Report Summary. High inflation and concerns of fiscal deficit Thin trading activity amidst New Year

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Denis Harris
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1 Decision enabling cash market analysis & price outlook For the week beginning Dec 30 th, 2013 USDINR last closing as on Dec 27, 2013 Report Summary Fundamental Summary Price drivers (Indian Rupee) Increasing risk in Indian banking sector High inflation and concerns of fiscal deficit Thin trading activity amidst New Year Expectation of slowing FII Improving Manufacturing and Services PMI Sum Up Impact on Prices Depreciation Depreciation Neutral Depreciation Appreciation Neutral to Depreciation Technical Summary Price Outlook Summary Price Ranges Strategy Review and Generic Procurement Strategy Turnaround point Corrective leg is evident on the chart hence mixed trade is likely to follow. Price is likely to consolidate in the broader range of INR Concisely, USD/INR spot price is likely to trade mixed in the range of INR in the coming 2 3 weeks. 0 2 weeks 0 1 month Range Direction Range Direction Mixed Mixed IL=Initial level (Initial Expectation from the current closing) SL= Subsequent level (The subsequent forecast after reaching the initial level) Imports 20% of Dec 13 exposure covered at INR on 5 th Dec, % of Dec 13 exposure covered at INR on 9 th Dec, % of Dec 13 exposure covered at INR on 16 th Dec, 13. Exports 30% of Dec 13 exposure covered at INR on 12 th Dec, % of Dec 13 exposure covered at INR on 18 th Dec, 13. Rest 20% of Dec 13 exposure should be covered around INR Close above INR shall turn the short term sentiments bullish and then INR would be possible before turning negative again. Discuss with our expert 1 Phone: E mail: services@transgraph.com Internet:

Market analytics Summary of global macro and market themes Financial markets across the Globe would remain closed at the mid of the week due to New Year celebrations.

The US economic releases are expected to remain mostly positive with improving pending home sales amidst improving housing sector which might remain favorable for the greenback against the other

2 Market analytics Summary of global macro and market themes Financial markets across the Globe would remain closed at the mid of the week due to New Year celebrations. Ahead of the holidays, we expect thin trading activity and low volumes might result in sluggish market activity in the coming week. The US economic releases are expected to remain mostly positive with improving pending home sales amidst improving housing sector which might remain favorable for the greenback against the other currencies. However, weakness in the ISM manufacturing is likely to limit any sharp appreciation. Euro zone growth continues to remain uneven; further the manufacturing PMI numbers are also likely to remain lower for the peripheral nations and might weigh on the shared currency. Compared to the developed markets, emerging markets including China are likely to remain vulnerable amidst tight liquidity condition ahead of the quarter end and year end. Optimism over the US equities might continue to push the Japanese Nikkei while the yen currency might continue to struggle near 5 years lows against the US dollar on the back of continued loose monetary policy. The Reserve Bank of India s financial stability report of the Indian banks reflects the strain on asset quality continues to be a major concern. A few sectors, namely, Infrastructure, Iron & Steel, Aviation, Textiles and Mining continue to contribute significantly to the problem assets of the banking sector, while the performance of the retail sector has been relatively good. Weakness of the Indian rupee against the US dollar is likely to remain intact amidst increasing bank risk. Economic update and preview After witnessing a gain of 0.43 percent in the third week of December, the US Dollar Index remained sluggish last week and inched marginally down by 0.07 percent. Post the Fed tapering asset purchase by US dollar 10 billion per month and successful passage of Budget Bill, there were no major developments to push the safe haven currency further northwards amidst thin holiday trading. On the other hand, the US long term treasuries yields continued to march higher and presently the 10 year treasury yields have surged above 3 percent marking one of the worst years for the bond market. While the US equities largely remained higher and continued to trade near yearly high levels ahead of the New Year. Amidst an improving GDP and labor UoM Consumer Sentiment Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 sector, the US durable goods increased by 3.5 percent in the month of November while the durable goods excluding defense and air increased at a faster pace of 4.5 percent reflecting 2

