What is Purchasing Power Parities (PPP)?

Purchasing power parities (PPPs) are currency exchange rates obtained by comparing the prices of identical goods and services in different countries. These price comparisons are made by dividing the price of a specific good or service in one country by the price of the same item in another country.

For example, if a 300 milliliter can of Pepsi costs Rp16.42 in country A and $3.24 in country B, a price relative can be calculated as 3.24/16.42, or 0.197. This is the “Pepsi PPP” for countries A and B. Also called “price relatives”, PPPs are calculated for several hundred items covering all the final expenditure components of GDP. These PPPs for individual goods and services are then combined to obtain PPPs for higher levels of aggregation such as “Bread and Cereals”, “Food and Beverages”, “Household Individual Consumption” and, eventually, GDP as a whole.

How are PPPs used?

PPPs are used in two ways:

• First, they are used to convert GDP and its expenditure components to a common currency so that GDP comparisons can be made in real terms. “Real terms” means that differences in price levels between countries have been eliminated so that it is the underlying volumes of goods and services in each country that are compared.
• Second, PPPs are used to measure differences in price levels among countries. Market exchange rates are currency convertors that include differences in price levels among countries; PPPs are currency convertors that exclude these differences. The ratios of PPPs to exchange rates, therefore, measure the differences in price levels among countries. These ratios are called price level indexes.

Where does India stand in terms of PPP?

As per data compiled by International Monetary Fund (IMF), India ranks fourth in terms of PPP behind only USA, China and Japan. Following is a list of top 15 countries in terms of PPP as compiled by IMF for the year 2009.

Top 15 countries as per PPP (2009)

(Source: IMF)

Adapted from Asian Development Bank (ADB) publications.

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• The US Dollar finished the week as the top-performing G10 currency, staging a rally against the Euro, Japanese Yen, and other key counterparts. The DJIA and S&P500 pushed out to fresh 16-month highs this week as the first quarter lurched towards its close. Fed Chairman Bernanke reiterated that the continued need for accommodative policies and economic slack warrants low rates for an “extended period.” The news was mixed for the US housing sector this week. US new home sales fell to their lowest level ever in February, while existing home sales data declined very slightly from January levels, in line with expectations. Another political storm brewing with the US Treasury likely labeling China as a currency manipulator in its next report. It remains to be seen what impact that will have on the Treasury yields which have gone up in the past week. Fourth quarter GDP came a touch lower at 5.6 % against expectations of 5.9 % nonetheless reinforcing the view that US is recovering much faster than expected.
• Uncertainty prevailed in the Euro-Zone with a somewhat workable package that includes the IMF being announced for Greece. Market reacted by a strong selling with the pair testing 1.3250 levels on Tuesday before staging a small recovery. The bail put plan for Greece is likely to work with support from IMF. However it remains to be seen how risk appetite pan out for the Euro. We all know that Greece is not the only country in the zone standing in line for aid. The bigger worries come from Spain, Portugal and Italy. Again we would continue to maintain our negative bias on the Euro until a strong resolution on the sovereign issues is reached. Rebounds in the Euro are likely to be met with sellers at 1.3500 levels and any further political unrest among the leaders or any news impacting risk appetite is likely to take the single pair downwards towards our 1.3000 levels.
• The British Pound was broadly in range and taking support at 1.4793 close to March low of 1.4782. While we continue to maintain a negative bias on the pair with upticks being sold, it might not slide rapidly in the near term. Comments from the Chancellor about declines in unemployment and increase in public may be true but with all other major indicators pointing downwards the UK economy is far fro being out of the woods. We continue with a negative bias on the currency with key support at 1.4783 after which 1.4400 levels should not be far away.
• The economic calendar is packed for United States in the week ahead. Personal income/spending and the core PCE price index on Monday while Tuesday brings consumer confidence. ADP employment report, Chicago PMI and factory orders on Wednesday. Thursday being the important with initial jobless claims, ISM manufacturing, construction spending and vehicle sales while the nonfarm payrolls rounds off the look weekend on Friday. Eurozone has the business climate indicator, consumer confidence and German consumer prices coming out on Monday. French gross domestic product (Tuesday). The UK calendar is on the light side. For UK Consumer credit and mortgage approvals on Monday and the final cut of 4Q GDP on Tuesday with PMI manufacturing closing the week on Thursday. In other regions Japan is up for employment, industrial production, small business confidence, housing starts and the Tankan business indices on Tuesday.

