Market Roundup. Chart M1: Sector-wise Growth Rate (%) in Production Petroleum. Fertilizers Natural Gas. Products -7.

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1 Macro-Economic Overview Market Roundup Domestic Macroeconomic Development After a robust first quarter, the Indian economy experienced a tepid growth in the next three months of the fiscal, as is evident from the available data. External circumstances were certainly not in favor, with the exchange rate and commodity prices suffering sharp adverse movements. On top of that, a brewing liquidity crisis in the non-banking financial (NBFC) sector is impacting the informal sector of the economy significantly. The informal sector employs over 80 per cent of the non-agricultural workforce in the country (ILO Report 2018), and is a key cog in the job growth and consumption engine of the country. With the formal banks' lending already impaired due to the sharp increase in the non-performing assets (NPA) on their books, NBFCs have been at the forefront of the shadow banking environment prevalent in the country. The PMI surveys for the month of October though depict resilience in the economy to continue with quicker job growth and new orders creation than earlier, both in the manufacturing and service sector. Export-oriented orders in the manufacturing sector remained on the wane though, which is a continuing cause for worry for the Government in the face of a depreciating currency. Chart M1: Sector-wise Growth Rate (%) in Production 30.0 (%) Coal Crude Oil -4.2 Natural Gas -1.8 Petroleum Products -7.7 Fertilizers -5.3 Steel Cement Electricity Overall Sep-17 Aug-18 Sep-18 The growth in industrial production index (IIP) decelerated for the second consecutive month (4.47% vs. 4.67%). The mining sector has tapered after a robust second half of the previous fiscal. Coal production has decelerated sharply to an average of 52.5 million tonnes since April, after averaging over 66 million tonnes in the period between October 2017 and March It had reached a historical level of 85 million tonnes in March 2018.Growth in the manufacturing sector also decelerated to 4.62% (5.08%). Growth in capital goods also experienced a sharp decline, while infrastructure sector continued its strong growth. Consumer durables remained steady after two consecutive months of double digit growth, which were largely due to a low base. 20

2 Macro-Economic Overview Among the eight core industries, crude oil and natural gas remained in the doldrums. The country's leading oil and natural gas producer, ONGC has been experiencing teething infrastructure problems in its western offshore fields, which has lowered its production capacity. The second largest producer Oil India Limited has also been facing similar issues. Steel production also decelerated further, while cement production remained strong. Infrastructure demands in the economy have boosted cement production, especially from the southern states like Andhra Pradesh and Telangana. However, oversupply has cut into the profit levels of the companies, and this might lead to a curtailing of output in the near future. Period Table M1: India's Industrial Production Growth Profile (at Base Year ) Growth (Y/Y) Rate (%) Mining MFG Electricity IIP Primary Capital Intermediate Source: MOSPI & CCIL Research Growth (Y/Y) Rate on Use-Based (Goods) Classification Infrastructure/ Construction Consumer Durables Consumer Non- Durables Dec Jan Feb Mar Apr May Jun Jul Aug Sep Consumer price inflation softened in October, growing by 3.31% (3.70% in the previous month). Prices were lower in rural areas (2.82%) compared to the urban areas (3.97%). Pulses (-10.28% vs -8.65%), Vegetables (- 8.06% vs -4.21%), and Sugar & Confectionery (-7.64% vs -6.42%) were the chief components which lowered the aggregate food inflation to -0.86% (0.51%). Protein items also softened in value with Egg (2.21% vs 3.76%) and Milk Products (0.92% vs 2.36%) being the chief contributors. Fuel inflation decelerated to 8.55% (8.63%). Among the categories experiencing a rise in prices, Health (7.92% vs 5.97%), Transport & Communication (7.72% vs 6.51%) and Pan, Tobacco & Intoxicants (6.13% vs 5.57%) registered the sharpest upwards movement from previous month. 21

