FOREX- Is Rupee Still Under Threat ?

Rupee was flat in the month of November amid global financial crisis. Pressure in international equity markets remained and more bailouts were given to help financial sector of US, Euro zone and other countries. Dollar maintained its strong grip on Rupee although the trades were range bound. Major setback to the financial situation during November was the terrorist attack in the financial hub of Mumbai. This is expected to have a indirect impact on the economy as the foreign inflows which are already in jeopardy can dry up.

RBI from time to time stepped up to curb the liquidity crunch and this was clearer from the movements of Rupee which although had a negative undertone yet stayed in the range of 47.10 and 50.60 against the greenback. Rupee settled the month at 49.84 against the Dollar.
One positive thing that happened for RBI, Government and Consumers was the easing of inflation. RBI can now think of cutting down the interest rates further to infuse money supply in the system and restore confidence among investors. Inflation for the week ending 15th November 2008 eased to a 6 month low of 8.84 percent as against a 16 year high of 12.91 percent in August.

The Central Statistical Organization (CSO), MOSPI released the estimates of Gross Domestic Product (GDP) for the second quarter of July-September 2008-09, showing a growth rate of 7.6 per cent over the corresponding quarter of previous year.

Oil prices slipped during the month in an unpredictable trade market and over declining economic growth in the US, the world's top energy consumer. New York's main contract, light sweet crude for December delivery fell 11.36 dollars during the month to close at 53.47 dollars per barrel.

The Organization of Petroleum Exporting Countries (OPEC) which decided to slash output by 1.5 million barrels per day, effective 1st November 2008, had another round of consultations to cut the output second time in a row. But the meeting ended undecided in Cairo on production cut. OPEC produces 40 per cent of world crude. The OPEC made it clear it would consider another output reduction if oil continued to remain below 70 dollars a barrel.

Rupee closed at 49.84 against the Dollar marking a sharp fall of 1.20 %. The domestic currency was at 48.96 against the greenback on 3rd Nov 2008. On a yearly basis the depreciation was 25.64 percent as compared to October 2007.

The Indices of Industrial Production (IIP) data released for the month of September 2008 showed a marginal increase on a monthly basis. The IIP for the Mining, Manufacturing and Electricity sectors stood at 162.8, 294.4, and 219.3 respectively, in September 2008 with the corresponding growth rates of 5.7%, 4.8% and 4.4% from September 2007. The IIP for the Mining, Manufacturing and Electricity sectors stood at 162.2, 282.4, and 221.6 respectively, in August 2008. The cumulative growth during April-September, 2008-09 stood at 3.8%, 5.2% and 2.5% in the three sectors over corresponding period previous year.

India’s GDP growth for the second quarter of 2008-09 rose by 7.6 percent. Major sectors which registered growth in the second quarter were manufacturing at 5 per cent, construction at 9.7 percent, trade, hotels, transport and communication at 10.8 per cent, financing, insurance, real estate and business services at 9.2 per cent, and community, social and personal services’ at 7.6 per cent. The growth rate in ‘agriculture, forestry & fishing was estimated at 2.7 per cent in this period.

Ministry of Commerce foreign trade data showed that trade deficit for cumulative April- September, 2008 was estimated at $ 59771 million as against $ 39098 million during the corresponding period 2008. Exports during September 2008 were valued at $ 113748 million, 10.4 per cent higher than corresponding period previous year. Oil imports were valued at $ 24380 million up 43.3 % on a y-o-y basis. Oil imports for the corresponding period last year were $ 17009 million. Oil imports during April-September 2008 was at $ 55063 million, 59.2 % higher than oil imports valued at $ 34590 million in the corresponding period last year.

October month turned out to be impressive for Rupee against other major currencies. Rupee ended at 64.38 against the EURO, during this period Rupee depreciated by 2.45 % with a high of 60.57 and a low of 64.68. Pound lost 4.42 % against the domestic currency. Rupee started the month at 80.26 against GBP on 3rd November 2008 and ended the month at 76.81 on 28th November 2008. During the month, Rupee touched a high of 72.14 and a low of 80.26. Rupee however lost momentum heavily against Yen. Rupee started at 49.16 against the Yen and ended the month at 52.27, thereby marking a fall of 3.67 % against the Japanese Currency.