Domestic Outlook

• Capital inflows due to high yields and a strong view on an appreciating INR in 2010-11 saw the pair being volatile during the week. After consolidating for the first two around the 45.60 levels the pair saw a false break out of the 45.60 levels to open at 45.70 levels on Thursday on the backdrop of risk sentiments in the Euro zone. However the upside momentum did not last much with the pair dropping nearly 50 paise in 2 trading sessions. SENSEX gains and potential bond inflows were watched. RBI hikes also set the INR on a positive footing on rate differential plays.
• Equity market inflows continued to be robust despite patches profit-taking. Speculation that cap on infrastructure related corporate bond buying limits for FII will be raised also added to the sentiment for more inflows coming in the Indian shores. Overall the INR has been bolstered from these sentiments and could remained heavy, but support on further dips could come from two fronts firstly from importers month-end USD demand, and secondly from any episodes of risk aversion that could prompt broad-based back-flow into the USD assets. We expect that the USD INR to trade between 45.10-45.60 in the coming week.

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Years back when the South African Government opened their country for outsiders to come and do mining for diamonds, entrepreneurs form all over the world rushed to South Africa in the hope of finding diamonds and changing their fortunes. Of them only very few were able to do so and become rich. But there was one African business man who instead of joining this rat race to discover diamond started the business of selling/renting hammers and other mining material whoever was coming to discover diamond. He eventually became a millionaire and one of the most successful entrepreneurs of this Diamond run.

I hope some of you must have realized the point I am trying to put here. In India currently most of the companies are running to set up the power plant to generate power and other half are running to build the great power generating turbines or boilers. But very few are there in the business of building the Balance of Plants (BOP) which accounts for more than 35% of the total money spent in building up a power plant.

Thus, I strongly believe that there is a huge potential in this sector and BGR energy being the undisputed leader with a strong order book and execution track record offers great long term investment opportunity.

I would recommend one to start a SIP form of investment in this stock for a minimum of 2.5-3 years period, since at the current levels investing lump sum might be a little dangerous given the market conditions.

Happy Investing…!!
Author: Rahul Sonthalia, Analyst, Kredent Group

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What is Repo Rate?

Definition of Repo Rate: Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which commercial banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

What is Reverse Repo Rate?

Definition of Reverse Repo Rate: It is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.

In order to tame inflation, anchoring inflationary expectations and considering the signs of strong economic revival  RBI on March 19 , 2010 announced Monetary Policy Measures  with immediate effects:

• to raise the repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.75 % to 5 %
• to raise the reverse repo rate under the LAF by 25 basis points from 3.25% to 3.5%

This is the second action since January when RBI announced a 75-basis point rise in the cash reserve ratio (CRR) to 5.75 per cent. But, unlike CRR, which is used to manage liquidity in the system, an increase in the repo and reserve repo rates is aimed at signaling an increase in interest rates.

The action by RBI is the first increase in policy rates since July 2008 when the repo rate was increased 50 basis points. The reverse repo was last raised in July 2006, when RBI raised the rate 25 basis points. Since October, 2008, RBI started the process to reduce interest rates and lowered the CRR to inject liquidity in the system to spur economic activity in the wake of the global downturn. These steps of RBI comes against the backdrop of rising inflation which touched 9.89 per cent in February YoY basis which has exceeded the base line projection of 8.5% for end march 2010 set out in the third quarter review and RBI for the first time said that wholesale price index-based inflation may cross double digits in March 2010.