3 Macro-Economic Overview Table M2: Indian Inflation (Y/Y) Rate (%) Environment Type Items Oct-18 Sep-18 3 Months Ago 6 Months Ago 1 Year Ago WPI WPI Inflation Rate (New Series) CPI Inflation Rate Primary Food Fuel & Power Manufactured Products CPI-Rural CPI-Urban CPI-Combined CFPI (C) Source: Office of the Economic Advisor & MOSPI, CFPI : Consumer Food Price Index (Combined), * P: Provisional; R: Revised for WPI; F: Final for CPI; Wholesale prices on the other hand, increased for the second consecutive month (5.28% vs 5.13%). Fuel (18.44% vs 16.65%) and inflation in manufactured products (4.49% vs 4.22%) both increased, while food inflation, represented by the food index, declined further (-0.64% vs 0.14%). Chart M2: Trajectory of WPI and CPI (Combined) Inflation Rate (%) Y-o-Y growth (%) Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 CPI (C) Apr-18 May-18 WPI Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 22

4 Macro-Economic Overview India's trade deficit widened to US$17.13 billion in October. Imports rose by 18 per cent over the previous year to US$44.11 billion, while cumulative imports between April and October grew by 16.4%. Within the import segment, cumulative oil imports grew by 50.5% to US$83.94 billion, as against US$55.78 billion in the previous year. During the aforementioned period, the global crude price has risen by 39.66%. Cumulative non-oil imports grew by 7% to US$ billion. As expected, Petroleum, Crude & Products formed the largest contributing segment in terms of annual growth within the import sector (52.64%), followed by Electronic Goods (31.94%) and Organic & Inorganic Chemicals (26.63%). Chart M3: India's (Region-wise) Retail Inflation Profile Y-o-Y growth (%) CPI (R) CPI (U) 0.0 Cumulative exports between April and October 2018 grew by 13.3% to US$ billion. Within the sector, Petroleum Products (49.38%) registered the highest growth level, followed by Organic & Inorganic Chemicals (34.01%) and Drugs & Pharmaceuticals (12.83%). Cumulative non-petroleum and non-gems & jewellery exports grew by 10.88% over previous year. In services trade, cumulative exports between April and September grew by 25.8% over previous year, to US$101 billion, while trade imports increased by 33.9% during the same period. Cumulative trade surplus in services expanded to US$38.50 billion, from US$32.05 billion in the previous month. Sep/17 Oct/17 Nov/17 Dec/17 Jan/18 Feb/18 Mar/18 Apr/18 May/18 Jun/18 S Jul/18 Aug/18 ep/18 Oct/18 23

5 Macro-Economic Overview Table M3: India's Trade (Merchandise & Services) Profile ($ Billion) Merchandise Trade Services Trade* Period Exports Oil Imports Imports Non-Oil Imports Source: Department of Commerce / Trade Statistics; * Services Trade Data with 1 Month Lag from Reported Month Total Trade Balance Exports Imports Balance Growth (%) Oct Oct Growth (%) The Central Government's cumulative revenue receipts between April and September grew by 11%. Tax revenue grew by 7.45% for the aforementioned period, while non-tax revenue grew by 34.8%. Cumulative revenue expenditure also grew by 25.3%, due to a 23.7% increase in interest payments. There was a sharp fall in cumulative capital expenditure by 17.2%, primarily due to a reversal in loans dispersed in the month of September. Fiscal deficit increased by 19.2%, and reached 95.27% of the budgeted level for Table M4: Central Government's Income - Expenditure Details : PR : BE Apr-Sep FY Apr-Sep FY ( ` Crore) Growth (%) Cumulative Actuals / BE (%) Revenue Receipts % 40.08% Non-Debt Capital Receipts % 19.23% Total Receipts % 39.03% Revenue Expenditure % 53.29% Capital Expenditure % 54.22% Total Expenditure % 53.40% Fiscal Deficit % 95.27% Revenue Deficit % % Primary Deficit % - Source: Controller General of Accounts (CGA) BE: Budget Estimate, RE: Revised Estimate, PR: Provisional Estimate 24

