MONTHLY REPORT. Month gone by

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1 Month gone by USD/INR Outlook 31st January, 2012 The New year started on a stronger note for the Indian currency and the equity markets. The Indian currency strengthened by 7.50 % in the January month itself erasing most of the losses witnessed during November and December months. The Indian rupee opened the month at levels and started its appreciating trend on news of Government allowing foreign individual investors, Market pension funds, & trusts to directly invest in Indian equity. India's Nov Trade deficit narrowed to $13.60 bln v/s prior $19.60 bln keeping the trend alive and guided the Rupee to break and levels. A formal notification on the removal of foreign direct investment limits in the single brand retail sector, also cheered the market. The Indian currency rose further propelled by huge investments into Indian debt by foreign funds, who had to invest by 13th January 2012, to utilise previously won limits. Foreign funds have invested around $3.06 billion in local debt and $1.4 billion in equities as on 30th of January. The strength was also largely aided by dollar flows into local equities as a rebound in factory production suggested an improving economic outlook. Industrial production recovered in November, rising 5.90 percent from a year earlier. The strength in Euro helped by strong demands at EU countries' debt auctions encouraged investors to take on more risk and in turn helped rupee to gain strength to sub 52 levels. On the downside, rupee witnessed some pullback from its strong resistance level of and weakened to levels on back of dollar buying by oil refiners and a volatile domestic market after S&P cut the sovereign rating of several Euro zone countries including top notch France and Austria. The Indian rupee however, reversed the losses as strong China growth data and better than expected German business sentiment improved appetite for riskier assets globally. RBI intervention suspected at higher levels refrained traders to take long dollar

2 positions in the market. Further, break of its crucial and levels triggered stop loss selling by exporters adding to the gains in the local unit. Recent measures by the Indian government to raise the ceiling on foreign investment in debt and higher interest rates on deposits by non resident Indians also helped to bring in the flows into the country. The rupee swiftly extended its gains close to 50 levels helped by the news, that the International Monetary Fund was seeking to boost its resources to 1 trillion dollars to tackle the euro zone debt crisis. Moving further, the strength in the local unit was supported by the bold steps by Reserve bank of India to cut the Cash Reserve Ratio (CRR) by RBI by 50 bps to 5.50 percent to ease the tight liquidity situation. RBI held Repo and Reverse Repo rates steady citing persistent inflationary pressure. The RBI comments from RBI governor that recent administrative steps taken to curb speculation in foreign exchange are not temporary, helped rupee to break the psychological 50 barrier and move towards its crucial support of levels. Statements from US FED chairman after the FOMC meet that the key rates may remain low till the end of 2014 and FED may look for another round of bond purchases if required, weakened the US dollar overseas. The rally in Euro to levels, weak dollar overseas and persistent FII flows aided the local unit to break below levels. The break of major support levels triggered fresh stop loss selling by exporters in the market leading rupee to a high of levels. Nearing the month end, rupee erased some of the gains hurt by dollar buying from oil refiners, profit booking in equity markets and negative risk sentiments, as markets focused on talks between EU leaders' gathering for their first summit of 2012 to address the Greek debt crisis. The Indian currency ended the month at levels.

3 Key indicators that weighed on the FX markets last month: India India's industrial output rose a better than expected 5.9 percent in November from a year earlier, rebounding from an annual contraction of 5.1 percent a month earlier Manufacturing output, which constitutes about 76 percent of the industrial production, grew an annual 6.6 percent. India's wholesale price index (WPI) was almost in line with market expectations at 7.47 percent in December from a year earlier. The Reserve Bank of India (RBI) left interest rates on hold but cut the cash reserve ratio for banks by 50 basis points, a move that eases tight liquidity in the banking system and underscores a policy shift from fighting inflation to reviving growth. India reported a trade deficit equivalent to $13.60 Billion v/s prior $19.60 Million in November of Overseas Standard & Poor s stripped France of its top credit rating and cut eight other euro zone nations. Rating agency Standard & Poor's has downgraded the creditworthiness of the euro zone's rescue fund by one notch to AA+, putting the fund's ability to raise cheap bailout money at risk. S&P ratings agency cuts AAA rating of France and Austria, whose financial guarantees were key to the creditworthiness of the European Financial Stability Facility The US Federal Open Market Committee (FOMC)kept the fed funds rate steady at 0 to 0.25 percent and also indicated that the current economic conditions would likely warrant exceptionally low levels for the federal funds rate at least through late Bank of England kept its monetary policy unchanged despite mounting concerns over the state of the British economy.