3 improving consumer spending. However, the continuing jobless claims and personal income turned out to be marginally weak and weighed on the safe haven currency in the last week. Raising fresh questions about the prospects of recovery and the European Union s handling of the economic crisis, the Standard and poor s lowered the euro zone credit rating from AAA to AA+. However, amidst thin trading activity during the Christmas week the shared currency mostly remained positive and appreciated 0.34 percent against the US dollar. Positive economic development and optimism over the future economic growth resulted in gains of the euro currency. Low interest rate and pro growth policies have not been enough to provide smooth and even economic recovery in Europe. Recently, the inflation numbers have remained biased towards downside while the economic activity has also remained muted (EU GDP growth has remained near 0.1 percent). However, optimism of riskier assets including equities and continued support by the ECB has mostly remained favorable for the gains in euro currency. Investors stress in the Chinese banking system has subsided with the PBOC s injection of cash to the tune of 300 billion Yuan (US dollar 49.2 billion in the prior week). The seven day repo rate which surged to 9.8 percent last week are presently maintaining at 4.84 percent and limited the downside impact ahead of the quarter end in December. On the other hand, Japan s equity index Nikkei soared to near 6 year high levels supported by positive economic developments and continued weakness in the Japanese currency (The Japanese Yen has also declined to near five years low against the US dollar). Continued asset purchase and higher government spending in Budget resulted in higher equities and weak currency (presently the Japanese Yen has extended losses to more than 17 percent in 2013). Calendar Key Economic & Other Fundamental Data Event Date Expected Value Current Value Pending Home Sales (USD) 30 Dec 1.00% 0.60% S&P/CS House Price Index (USD) 31 Dec 13.0% 12.80% ISM Manufacturing PMI (USD) 02 Jan Total Vehicles Sales (USD) 03 Jan 16.0M 16.41M Manufacturing PMI (EUR) 02 Jan M3 Money Supply (EUR) 03 Jan 1.50% 1.40% Manufacturing PMI (CNY) 01 Jan HSBC Manufacturing PMI (INR) 02 Jan 51.3 HSBC Services PMI (INR) 03 Jan 47.2 International markets Post the Christmas week, thin trading activity is likely to remain under limelight in the week with the New Year. Most of the financial markets including the US and Europe are likely to be closed on January 1 st and this is likely to reflect sluggish price performance in global currency markets, next week. 3

As the 2013 calendar gets exhausted and financial markets approaches the New Year, US equities are likely to witness the best yearly performance in 2013 while the bond market remains disappointed.

6 57 percent (slight lower pace compared to 4 percent growth).

4 As the 2013 calendar gets exhausted and financial markets approaches the New Year, US equities are likely to witness the best yearly performance in 2013 while the bond market remains disappointed. Global equities ISM Manufacturing PMI 58 are also expected to remain higher amidst the optimism while the World 57 economy is projected to grow at percent (slight lower pace compared to 4 percent growth). Improving housing releases and growing consumer sentiments after a successful 55 budget deal is likely to remain favorable 54 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 for the US economy in the coming week. However, the housing releases and ISM manufacturing PMI are expected to grow at a slower pace amidst slowing personal income and weakness in the regional manufacturing surveys, which might limit the gains in US dollar in the coming week. Not only from US, the euro zone manufacturing PMI are also likely to be keenly eyed on the holiday shortened trading week of New Year. The regional PMI numbers are likely to remain uneven (Southern peripheral economies including France might continue to remain weak while Germany and euro zone PMI is likely to improve) which might limit the gains in the euro currency. Further, the banking union in the shared currency zone might also remain a short term risk (Individual banks are given a thorough check up while member countries are left on the hook for the cost of treatment). As each country takes the banking union bill separately, we expect the pressure on the ECB from each member state is likely to limit the optimism over the union. Tight credit conditions in China might also heighten ahead of the quarter end in December and may force the People s bank of China to continue with liquidity infusion. Risk appetite is also expected to remain sluggish ahead of the New Year holidays as global investors change their portfolio allocations and exit positions before the next calendar. The Chinese manufacturing PMI is also likely to increase at a slower pace amidst tight liquidity conditions. Slowing Chinese manufacturing might limit the optimism over the riskier assets and favor the safe haven US dollar in the coming week. The Japanese Yen is also likely to remain vulnerable after the record depreciation of 17 percent in Although the Japanese economic activity has gathered pace with improving housing and inflation numbers backed by rising equities, weakness in the Japanese yen is likely to remain intact amidst continued loose monetary policy. Overall, amidst thin trading activity and short week (Markets are closed due to New Year holiday) we expect currency markets to remain sluggish in the coming week. Weakness in the shared currency is likely to be witnessed as markets focus on uneven euro zone recovery while the US dollar might continue to remain higher backed by rising optimism and positive economic data releases. 4