6 Macro-Economic Overview Global Economic Development The global economy has been growing steadily through the calendar year, withstanding sharp volatilities along the way and threats of a trade conflict, rooted in protectionism. However, growth has softened in the latest quarter, even as financial volatilities observed in the previous month have appeared to have quietened out. Crude prices have gone below US$60 levels, over concerns of a supply glut as growth slows in China and other emerging economies. The end to the unconventional policy monetary regime is also drawing out longer than expected, as uneven growth has placed uncertainties in the minds of policymakers as to the accurate durations for such policies to end. Table M5: Major Global Macroeconomic Indicators GDP Growth Inflation IIP Growth 10-Y Sovereign Bond Yield Economy (Q3:2018) Oct-18 Sep-18 M-END: Oct'18 Eurozone US UK Japan* China India# (Q1) Russia Brazil (Q2) South Africa (Q2) Source: Respective Country Data Source, IMF, World Bank, OECD, M-END: Month End #India follows an Apr-Mar Financial year *Inflation data at a 1 month lag Chart M4: Markit's PMI (Composite): A Measure of Economic Activity Dotted Line No Change in Economic Activity Global Economy US Eurozone Japan China India Russia Brazil South Africa Sep-18 Oct-18 Neutral Line

7 Macro-Economic Overview US GDP for the third quarter of 2018 grew at 3% over previous year, higher than 2.9% (revised downwards) observed in the previous quarter. Growth was stronger in personal consumption (4% Q-o-Q), private inventory, government spending (3.3%) and private fixed investment (12%), while export (-3.5%) growth was negative. The Federal Reserve held its key rate unchanged in its October policy meet, while stating that a December hike is likely. It further mentioned that inflation was near the targeted level, and labour market continued to remain strong. Inflation in October increased to 2.3%, on account of higher prices for fuel (26%) and gasoline (16%). Prices rose slower for shelter (3.2%), food (1.2%) and medical care services (1.9%). Industrial production slowed down from the previous month, growing at 4.1%, from 5.6% earlier. The Composite PMI for the month of November indicated that activity rose at a higher rate in both the manufacturing and services sector. The European Central bank (ECB) kept its key policy rate unchanged at 0% in the October meeting, stating that incoming economic data was weaker than expected, although believed to be consistent with the committee's expectations. ECB president reiterated that the policymakers do not expect any change in key rates through the summer of EU GDP decreased to 1.7% in the third quarter, from 2.2% in the previous quarter. Among the larger member states, Germany grew slower by 1.2% (1.9% in Q2), followed by Italy (0.8% vs 1.2%) and Portugal (2.1% vs 2.4%). The Euro Area Composite PMI for October shows that a deceleration in activity is set to continue in both services and manufacturing sector. Industrial production also slowed down to a growth of 0.9% in September, from 1.1% in August. The UK Economy is exhibiting mixed signals. On the one hand, third quarter GDP increased by 1.5%, which was its strongest pace of expansion in a year. Growth was driven by household expenditure (1.8% vs 1.6% in Q2), while government spending grew by 0.8% (0%). Business investment declined most since Q Industrial production was unchanged in September, decelerating from a 1 per cent growth in the previous month (revised downwards). Production slowed in manufacturing (0.5% vs 1.3%), mining & quarrying (-1.8% vs 2.1%) and electricity, gas, steam and air conditioning (-1.8% vs -0.9%). Manufacturing PMI also slowed for the month of October, as Brexit uncertainties are said to have finally had a toll on export orders. The Bank of England (BoE) kept its key rates unchanged in its latest MPC meeting, while stating that a further tightening in lending rates might be necessary in the near future. It lowered its growth forecast for both 2018 and 2019 by 10 bps, primarily due to the uncertainty over Brexit impacting the export sector. The Committee also lowered its inflation forecast for 2019, while setting it higher in Inflation in October came in at 2.4%, which was lower than market expectations. Prices slowed for transport, food, clothing and hotels & restaurants, while accelerating for recreation, housing and energy. The economy of Japan is also experiencing retraction after a solid first half. GDP growth for the third quarter of 2018 decelerated to 0.3%, from 1.4% in Q2. Industrial production also declined by 2.5% in September from a positive growth of 0.2% in the previous month. PMI survey for October hints at some form of recovery though, as both manufacturing and services PMI increased from their previous levels. Bank of Japan (BoJ) expectedly kept the key lending rate unchanged in its October MPC meeting, and downgraded its inflation forecast, stating insufficient momentum in price levels to achieve stability around the targeted level. Inflation rate decelerated to 1.2% in September (1.3% earlier), on account of lower food prices. Core inflation increased to its highest growth since February. 26

