar. This indicates investors belief that emerging Asian economies will recover steadily compared to the developed nations. PROSPECTS for the INDIAN RUPEE The Indian economy grew at an average rate of 8.6% over the past 4 years. Moreover, it grew by 9.6% in 2007, 7.3% in 2008 and 6.45% in 2009 Despite the global recession, India established itself as the world's second "fastest" growing major economy until In addition, China overtook the US as India's largest trade partner in India is the second most populous country in the world, with a population of over 1 billion. Moreover, one-third of the population is below 15 years of age. It is the only country in the world where the size of the working population will increase along with increase in market for consumer goods India has developed significant employment opportunities for the working population of around 90 million which would offer a considerable potential market for manufacturers and retailers RISK FACTORS to CONSIDER As India is an emerging market, the economy and the value of the rupee is vulnerable to the fluctuations, pertaining to exports, imports and other industrial developments The strength in rupee limits the profitability of Indian exports. Overall, the current account deficit is likely to narrow from 3.4% of GDP in 2009 to 0.5% of GDP by 2013 Poor infrastructure throughout the country is an impediment for business development in many parts of India The sustenance of economic growth is still a concern for India as the concerns of the global financial crisis persist. Although the fiscal deficit is expected to fall to 5.5% of the GDP, it is still a cause for concern

11 OUTLOOK It is really difficult to predict what path the government would take. Tinkering with the stimulus package at this stage would lead to increase in interest rates which will affect investment and thus the government borrowings. Although it s not the right time to withdraw stimulus packages when the economy has started to show recovery, government might withdraw few of the subsidies from the market. The stimulus packages are expected to continue in the oil industry as prices of diesel and petrol adverse effect on the transport rates of food products. The government is aiming to manage foreign capital flows and to promote higher exports, which in turn would increase the currency flow in the economy. Moreover, the India is set to be the most sought after destination for investment as it is one of the fastest growing economies. The rupee is likely to strengthen further in Higher interest rates in India would always allure investors to invest in this country, thereby adding to capital flows. Moreover the government is expected to ease out rules on foreign inflows as the Chairman of the PM's Economic Advisory Council, Mr. C. Rangarajan, thinks that India can absorb US$100 billion of foreign capital inflows every year. Moreover, the government is shying away from any regulatory intervention to manage the rupee, as sky-rocketing oil prices would increase inflationary pressures if the currency weakens. Given the above mentioned facts, one would say that the outlook for India is hopeful. As the Sensex, have already rocketed, the returns will be lower than that in However, India is likely to be favored investment destinations in Although India will benefit from the recovery in the global economy, surging food prices and the resultant high food inflation will remain a cause for concern. We expect the rupee to appreciate in the short term. However, it is expected to shed some gains in the long term, as the dollar is expected to strengthen after 2 years of the global recession. Overall, the rupee is expected to remain volatile in the long term. TECHNICAL REVIEW The spot Indian rupee witnessed a downfall in Q1CY2010. It continued with its bearish trend and made a low of It is currently trading at levels. Overall, it declined as much as 3.4% from the previous quarter. Indicator Analysis: Currently, market has a crucial support placed at levels (61.8% retracement of range). A sustained move above the same would guide the rupee to trade higher. The momentum indicator ADX is treading at 0.30 levels, indicating a good buying opportunity for the near term. The resistances are placed at 47 and 49 levels. On the other hand, the supports are placed at 44 and 42 levels.

12 Elliot wave analysis: According to Elliot wave analysis, the market is currently on the edge of completing a correction mode. Moreover, the formation of Leading diagonal triangle pattern at the extreme end suggests such an upside. If the price completes the correction wave C at levels, then the market is expected to rise to levels (point from where it started declining). OUTLOOK Although there has been a fall of 3.4% in the last quarter, the prices may initially remain on the lower side and find support at levels. If it breaches levels, then it may further fall to range. Going by the Elliot wave count methodology, prices are likely to bottom-out at around to validate our analysis. However, break below may require readjusting our counts.

13 Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and up on sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor any person connected with any associated companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned companies from time to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd.

Recommendations pg 3. Indian Rupee: The Yellow Pages pg 4

Recommendations pg 3. Indian Rupee: The Yellow Pages pg 4 INDIAN RUPEE: Q2CY11 1 CONTENTS: Recommendations pg 3 Indian Rupee: The Yellow Pages pg 4 Union Budget: Another Balancing Act pg5 External Liabilities: Foreign Exchange Reserves pg7 Macro Economic Factors