5 Indian markets The Indian rupee appreciated marginally by 0.05 percent against the US dollar amidst positive equities and higher foreign capital inflows in the last week. Unlike expectations, foreign investors continued to pour in funds in the Indian debt as well as equity markets and supported the gains in the rupee. The Indian foreign currency reserves increased at a slower pace to US dollar billion last Friday while the bank loan growth inched up by percent and remained supportive for the Indian rupee. Improving equities and economic optimism amidst growing new loans indicated that the Indian economy continues to revive from the slump. Further, as the new loans increases, nonperforming assets have also increased and are likely to limit the sharp appreciation of the Indian rupee against the US dollar. Amidst slow domestic economic activity, agriculture recorded highest gross nonperforming assets ratio at 5.5 percent followed by industries at 4.9 percent. Although industries recorded the highest share in restructured standard advances as percent of total advances at 10.9 percent at the end of September 2013, highest share of stressed advance was witnessed in the below mentioned sectors. Major Contributor to Stressed Advances of SCBs Sector March 11 March 12 March 13 Sep 13 Infrastructure Iron & Steel Textiles Aviation Mining Total Sectors Source: RBI and TransGraph Share in Total Advances Share in Total Stressed Advances Share in Total Advances Share in Total Stressed Advances Share in Total Advances Share in Total Stressed Advances Share in Total Advances Share in Total Stressed Advances Share in Total Advances Share in Total Stressed Advances Share in Total Advances Share in Total Stressed Advances Note: All data in percentage Most of the private banks were engaged in active lending to the retail sector which mostly fared well compared to infrastructure or steel. The Scheduled Commercial Banks are presently the worst hit with share of loans portfolio maintaining at 55 percent. Rising NPA remains a critical factor which might delay the nascent economic recovery witnessed currently in case the NPA is not controlled. Further, high domestic inflation and series of stress test for the Indian banks is likely to weigh on the gains in the Indian currency in the coming week. The latest RBI s report on Financial Stability also indicates that immediate measures are required to control the growing NPA s in order to support the domestic economy. 5