8 The Chinese economy grew by its slowest rate since the financial crisis in 2009, as prospects of a trade war with the US refused to die down, impacting its exports. GDP for the third quarter grew by 6.5%, decelerating from 6.7% in the previous quarter. Industrial production increased by 5.9% in October (5.7% earlier). Production was higher for mining (3.8% vs 2.2%) and manufacturing (6.1% vs 5.7%), while it decelerated for utilities (6.8% vs 11%). PMI surveys also show that the manufacturing sector grew further in October, while the services took a backseat. Both the monetary policy as well as the inflation rate was unchanged for October. Money Market Review Weighted average money market rates remained at an elevated level in October and have been rising persistently since the past 10 months amid liquidity tightness. Higher requirement of funds during festive season pushed call rates above the policy rate during the third week of the month. The rate of increase in the monthly average has, however, declined considerably. Short term rates in the Repo segment hardened by 6 bps while average CBLO rate increased by 2 bps. Money market rates shot up after an announcement of monetary policy on October 5 where the RBI moved its liquidity stance from the neutral to calibrated tightening indicating only upward revision in the policy rate in future, if any. There has been phenomenal improvement in the total trading in all the money market segments, especially the collateralised segment. Daily average volume in the Repo market jumped the most - by 16% to `74,767 crore, followed by CBLO market (9% to `154,208 crore) and call market (2% to `20,697 crore). Tables below give the comparative weighted average rates over a period of time and the comparative statistics of volume and rates across the various sub-groups of the money market. Table 6: Comparative Weighted Average Money Market Rates (%) Oct-18 Sep-18 3 Months ago 6 Months ago Year ago CALL REPO CBLO Source: CCIL Research Table M7: Comparative Money Market Volumes and Rates Gross Daily Average Std Minimum Maximum Market Share Volumes (` Cr) Volumes (` Cr) Dev Rate (%) Rate (%) (%) Oct-18 Sep-18 Oct-18 Sep-18 Oct-18 Sep-18 Oct-18 Sep-18 Oct-18 Sep-18 Oct-18 Sep-18 CALL 434, ,932 20,697 20, REPO 1,570,111 1,162,273 74,767 64, CBLO 3,238,365 2,554, , , Source: CCIL Research 27

9 Systemic Liquidity The Reserve Bank of India (RBI) hardly fails to surprise the market by decisions taken during Monetary Policy Review meet. On October 5, RBI sprung another shocker for the market when, against the general belief, it kept the policy rate unchanged at 6.50% and deviated from its liquidity stance from neutral to calibrated tightening. In a post-policy conference RBI Governor clarified that the stance of 'calibrated tightening' essentially means that in this cycle, a rate cut is off the table. At the same time rate hike at every meeting is also ruled out. The central bank lowered the inflation projection to 4 per cent in the second quarter of , per cent in the second half and 4.8 per cent in the first quarter of the During October 2018, RBI auctioned variable rate Repos of varying maturities which ranged from 7- day to 21-day through which it lent `2,43,816 crore to banks. On the contrary, it absorbed `3,70,618 crore from the market using variable rate reverse repos; comprising `2,15,082 crore through overnight and reverse repos. `1,55,536 crore through 3-7day Total as well as average liquidity absorption through LAF fixed rate reverse repo auctions declined by 19% and 22% over the previous month. Total cash injection by the RBI using LAF fixed rate repo auctions increased marginally by 1.45%, nevertheless, average liquidity infusion was 7% below the previous month's level. Table M8: Volume under LAF Reverse Repo and Repo auctions as well as the MSF Amount ` Crore LAF Reverse Repo Vol LAF Repo Vol MSF Vol Oct-18 Sep-18 Oct-18 Sep-18 Oct-18 Sep-18 Total Vol Average Vol Source: RBI & CCIL Research next financial year. The earlier projections on these counts were 4.6 per cent, 4.8 per cent and 5 per cent, respectively. The projections include the impact of house rent allowance, which is dissipating gradually. Systemic liquidity was somewhat comfortable at the beginning of the month, as outstanding variable rate reverse repo amount stood above `1 lakh crore as RBI conducted overnight as well as term (2-day and 7-day) reverse repos to suck out excess liquidity from the market. However, as the days passed by, the scenario changed with the banking system experiencing liquidity tightness. Outstanding variable rate repo amount remained elevated at ` lakh crore while its counter-part saw outstanding amounts tapering to `33,222 crore by mid-month to eventually becoming nil. The daily average borrowing by banks, under the MSF, was drastically down by 71% to `613 vis-à-vis `2,081 crore in September Government Securities Market Primary Market The government sold 18 dated securities for `44,000 crore with maturities ranging from 2 years to 37 years. To meet the festival season demand for funds, RBI purchased securities under OMOs and infused `36,000 crore in three tranches. RBI, in consultation with the Government of India, converted two securities maturing in and having total face value of `6,155 crore to two longer tenor securities maturing in and respectively on October 19. Again, on 28