As per RBI as liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected and the RBI will continue to monitor macroeconomic conditions, particularly the price situation, and take further action as warranted.

Impact:
The overall interest rate of banks on advances (like housing loans, consumer loans, auto loans etc) will go up. It is not expected to have a major impact on corporate borrowings in the immediate future. Yield on government securities, which eased to 7.82 per cent, from a 17-month high of 8.02 per cent last week, could harden in the days ahead.

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Author: Abhijeet Ahir, Economic Analyst, MBA Finance (SIIB)

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Market Developments
Global Outlook

• Equity markets sustained their upward move this week, with the S&P500, DJIA and the NASDAQ at new 16-month highs. The US economy is seen ahead of the curve and an interest rate hike may be looming large. The Dollar Index has resumed its uptrend and would probably see 82 levels in the medium term. The problems in Greece and speculation of asset bubble in China would reassert the status of Dollar as the safe haven. The week saw rhetoric from the all quarters on putting pressure on Yuan appreciation while on the Chinese side any further appreciation seems unlikely. It remains to be seen how this political risk unfolds.
• The Euro was the worst-performing G10 currency through the past week of trade and resumed its downfall with its worst week in a while. The single pair dropped 300 pips during the week. The initial buoyant mood which took the currency with 1.3800 levels met with sellers and the currency suffered once again due to continued struggles with the Greek fiscal crisis and questions on the stability of the European Monetary Union. The lack of clarity on the situation and conflicts of opinion within the Euro Leaders is not helping the currency. Whether or not Germany can agree to any plan involving European funds may be of chief importance. Technically the Euro looks weak with up ticks still being sold. It has reached dangerous levels and if 1.3436 is broken simultaneously with indecision persisting on Greece then we would looking at 1.3000 and 1.2700 levels on the downside. Any level above 1.3750 continues to be good levels to sell the currency. Only a break of 1.3800 on a weekly basis would suggest any upside for now.
• The British Pound also fell sharply during the week after rising momentarily to 1.5300 levels. The Cable saw across the board losses with comments from hawkish MPC members and also Andrew Sentence (BOE Member) warning a double dip recession. Jobless claims dropped by 36,000 vis-à-vis expectations of a rise of 6,000. Increase in upside inflation risks is being seen as a risk which might force the central bank to initiate end to quantitative easing. On the other data front, Mortgage approvals declined for a third month in a row, lending standards saw tightening with new loans declining from 48000 from 49000. Restrictive lending continues to a concern blocking growth. Another area of concern is the public net borrowing increasing by 12.4 billion. The overall deficit continues to grow and considering the concerns over troubled counterparts in the Euro-Zone UK could see its AAA rating at risk. Our outlook continues to be negative for the GBP with downside support at 1.4866 and 1.4784. A break of 1.4784 would set us up for a steep fall towards 1.4400 levels in the medium term.
• Key data and events for the US are Chicago Fed National Activity (Monday), Existing home sales (Tuesday). On Wednesday markets would expect durable goods and new home sales. Initial jobless claims would be the highlight on Thursday while the final cut of 4Q gross domestic product and the University of Michigan sentiment index round out the week on Friday. In between Bernanke’s testimony on Wednesday would be the one to watch out for. Euro zone sees Consumer confidence (Monday) while French business confidence is due Tuesday. PMI indices, industrial new orders and the German IFO surveys are due Wednesday. Consumer prices –UK on Tuesday, UK budget release on Wednesday, retail sales on Thursday and business investment is scheduled for Friday.

Domestic Outlook

• As discussed last week inflationary concerns continued to plague the policymakers and once the figure was out crossing 9%, the central bank wasted no time in raising the policy rates by 25 basis points. In the hindsight the timing seemed right with S&P upgrading India’s rating from negative to stable. The interest rate hikes, sustained economic recovery and capital inflows suggests more appreciation for the INR we continue to expect that 45.28 should hold in the near term. A confirmed break of 45.28 would set us up for 45.00 levels. Having said that year end importer buying and continued risk in the Euro –Zone could see the USD strengthening from these levels.

