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Rupee continues its searchfor inspiration

INR has witnessed a complete turnaround since October after being the

best performer amongst its emerging peers, gaining 5% in the

September quarter. Since then INR had shed 7.7% of its gains, before

recovering 2 % last week. As expected the initial euphoria following the

series of announcements by the Government has faded, bringing to the

forefront the growing domestic uncertainity. At the same time global

conditions have not been supportive with delays in the payouts and

decision over Greeces funding requirements. However, what is

noteworthy is that despite the trending depreciation of the Rupee since

October, net FII inflows have totalled around USD 5.2 billion. Infact

comparing with its other Asian counterparts, India still continues to be a

net recipient of foreign equity flows. Going forward, various events are

likely to shape the risk sentiments and trajectory of INR, both on the

global and domestic front.

Global factors

1. On the global front, developments over the ongoing discussions on fiscal

cliff in the US will be key. While a solution is likely to pass through

successfully by the end of December, the political haggling prior to the

final acceptance will set the tone keeping the uncertainity alive.

2. While the global growth concerns remain, recent dataprints in the US and

China do suggest some stability. Additionally, the sandy storm-linked

rebuilding in parts of the US is likely to support the economic activity

going forward, giving scope for postive data surprises.

Fig 1 INR takes a U-turn again shift from best to

worst performer

Fig 2 despite India receiving more foreign equity

inflows compared to its Asian peers

-6 -4 -2 0 2 4

INR

BRL

IDR

MYR

THB

SGD

TWD

CNY

PHP

KRW

Oct-till date

Jul-Sept2012

-6

-3

0

3

6

9

India Philippines Indonesia Thailand Korea

Jun-12 Sep-12 Oct-ti ll date

Source: Bloomberg, ING Research Source: Bloomberg, ING Research

India Monthly4 December 2012

FINANCIAL MARKETS RESEARCH

Upasna BhardwajEconomist

Mumbai +91 22 33095718

upasna.bhardwaj@ingvysyabank.com

INR loses it sheen over

the last two months

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3. Another important event which could shape the risk sentiments going

forward is the decision on Operation Twist (worth USD 45 billion of

monthly purchase of longer dated gsec) which is pending given the end

of the programme by December. However, with the recent improvement

in dataprints, we expect the Fed to possibly wait in the forthcoming

December meeting before announcing additional purchases next year.

Domestic factors

1. Besides the global factors, worsening trade balance continues to remain

a big cause for worry. The trade deficit has been gradually widening with

exports continuing to slowdown without a similar momentum in imports

despite the moderating domestic demand. Cummulatively, exports for the

Apr-Oct2012 period have contracted by 7.3% YoY but imports have

declined by mere 3% YoY.

2. The breakup of imports clearly highlights the perrenial risk to the external

balance in India. While a slowing economy has led to non-oil importsregistering a decline by 7.6% YoY, oil imports have instead risen by 7.5%

YoY. On a sequential basis as well trade deficit has again started to pick

up pace since July, hitting an all-time high of USD 21 billion in October.

3. Meanwhile, the ruling government seems to be losing its credibility in

terms of implementaion of the much talked about reforms over the past

two months.

4. Fiscal concerns have again resurfaced with the government expected to

miss its upward revised fiscal deficit target of 5.3% of GDP (as against

the budgeted target of 5.1% and ING estimate of 5.7% of GDP). Such anoutcome has again increased the probability of a rating downgrade very

soon. Although we believe that currently the possibility of a downgrade is

less than 50%, but going into February and March as fiscal calculations

become clearer with next years budget as the key focus, the rating

agencies may want to review their stance.

5. The progress on the winter session of the Parliament and the passage of

some key bills will be critical in restoring investor confidence.

6. While the above factors do suggest risks abound, we expect INR to

remain supportive in the Jan-Mar quarter on fol lowing account.

Most of the disinvestment program of the government is expected

to take-off in the Jan-Mar quarter, which in turn could provide

some support to the INR provided we witness enough foreign

investor interest.

The government is considering expanding the ambit of external

commercial borrowings for sectors which have recently been

included in the definition of infrastructure sectors - education,

agriculture & health;

Trade deficit in October

reached an all-time high

Oil and gold imports

remain persistently high

Government faces a

credibility issue

While near-term risks

suggest high volatility we

expect INR to remain

slightly supporti ve in the

next quarter

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In an attempt to narrow India's current account deficit, the

Finance Ministry last week increased FII limits in government

securities and corporate bonds by USD 5 billion each, taking the

total investment limit in domestic debt to USD 75 billion.

FDI in aviation and single brand retail seems to be progressingwith some inflows expected in the last quarter of the financial

year.