10 October 22 and 23, RBI converted a security maturing in having total face value of `1,500 crore and `4,600 crore to a longer tenor security maturing in and respectively. The borrowing by states through state development loans (new issues + re-issues) amounted to `46,577 crore at an average yield of 8.57%. Among the 20 states that borrowed in October, the top 5 borrowing states, namely, Uttar Pradesh, Karnataka, Andhra Pradesh, West Bengal and Gujarat, together accounted for nearly 60% of the month's total borrowing. Treasury bills auctioned during the month amounted to `127,720 crore. The average yield of the 91-day, 182-day and 364-day T-Bills eased moderately by 4-9 bps during the month. RBI also auctioned 59-day Cash Management Bill for `15,000 crore on October 15. The henceforth tables provide the details of various auctions. Date of Issue/ Auction Security Table M9: Details of Auctions of the G-Secs Amount (` Crore) Cut-off Price (`) Yield (%) Devolvement on PDs (` Crore) ACU Commission Cut-off rate (paise per `100) 05-Oct % G.S , Oct % G.S , Oct-18 FRB , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S , Source: RBI & CCIL Research 29

11 Date of Repurchase Table M10: Details of OMO Purchases Security Amount Accepted (` Crore) Cut-off Price (`) Cut-off Yield (%) 11-Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S Oct % G.S Oct % G.S , Oct % G.S , Oct % G.S , Oct % G.S Oct % G.S Oct % G.S Oct % G.S , Oct % G.S , Oct % G.S Oct % G.S , Date of Issue/ Auction Table M11: Details of SDL Auctions/Re-issues Security Amount (` Crore) Cut-off Price (`) Yield (%) Under- Subscription 01-Oct % Rajasthan SDL , Oct % Punjab SDL Oct % Kerala SDL , Oct % Andhra Pradesh SDL , Oct % Madhya Pradesh SDL Oct % Madhya Pradesh SDL Oct % Telangana SDL , Oct % Karnataka SDL , Oct % Gujarat SDL Oct % Tamil Nadu SDL , Oct % Punjab SDL , Oct % Uttar Pradesh SDL , Oct % Sikkim SDL Oct % Jammu & Kashmir SDL Oct % Andhra Pradesh SDL , Oct % West Bengal SDL , Oct % Haryana SDL , Oct % Madhya Pradesh SDL Contd... 30

12 Date of Issue/ Auction Source: RBI & CCIL Research Table M11: Details of SDL Auctions/Re-issues Security Amount (` Crore) Cut-off Price (`) Yield (%) Under- Subscription 16-Oct % Madhya Pradesh SDL Oct % Chhattisgarh SDL , Oct % Madhya Pradesh SDL Oct % Puducherry SDL Oct % Karnataka SDL , Oct % Tamil Nadu SDL , Oct % Gujarat SDL , Oct % Uttarakhand SDL Oct % Uttar Pradesh SDL , Oct % Meghalaya SDL Oct % Andhra Pradesh SDL , Oct % Punjab SDL Oct % Telangana SDL , Oct % Gujarat SDL Oct % Goa SDL Oct % Tamil Nadu SDL , Oct % Uttar Pradesh SDL , Oct % Himachal Pradesh SDL Oct % Andhra Pradesh SDL Oct % West Bengal SDL , Oct % Karnataka SDL , Oct % Chhattisgarh SDL Oct % Karnataka SDL , Oct % Tamil Nadu SDL Oct % Rajasthan SDL Oct % Gujarat SDL , Oct % Uttar Pradesh SDL , Oct % Andhra Pradesh SDL , Table M12: Cash Management Bills Auctioned During the Month Date Instruments Amount (` Cr.) Cut-off Price (`) YTM (%) 15-Oct Day CMB