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Market Developments
Global Outlook

• The US Dollar fell against all majors except the Japanese Yen, breaking out of its tight range against the Euro and testing its recent lows. A limited week of economic event risk initially left the heavily-traded currency relatively motionless, but the latter half of the week saw the Greenback considerably lower through Friday’s trade. The declines were perhaps surprising given a significantly stronger-than-expected US Retail sales report on Friday morning; robust spending gave modest hope that the US consumer may prove more resilient than previously predicted. CFTC data is mixed with Dollar’s net long positions fell from $5.58 billion to $3.99 billion, however Euro shorts rose to another record of 74551 contracts suggesting that 1.3800 would be hard to break. After the break of 80 levels in the dollar index we feel that 78.56 would a decisive level to watch. A busy week of economic event risk likewise promises considerable volatility in the days ahead.
• EUR/USD was encouraged by better equity market and stronger than expected EU Industrial Production to hunt for stops through 1.3750, despite initially hampered by Russian selling. Prices made a run close to 1.3800, but lost momentum. Equity markets were majorly buoyant for the major part of last week with S&P 500 breaking January’s high of 1150. Nikkei managed to rise 382 pts to close at 10751. Markets are cautiously looking at the upside after the consolidation which has lasted for almost two months. However only a weekly close above the 1.3800 levels should show more upside. Market is still short ahead of FOMC next week and that’s going to limit dips within a range of 1.3600-1.3800.
• The British Pound rose to 1.5200 levels and may continue to rise if the Bank of England is able to convince the markets about its current stance The British Pound may benefit if the BOE succeeds in branding themselves as standing truly at the center of the policy spectrum. Rating agency Fitch said the UK’s AAA credit rating may be jeopardized if it doesn’t do more about its fiscal shortfall reminding us that political risk could be a major factor in the United Kingdom.
• Commodity currencies continue to be bullish on the backdrop of strong economic data from Canada, Australia and New Zealand. Australia is the first country to raise rates to 4%. RBNZ left rates unchanged at 2.5% and reiterated the already stated stance of removing stimulus in the middle of 2010. The key risk for commodity currency comes from the tightening policies to cool down China.
• Key Data for the coming week are Euro-Zone Employment and US industrial production on Monday. Tuesday would be crucial with Euro-Zone CPI, ZEW survey, US Housing data and the most important FOMC rate decision (rate may not be hiked but the wordings need to be watched). On Wednesday we would see the UK Jobless and other unemployment figures for the UK with Thursday bringing focus back to the weekly jobless claims. Friday would see housing, retail sales coming out of various regions.

Domestic Outlook

• USD/INR saw downside for most of last week, though dips below the 45.40 saw importer buying interest amid intervention fears as well. As a result of such buying interest some the pair staged some sharp rally towards the upside all of which faltered at the 45.63 level. SENSEX gains aided with the INR upside though stock market gains were trimmed on fears of rate tightening on strong Jan Industrial Production for a second month in a row.
• Inflation data next week is to be the focal point and is likely to be higher on the backdrop of high weekly food prices. However we expect food inflation has peaked out and the same effect would be reflected on the WPI in the coming month which could settle in the range of 7-8%. The borrowing programme still being largely front loaded with almost 70% of the government borrowing being done in the first half is likely to keep yields in the 7.8 % levels for some time. On the whole we expect that the USD/INR to gradually tilt lower, but dips would not be very rapid till exporters start panicking. Broader range of 45.28-45.75 is seen being traded for now as the USD/INR consolidates with eyes on policy at home as well as external risks. Intraday range of 45.38-45.63 should hold as state bids and underlying strength of the INR unlikely to let the pair go either way. One more factor that might be a food for thought is that markets have started looking at the Real Effective Exchange Rate (REER) which is hovering at 112 against a historic high of 116. It remains to be seen how far the central bank stays on the side lines.