Also, if the government was able to successfully introduce more

big ticket reforms like GST & DTC we may expect additional

boost to the currency.

While mounting current account deficit is expected to continue to remain

a cause for worry, we believe that capital flows will be sufficient to record

a positive balance of payments. Amidst the high uncertainty levels in thenear-term, the trajectory of INR will continue to remain fairly volatile, with

a range of 54.50-56 expected in December. We continue to hold to our

view that INR is expected to trade in the 52.00 -54.00 range in the Mar-

quarter.

Table 1: BoP expected to turn surplus for the year on sufficient capital flows

USD bn FY08 FY09 FY10 FY11 FY12

FY13 (ING

estimates)

Current Account -15.7 -27.9 -38.4 -46.0 -78.2 -75.9

Trade balance -91.5 -119.5 -118.4 -130.4 -189.7 -197.6

Exports 166.2 189.0 182.2 250.6 309.8 308.9

Imports 257.6 308.5 300.6 381.1 499.5 503.3

Invisibles 75.7 91.6 80.0 84.5 111.5 121.7

Software 36.9 43.5 48.2 53.3 61.0 65.8

Private transfers 41.7 44.6 52.1 51.5 61.5 69.8

Other income -2.9 3.6 -20.3 -20.3 -10.9 -13.9

Capital Account 106.6 7.4 51.6 62.0 67.8 85.7

Net FDI 15.9 22.4 18.0 9.4 22.1 23.1

To India 34.7 41.7 33.1 25.9 33.0 34.1

From India -18.8 -19.4 -15.1 -16.5 -10.9 -11.0

Portfolio investment 27.3 -14.0 32.4 30.3 17.2 17.6

ECB 22.6 7.9 2.0 12.5 10.3 12.5

Short-term credit 15.9 -2.0 7.6 11.0 6.7 9.2 Banking capital 11.8 -3.2 2.1 5.0 16.2 16.6

NRI deposits 0.2 4.3 2.9 3.2 11.9 12.9

Other capital 13.1 -3.6 -10.3 -6.1 -4.7 -4.7

Errors and ommissions 1.3 0.4 0.0 -3.0 -2.4 -3

BoP 92.2 -20.1 13.4 13.1 -12.8 6.5

CAD % of GDP -1.3 -2.3 -2.7 -2.7 -4.2 -3.8

Source: CEIC, ING Research

We expect INR to trade in

the 52-54 range over next

quarter

BoP to remain in surplus

despite uncomfortably

high CAD as global

liquidity and domestic

factors to support capital

flows

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Fig 3 INR takes a beating despite robust FII flows Fig 4 Trade deficit widens to record high levels

-2

0

2

4

6

8

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

40

42

44

46

48

50

52

54

56

58

FII flows USDINR-rhs

15

20

25

30

35

40

45

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

-20

-18

-16

-14

-12

-10

-8

Trade balance (inverted, rhs) Imports Exports

Seasonally adjusted 3-month moving average (USD bn)

Source: Bloomberg, ING Research Source: Bloomberg, ING Research

Fig 5 Oil imports pick up significantly Fig 6 Gold demand again picked up in Sept quarter,

despite record high prices

5

15

25

35

45

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Oil imports Non-oil imports

Seasonally adjusted 3-month movin g average (USD bn)

0

50

100

150

200

250

300

Q3-2010

Q4-2010

Q1-2011

Q2-2011

Q3-2011

Q4-2011

Q1-2012

Q2-2012

Q3-2012

15000

18000

21000

24000

27000

30000

33000

Jewellery Investment demand Average Gold prices-rhs

Tonnes Rs/10gms

Source: CEIC, ING Research Source: Bloomberg, ING Research

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Disclosures Appendix

This report prepared by ING Vysya Bank Limited (the Bank) is purely indicative and is for the purpose of

information only and is not intended to be relied upon.

This report is not intended to provide any basis for any analysis or any other evaluation and is not to be

considered as a recommendation and readers are required to make their own independent evaluation and

judgement.

All projections and forecast in this report are based on assumptions considered to be reasonable but the actual

outcome may be materially affected by changes in economic and other circumstances, which cannot be

foreseen. No representation or warranty (express or implied) is made that any projection, forecast, assumption or

estimate contained in this report is accurate. Accordingly the Bank, its respective directors, employees, affiliates,

partners, members, stockholders, agents, advisors or representatives accepts no liability whatsoever with respect

to use of this report.

Analyst cert if ication

The analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect

his/her personal views about the subject securities or issuers and no part of his/her compensation was, is, or will

be directly or indirectly related to the inclusion of specific recommendations or views in this report.