13 Date Amt (` Cr) Source: RBI & CCIL Research Table M13: Details of T-Bills Auctions 91 day T-Bill 182 day T-Bill 364 day T-Bill Price (`) YTM (%) Amt (` Cr) Price (`) YTM (%) Amt (` Cr) 03-Oct-18 10, , , Oct-18 28, , , Oct-18 9, , , Oct-18 15, , , Oct-18 15, , , Total Price (`) YTM (%) Table M14: Average T-Bills Cut-Off Yields (%) Oct-18 Sep-18 3 Months ago 6 Months ago Year ago 91-day T-Bill day T-Bill day T-Bill Source: RBI & CCIL Research Secondary Market The total trading volume in the outright market was stagnant as compared to the previous month. On a daily average basis, however, the month witnessed considerable decline, both, in the number of trades and the amount traded. Average number of trades was down by 21% to 3,199 versus 4,047 and average outright trading volume fell to `36,725 crore - 13% lower than the previous month's average volume of `42,112 crore. Out of total outright volume, trading in central government securities comprised of 85% followed by T-Bills (10%) and SDLs (4%). The daily average settlement volume for the month stood at `36,676 crore which was 13% lower than the September tally of `42,001 crore. 10-year benchmark security occupied 68% share in total G-sec settlement volume for the month. Top 5 securities, 7.17% G.S. 2028, 6.84% G.S. 2022, 7.59% G.S. 2026, 6.68% G.S and 7.37% G.S constitutes 87% on total g-sec settlement volume highlighting the issue of illiquidity amongst rest of the dated securities and concentration of the market in the benchmark. Yield Movement Sharp depreciation of rupee against the USD and shift in liquidity stance by the RBI kept bond yields elevated during the first half of the month. Yet, stabilization of rupee around 73.60/dollar along with the announcement of OMO purchases every week by the RBI helped yields ease from its month high level in the later part of the month. 10-year benchmark yield hovered around 8.03% till October 15 on account of weakening of rupee to its new-low almost every day, rise in crude oil prices making market participants anxious about the level of inflation in the near future and current account deficit, and on RBI hinting at no downward revision in the policy rate in near future. 32

14 Even though RBI ruled out cut in LAF Repo rate in months to come, market participants found solace in RBI's decision to keep the rate unchanged during the policy meet - going against the marketwide expectations of a rate hike. Fall in crude oil prices, followed by strengthening of the rupee in the second half of the month pulled benchmark yield down to around % level. The market also welcomed the RBI's decision to announce multiple rounds of open market bond purchases in November, which represent a dramatic improvement in demand-supply dynamics. At the end of the month, 10-year yield settled at 7.87% - 8 bps below the 7.96% witnessed at the beginning of the month. The yields of various tenors on the last working day of the month and the spread analysis of various tenors over a period of time are provided in the following tables. Table M15: Yield Movements (%) Tenor Oct-18 Sep-18 3 Months ago 6 Months ago Year ago O/N month month year year year year Source: CCIL Research Table M16: Spread Analysis Period G-Sec Spread (bps) Oct-18 Sep-18 3 Months 6 Months 1 Year 1-5 Years Years Years Years Source: CCIL Research 33

15 Foreign Exchange Market Indian currency bettered its performance against major international currencies when compared to September data. It appreciated against the Euro and GBP while the rate of depreciation against the USD has declined. Rupee continued to weaken incessantly till October 11 from to (lowest level ever) because of the higher crude oil keep the policy rate unchanged didn't go down well with market dealers. RBI Governor Urjit Patel's comments in the post-policy conference that the rupee's fall was moderate as compared to other emerging market currencies and that the market will determine the rupee's exchange rate and there is no target band for the dollar/rupee pair that the central bank is targeting soured sentiment further. Table M17: Exchange Rate Movement ` / Euro ` / Pound ` / 100 yen ` / Dollar Movement (%) Average Rate Stdev Max Min Source: RBI prices, a warning from the International Monetary Fund about risks to financial stability amid uncertainty about trade war hammered investor risk sentiment and persistent dollar demand from importers back home. The period after October 11 saw rupee oscillating within the wide range of and against the US dollar. It strengthened to per dollar by October 24 as market cheered data released by the commerce ministry showing dip in trade deficit to $13.98 billion in September--lowest level in five Data releases in the US like higher-than-market months and fall in crude oil prices internationally. expectations rise in private sector payrolls and The trend reversed and rupee dropped to $73.99 to jump in service composite for September, along close the month as the American currency with, comments by US Federal Reserve Chairman strengthened against major global currencies Jerome Powell that the economic outlook was overseas amid steady capital outflows. Forex traders "remarkably positive" and interest rates might rise said increased demand for the US currency from above "neutral" raised expectations of a rate hike by importers and concerns around the rift between the the Fed in December. The decision by the RBI to government and the RBI weighed on the local unit. Table M18: Exchange Rate Movement Exchange Rate Oct-18 Sep-18 3 Months ago 6 Months ago Year ago ` / Euro ` / Pound ` / 100 yen ` / Dollar Source: RBI 34