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First time adoption of IFRS for PPE
An entity can use fair value as deemed cost on First time adoption of IFRS

OR

It has to apply Retrospective application which means recalculate carrying amount of each PPE item according to IFRS since its purchase date including transaction cost, useful life and residual value.

Suggestion
However fair value as deemed cost is more appropriate since there would be practical difficulties for companies to do retrospective application from the date when the asset has been purchased.

Fair value for PPE
Fair value for Land and Buildings is usually determined from market based evidence by appraisal normally undertaken by professionally qualified valuation officers and for other items of PPE their market value is determined by appraisal.

If there is no market-based evidence of fair value because of special nature of asset then it has to be determined on basis of either Income Approach or Depreciated replacement cost approach.

Methods for Subsequent Measurement of PPE
There are 2 methods available for Subsequent measurement of PPE i.e. Revaluation Model and Cost Model.

However most of the LSE listed companies have adopted Cost Model. Generally companies who are in business of Investment property prefer revaluation model.

Suggestion
Cost model is preferable over revaluation model mainly because of the following reasons:

• Once revaluation model is adopted one has to do frequent revaluation as prescribed by IAS 16 which requires expertise of professional valuer which may not be cost effective for companies.

• Also if the property prices changes drastically one has to book the difference in Income Statement resulting in huge volatility which may not be accepted to management of company.

Reclassification
Movement from Cost Model to revaluation model is permitted however vice versa is not permitted which means if Revaluation model once followed cannot move to Cost Model.

Suggestion
Companies should carefully examine the impact before making policy and procedures in respect of the same.

Author: CA Shalini Tibe, IFRS Consultant

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Equity

After correcting for most part of January and early February, Sensex touched a monthly low of 15725 on Feb 5 and thereafter gained strength from positive news on the budget front. It touched a monthly high of 16669 on the day of budget and closed the month at 16429, about 2 % above the last month’s close and 4.5% above the monthly low.

Rupee

Taking over from the appreciating trend in the last month, rupee weakened in the first week to touch a monthly low of 46.94, loosing 110 bps in 3 trading days. But post that, appreciation again set in and buoyed by the bullishness in equity markets, rupee closed the month at 46.08, marginally up from last month’s close of 46.12.

G Sec yields

After moving in the range of 7.57 to 7.72 for the month of January, the yields on 10 year benchmark 6.35% 2020 bond surged during February. Yields touched a high of 7.96 during mid feb and thereafter corrected to rise again during the budget following announcement of market borrowing of Government for the year 2010-11 which were in line with expectation. Yields closed the month at 7.86 against a close of 7.58 for January.

Gold

Gold futures on COMEX for March delivery which fell in the later half of January were in red in the beginning of February as well under the influence of better than expected economic numbers of USA. But since second week of February, after touching a monthly low of $1,044.50/ Oz, gold prices started moving up and touched a high of $1,131.50/Oz before closing the month at $1,118.90, 3.3% above last month.

Crude Oil

Crude oil for March delivery on NYMEX continued its downward journey carried over from the month of January and touched a low of $69.50/ barrel. But with optimistic numbers from US, economic recovery seemed to gain strength and prices started rising touching a monthly high of $80.78 before closing at $78.84, 9.2% above the January levels.

Author: Abhijit Ahir, Economic Analyst, MBA Finance (SIIB)

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Improved global conditions, especially out of Asia, will fuel Dubai’s logistics and service sector. However, the correction in the over-extended property and construction sector renders the overall outlook highly uncertain. With foreign investor confidence shaken and international capital markets less accessible, Abu Dhabi’s policy of selective support to Dubai will play an important role in limiting contagion to the U.A.E. economy and the banking system.

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Key issues

• The contrast between growth based on hydrocarbon resources and that based on non hydrocarbon diversification funded by maturity-mismatched leverage
• The spillover effects and financial support structures in the federation
• The volatility of markets in response to a lack of information disclosure and transparency
• In particular, the debt announcement undermined the widely held market perception of implicit government support, including from Abu Dhabi

Relook
The authorities responded to the global financial crisis in a comprehensive and prompt manner. Also, the increased spending on strategic infrastructure projects, mainly in Abu Dhabi, to reduce the contraction in construction activity, and provided support to quasi-public entities and national banks, has done a larger good for the UAE economy as a whole.