4 Month ahead In the coming month, signs of a recovery in Indian economy and shift in policy stance by RBI to boost growth may help rupee to continue it s strengthening trend. RBI has already cut the CRR rate and may look to cut its other key interest rates viz., Repo and Reverse Repo rates in near future depending upon the inflation scenario. These rate cuts, if any, may further boost the growth and infuse gains in the local unit. The inflation figures in the month could provide cues for further RBI stand. The easing of liquidity will also have positive impact in the local stock markets and dollar inflows should support the Rupee further. Global Impact The signs of recovery in U.S. Markets reflected by the drop in unemployment rate to the lowest level in almost three years and a rebound in manufacturing output would increase the investor's confidence to move out of the safe haven of U.S. Treasuries and invest in riskier assets. The indications by U.S. Fed to go for further bond buying if required and keep the interest rates low for a prolonged period may weaken the US Dollar across the board and Rupee will have a natural benefit. Any positive indications by Eurozone to restructure Greek debt may provide strength to European currency which in turn would lead to rise in the Indian currency. If the Risk factors pertaining to Europe begin to mellow down, emerging market currencies including the Indian Rupee would witness gains. Markets will also keep a close tab on ECB meet outcome during the month for further guidance on Eurozone growth prospects. Slowing inflation in China too could lead the Asian giant to focus on growth and bring in more foreign money into the Asian markets which in turn would add to the positives for the Rupee and could see Rupee gaining towards the band. Having resisted Rupee s gains thrice last year, could pose a strong resistance for the Rupee s gains. Significant, importer buying can be

5 witnessed at these levels which may lead rupee to trade in a range of to levels. A break on upside of range coupled with dollar demand by oil refining companies may even lead the rupee to weaken to band. However, a break of range on the appreciating move can trigger fresh stop loss selling by exporters leading rupee to and levels. This will also be supported by the persistent FII flows in the Indian equity and debt markets. The US and UK G.D.P data towards the end of the month will provide further directions to the dollar strength overseas and subsequently Indian currency. The state elections lined up in the month of February may invariably give a better picture of the future of the current UPA government in the country and any negative news on this front for the congress led UPA government may bring in the choppiness in the Indian equity markets. Overall Rupee is likely to trade in a broader range of to levels with an appreciating bias.

6 Technical analysis Chart 1: USDINR Weekly Chart The USDINR pair is currently trading around the levels after falling from as high as levels seen in late December. Key momentum indicators on the weekly charts including the RSI & MACD suggest further bearishness in the pair. However, on the daily charts the momentum indicators including RSI & Stochastics are at extremely oversold zone while MACD histogram is already exhibiting Bullish divergence. Hence, while the pair could continue to move lower further the possibility of a quick and sharp rebound cannot be ruled out. A break below immediate support at could see the pair test the psychological levels and any break of the same could see it testing the levels. The October '11 low of could also offer some support for the pair. Strong demand near the band could see the pair correct higher for the fall from levels. A break above would mark a short term bottom and the pair could move sideways up to test major resistance at levels. While large demand could be expected in the band, any convincing break below the levels could see the pair move towards the major levels which is the 61.8% Fibonacci retracement for the entire move of to levels.

7 Key Supports Key Resistances S 1 S 2 S 3 S R1 R2 R3 R Performance of Major Stock Indices Indices 1 Jan Jan 2012 % change Sensex 15, , % DAX 5, , % Hang seng 18, , % CAC 3, , % Shanghai 2, , % Dowjones 12,221 12, % Nikkei 8, , % Performance of Major Asian Currencies Currencies 1 Jan Jan 2012 % change INR % MYR % SGD % KRW % PHP % THB % CNY %

8 Strategy Exporters: Exporters are suggested to hedge short term receipts (up to 1 month) on spikes towards levels and on any break above levels hedge positions to be added in a staggered manner between the band for the medium term ( 1 3 months). Importers: Importers are suggested to hedge very near term payments ( 2 3 weeks) on dips towards the band and wait for better levels on any break below the levels. Hedge positions can be added for part of medium term ( 1 3 months) payments on moves near the levels. Risk Disclosure: Any information presented by Greenback Forex Services Pvt. Ltd should be in no way understood as an offer, promise or guarantee for receiving a profit or avoiding the losses. Stated here levels of support and resistance must not be construed as an investment advice or endorsement for any financial instrument. There exists no guarantee that the market would behave in accordance with the information stated here Prepared by Greenback Forex Services Pvt. Ltd.