16 The average forward premia curve moved downward and became steeper in October versus September. This shift was quite significant when compared to the shape and slope of the curve since June It was upward slopping in June-July period, flattened in the month of August before turning downward slopping since September. The spread between the shorter end of the curve (1 month) and 12 month rate stood at bps making the curvefall sharply at the near term. The Higher crude oil prices and its likely impact of India's inflation rate and current account deficit and improvement in economic fundamentals in US made dollar-denominated assets more lucrative for FIIs, impacting their investment in India negatively. They sold heavily from the Indian markets with total capital flight touching 23- month high of $5.28 billion. Equity market where the brunt was the sharpest witnessed capital outflows to the tune of $3.93 billion - 164% higher Source: FBIL Table M 19: Movement of Forward Premia over a period of time (monthly average) Oct-18 Sep-18 3 Months ago 6 Months ago Year ago 1-month month month month month rate of decline in 1-month forward premia over the previous month was 3 bps to 4.58% while the decline was sharper at the longer end with 9-month and 12-month forward premia rate declining by 11 bps and 13 bps respectively. than the September outflows and the highest ever. FIIs remained net sellers of debts worth $1.35 billion vis-à-vis net selling of $1.42 billion in September. Quarter Net Investment in Equity Table M 20: Movement of FII flows (USD Mn.) Net Investment in Debt Net Investment in Hybrid Total Q Q Oct

17 October closing balance of foreign exchange reserves touched 15-month low of $ billion (week ended November 02) against $ billion as on September 28. After a year, accumulation to foreign exchange reserves fell below the $400 billion mark primarily on account of change in foreign currency assets, capital flight from by institutional investors from Indian markets and likely intervention by the RBI (as and when required) to shore up rupee against the USD. The rate with which reserves depleted increased after May Chart M5: Foreign Exchange Reserves 425,000 15, ,000 10, ,000 USD Million 365, , , , ,000 5, ,000 USD Million 265, , ,000 Oct- 13 Dec- 13 Feb- 14 Apr- 14 Jun- 14 Aug- 14 Oct- 14 Dec- 14 Feb- 15 Apr- 15 Jun- 15 Aug- 15 Oct- 15 Dec- 15 Feb- 16 Apr- 16 Jun- 16 Aug- 16 Oct- 16 Dec- 16 Feb- 17 Apr- 17 Jun- 17 Aug- 17 Oct- 17 Dec- 17 Feb- 18 Apr- 18 Jun- 18 Aug- 18 Oct ,000-15,000 Change in Reserves Foreign Exchange Reserves 36

18 Banking Sector Investment in G-Secs by SCBs continued moderating on a monthly basis, while other business segments are clocking positive growth. Bank credit grew impressively by 2.67% m-o-m on account of 2.62% growth in non-food credit. From year ago period, both, non-food credit and bank credit observed double digit growth (14.32% and 14.11% respectively). Credit-Deposit ratio saw an uptick in October, riding on higher credit growth as compared to an increase in aggregate deposits (1.73%). Source: RBI Table M20: Trends in Scheduled Commercial Banks' Business ( ` Cr.) Oct-18 Sep-18 3 Months ago 6 Months ago Year ago Money Stock Aggregate Deposits Non-food Credit Investment in G-Secs Bank credit Table M21: Key Banking Rates and Ratios (%) Oct-18 Sep-18 Credit-Deposit Ratio Investment-Deposit Ratio Base Rate MCLR (Overnight) Term Deposit Rate >1 Year Savings Deposit Rate Source: RBI 37