However, recent developments in Dubai, while material, should be viewed in the wider perspective of the U.A.E. as a whole. Although the need to roll over part of Dubai’s substantial external borrowing in the post-Lehman environment has highlighted the risk embedded in the financing strategy of some Dubai entities, the U.A.E. has a net external creditor position well in excess of 100 percent of GDP, among the largest in the Fund’s membership.

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Recent Economic Developments
After the Global downturn, it hit simultaneously all of the U.A.E.’s three growth engines in 2009; Oil receipts plummeted, global trade and logistics contracted, and property development all but ground to a halt as incomes fell and property prices plunged.

Actions taken by Abu Dhabi boosted the fiscal stance via equity injections and loans. The central bank deployed bank liquidity support facilities and lowered interest rates. The federal government rolled out large scale recapitalization measures and provided AED 50 billion term funding to the banks. Finally, the GD announced a support package of $20 billion (half provided by the central bank and the other half by Abu Dhabi) to finance the needs of Dubai’s GREs, and established the Dubai Financial Support Fund (DFSF) to manage the support program.

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UAE Economy (2009)

• Notwithstanding the compensatory measures adopted by the authorities, overall real GDP of Dubai is estimated to have contracted by about ½ percent in 2009.
• Hydrocarbon GDP declining by 6¼ percent. Crude oil production averaged only 2.4 million barrels per day in 2009 lower then a average of 2.6 million barrels per day in 2008.

• Non Hydrocarbon growth, which had averaged 8 percent in the three previous years, is estimated to have slowed to about 1 percent.
• Inflation declined to 1 percent in 2009, reflecting lower import prices (-10 percent in 2009) and a reduction in rents as an increased share of rental contracts got renewed at the deflated market prices and new buildings came on stream.

• The external current account balance is estimated to have shifted to a deficit of 2.7 percent of GDP in 2009, the first deficit in decades.
• New external borrowing, mainly by Abu Dhabi entities, helped stabilize the reserves by the end of 2009, which stood at central bank international reserves to $31 billion by year’s end.

• Broad money growth slowed from 19 percent in 2008 to 10 percent in 2009. The consolidated fiscal position is estimated at a virtual balance in 2009, following a surplus of 21 percent of GDP in 2008.

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Outlook for 2010 and the Medium term
The fiscal and monetary policy mix will need to show adaptability over the medium term in order to sustain a further diversification of the economy within a more uncertain environment.

• Given Dubai’s share in U.A.E.’s non-oil GDP (above 50 percent) real GDP growth for the U.A.E. as a whole will be low (about ½ percent), despite the authorities’ support packages and Abu Dhabi’s investment projects that will help offset the contraction in Dubai.
• Growth would recover starting in 2011 owing to higher activity in the oil and trade sectors in response to the recovery in Asia; and orderly restructuring of Dubai’s GREs.
• Medium-term non hydrocarbon growth is projected to average about 4½ percent a year over the medium term, or 4 percentage points lower than before the crisis, a reflection of less activity in Dubai’s property sector and higher costs to access international capital markets.
• CPI inflation is expected to reflect higher import prices and the impact of Abu Dhabi’s large investments in infrastructure.
• Based on the WEO’s oil price projections, the overall fiscal position is projected to return to a surplus of about 10 percent of GDP in 2010. Over the medium term, the overall surplus will increase to about 15 percent of GDP, mainly due to a gradual increase in non-oil revenues associated with the introduction of the VAT.
• In 2010, the non hydrocarbon deficit is projected to contract by about 4 percentage points, to 30 percent of NHGDP, owing mainly to a slowdown in project implementation in Abu Dhabi, and to improve over the medium term because Abu Dhabi is not expected to continue providing support to its GREs
• The external current account is expected to shift to a surplus of about 7 percent of GDP in 2010, and to increase gradually in subsequent years. In the financial account, capital outflows would resume, reflecting official outward investment, but the Central Bank of the United Arab Emirates’ (CBU) gross official reserves would increase steadily.