6 As we approach the New Year, markets might also eye the HSBC flash manufacturing and services PMI numbers from India which might increase at a slower pace and limit the sharp depreciation of the Indian rupee against the US dollar. In order to strengthen the bilateral financial cooperation between Japan and India, the Indian Government approved enhancement of the bilateral currency swap arrangement between the Reserve Bank of India and Bank of Japan from US dollar 15 billion to 50 billion in the third week of December. Under the Focus Market Scheme, the Government would also push forward with exports to Africa, Latin America, CIS and ASEAN. In the current fiscal until October, Indian exports have surged by 5.99 percent to Europe and 8.64 percent to US compared to last year and is expected to improve further limiting the trade deficit. Although the current account deficit moderated to 1.2 percent of GDP in the second quarter of FY 14 amidst narrowing trade deficit, fiscal deficit has exceeded the budgeted target of 4.8% in November. The Indian government s plans of disinvestments and higher revenues have still not materialized. Presently, it is widely speculated that the government might reduce the fiscal deficit by using the cash reserves of the Public Sector Undertakings which might provide an additional Rs crore limiting the deficit to percent in the current fiscal. Concerns of increasing fiscal deficit are also likely to weigh on the Indian rupee in the coming week. Overall we expect the Indian rupee might depreciate against the US dollar on the back of deteriorating financial stability of the Indian banks and concerns of high inflation. Further, thin trading activity during the New Year might reduce the pace of FII inflows resulting in sluggish trading activity and limit any sharp movements in the forex markets. Technical Outlook on USDINR The short term momentum in the USDINR spot pair after striking low at INR has turned positive. The corrective pattern that has resulted after posting all time high at INR is in progress and likely to target INR in the coming few months. However, in the short term time frame INR is crucial, breaking above will result into double bottom formation on the weekly chart and then INR would be possible before turning negative again. Price is hovering around 18 pd EMA indicating mixed sentiments. On the weekly technical setup, price oscillator is trading below signal line and both being towards equilibrium indicates mixed price action to be followed. Concisely, USD/INR spot price is likely to trade mixed in the range of INR in the coming 2 3 weeks. 6

Technical Outlook on EURUSD EURUSD pair continues to trade above average and the upward sloping trend line indicating positive sentiment. On the downside support is expected arount USD 1.

27 is intact upon staying well above crucial support of 1.3300.

7 Technical Outlook on EURUSD EURUSD pair continues to trade above average and the upward sloping trend line indicating positive sentiment. On the downside support is expected arount USD while early break of the same likely to drift the pair towards USD where swing based support is in place. The positive trend from the July 13 low of 1.27 is intact upon staying well above crucial support of On the weekly technical setup the Stochastic (14/3/3) is overheated while RSI (9) has turned lower a bit indicating consolidation to be followed. Therefore possibility of further gains of US Dollar towards or even lower towards remains open in the coming few months. Concisely, EURUSD is likely to trade mixed in the range of USD in the coming week. Holistic view on USDINR and EURUSD Market Last Closing (Nov 18, 2013) USDINR Spot EURUSD Spot Price Outlook and Direction (1 month) The pair is likely to consolidate in the range of INR The pair is likely to stay below and extend lower towards Price Outlook and Direction (2 3 months) Prices could stay below INR and weaken towards INR The pair is likely to stay below and extend lower towards Weekly Dashboard Monthly ECB ($ Billion) Monthly Food inflation (%) Monthly FDI ($ Billion) Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Jun 12 Oct 12 Feb 13 Jun 13 Oct 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 7

Forex Reserves ($ Billion) Industrial Production in (%) Repo rate and WPI (in %) 295.5 283.57 281.29 277.17 277.73 275.49 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 10 8.4 8 6 3.5 4 2.5 2.6 1.5 2.0 2 0.

0 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Facts and Figures Digest Market and details 27 Dec 13 23 Dec 13 Change % Change USDINR spot 61.925 61.953 0.028 0.

8 Forex Reserves ($ Billion) Industrial Production in (%) Repo rate and WPI (in %) Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec Oct 12 Jan 13 Apr 13 Jul 13 Oct % May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Facts and Figures Digest Market and details 27 Dec Dec 13 Change % Change USDINR spot % NSE USDINR Oct 13 Futures % NSE GBPINR Oct 13 Futures % NSE EURINR Oct 13 Futures % NSE JPYNR Oct 13 Futures % NSE Equity index % BSE Equity Index % EURUSD Spot % Dollar Index % Dow Jones Industrial Avg. Index % DAX % US 10 Year debt yield (in %) % 8

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Report Summary. Expectations of reduction in repo rates by RBI. Uptick in global risk appetite sentiments

Report Summary. Expectations of reduction in repo rates by RBI. Uptick in global risk appetite sentiments Decision enabling cash market analysis & price outlook For the week beginning Oct 01, 2012 USDINR last closing (24 hrs market) Fundamental Summary Report Summary 52.84 ( 0.52) as on Sep 28, 2012 Price