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Conclusion
The ramifications of the Dubai event are still unfolding, as it will take some time for the GD to develop a strategy to restructure its GREs. Downside risks could materialize if the Dubai debt restructuring were to generate additional uncertainty.
It is important that uncertainty be removed regarding the financial viability of DW entities, the extent of implicit government guarantees to GREs, and the insolvency regime. If uncertainties remain in these areas, ramifications could include sustained lack of market access for even stronger Dubai entities and a more permanent loss of confidence in Dubai as a reliable business location.
The Dubai authorities stressed that they were committed to working with creditors in achieving an orderly and cooperative debt restructuring. They also indicated that they were working on improving transparency and corporate governance. This was regarded as important for viable companies to maintain access to international capital markets. The scope of the corporate restructuring and the debt restructuring options were still being defined.
Restructuring would seek to ensure economic and financial viability while protecting systemically-important entities. So far the debt restructuring is limited to the announced $22 billion, but the authorities recognized that other property GREs may have to enter a similar process.
The spillover effects of the Dubai event on the GCC, the wider region, and advanced economies appear manageable. However, the event may have a lasting impact on the availability and cost of external capital as creditors likely will further discount notions of implicit guarantees in pricing quasi-sovereign and private risk.

Author name: Abhijeet Ahir, Economic Analyst, MBA Finance (SIIB)

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Market Trends

Major Indicators

Key International Indices and Commodities

Market Developments

Global Outlook

• US Dollar finished the week on a strong note on the inherent weakness in the Euro area. On the data front it was a fairly disappointing week with a drop in Non-Farm Payrolls, continued fall in retail sales and a record US Federal Budget deficit. For now the US Dollar and mostly all currencies remain in tight range and lack of directions makes any forecast vulnerable. The coming week is expected to see housing stats and Initial Jobless Claims posing the major event risk.

• The EUR/USD traded in a tight band and overall fell during the week amidst worries of a strong dollar and other sovereign concerns. While the ECB kept rate unchanged, Prisident Trichet stated in no uncertain terms the underlying sovereign worries in the European Union. These sovereign concerns are posing a threat to the countries in the union. While countries like Germany and France have been quick  to show recovery, Greece and Ireland are reeling under their respective crisis. While the wider range of 1.4250 has still not been broken, a move to 1.4580 looks difficult.

• Gold currently trades at USD 1130 levels. Oil prices are hovering around USD 76.52 / barrel down from USD 80/ barrel and gaining demand is expected to keep prices upward biased. As the economy recovers commodities are expected to gain more strength in the coming months.

Domestic Outlook

• The domestic outlook looked set for further recovery with Industrial Production (IIP) posting a rise of 11.3% against expectations of 10%. Further, January has seen credit growth picking up to 13.2 % highest level for almost a year.

• Similar to last steep fall in October 2009, the steep fall in 2010 seems to be contained for now with the Rupee falling from the 45.28 low to current levels of 45.78. Equity flows are still strong and helped contain the retracement for the time being. Although at one side foreign flows continue to be strong, state bids and import demand would probably keep the pair in tight range for now. While major market participants expect levels of around 44.50 -45 around March, it remains to be seen how fast that happens. We expect this consolidation phase to last for some time.
• Inflation surged to 7.31% on the back of rise in food prices, making a CRR hike of around 50 basis imminent. With no major data expected for the week the focus in going to be on the month end policy review. We expect that the USD/INR could be seeing mixed impact from rate differential expectations on one hand and asset market impact on the other. On the whole though, equities remain as a strong direction provider for the INR and a range of 45.40-46 can be expected.

USD/INR (Last 3 Months)

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