Measures By RBI To Improve Liquidity:

RBI took series of steps in order to fulfill the liquidity requirements in the system. RBI Governor met with the bankers from public and private sector to review the situation of liquidity and credit. RBI introduced special refinance facility on 1st Nov 2008, under which all scheduled commercial banks (excluding RRBs) were provided refinance from the Reserve Bank equivalent to up to 1.0 per cent of each bank's NDTL at the LAF repo rate up to a maximum period of 90 days. RBI through its press release decided that the facility will continue till 30th June 2009 and it can be rolled over.

RBI has been providing liquidity support to NBFCs and Mutual Funds through banks. Reserve Bank allowed banks to avail liquidity support under the LAF through relaxation in the maintenance of SLR to the extent of up to 1.5 per cent of their NDTL for the purpose of meeting the funding requirements. It was decided that this facility will be extended to Housing Finance Companies. Banks will now be able to accommodate funding needs of Mutual Funds, NBFC and Housing Finance Companies as per the business needs. The end date for this facility, which is currently March 31, 2009, has been extended to June 30, 2009.

The Reserve Bank on 7th Nov 2008, decided to provide forex liquidity to Indian public and private sector banks having foreign branches or subsidiaries. The facilities were provided through forex swaps of tenors up to three months. It has been decided that this facility, which is available on request, will be made available up to June 30, 2009.

Major international developments included, the US government agreeing to absorb potentially billion of dollars in losses at Citigroup and shore up the financial giant with a $20 billion capital injection. Citigroup and the government targeted a pool of about $306 billion in troubled assets. Citigroup losses from this pool will be capped at $29 billion. The three government agencies take on losses above that from these assets, although Citigroup could still be held responsible for a small portion of them. The government gets warrants to buy shares in the company. The $20 billion in fresh capital being injected into Citigroup is in addition to the $25 billion infusion that was previously announced.

Forecasts:

Equity and Forex markets are likely to face the pinch of the attacks on the financial hub Mumbai. But the impact will be only for the short term. In long run weakening US fundamentals are expected to assist the domestic currency.

The Federal Reserve announced on 25th Nov 2008 that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)-Fannie Mae, Freddie Mac, and the Federal Home Loan Banks-and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process.

These measures created fear of the US government indebtness. Amid these fears RBI has also put an upper hand in curbing the shortage of funds. Inflation has been on its way down. Inflation for the week ending 15th November 2008 eased to a 6 month low of 8.84 percent as against a 16 year high of 12.91 percent in August. This will be supportive for the domestic currency in the coming days.

Aluminium- Bears Still Hold The Key

Prices of Aluminium have plummeted by 33% since July and are now nearing November 2007 levels. The fundamentals are still bearish for this base metal. Global recession, Shortage of liquidity for working capital and rising Inventories across exchanges will all pressurize the prices further to test lower levels.

Aluminium is the most widely used non-ferrous metal. Aluminium plays a very vital role when it comes to Fuel efficiency of Vehicles. By reducing the vehicles weight, it cuts down on fuel consumption and emissions without compromising the size or the safety of the vehicles. Aluminium also facilitates the construction of corrosion-resistant and low maintenance buildings.
News of major plant shutdowns in China and short covering offered Aluminium its limited support. After the crash in Aluminium prices major plants across the globe have came below the break even of production, this lead to shutdown in smelters. Demand prospects are still poor and smelters are cutting back on capital investments due to the global financial turmoil. China's top aluminium maker, Chalco announced that it might have to cut output because of weak prices, signaling that other producers in the world's biggest aluminium consuming nation might also struggle to keep their high-cost capacity running and follow suit. Chalco third-quarter profits plunged by more than half because of higher costs and lower demand and product prices. China's largest makers of the metal agreed to slash output more than a 10th from August because of power shortages.

The collapse in global car sales in the US and now the EU will shrink demand this year and in 2009 as well to keep Aluminium prices on the knees. September was the worst month since 1993 in US with Auto sales dragging down below a million. A plethora of bad economic news drove a sales decline for every major automaker as total light-vehicle sales tumbled to 964873, down 26.6% compared with September 2007, sales.

U.S. auto sales for October are expected to tumble about 29% to their lowest level in nearly 17 years. October sales are expected to drop 9.4% from September. This is an expectation of one of the renowned online resource for automobile Edmunds. In European Union the car sales fell for the fifth consecutive month in September, the longest stretch since 2005, as higher fuel prices and financial-market turmoil reduced demand.

Aluminium didn’t enjoyed the bull face seen in other metals much and so it is not surprising that it hasn’t suffered with same margin. However, it is not immune to the global economic slowdown. Slower economic growth and the global credit crisis are undermining demand for property and automobiles, which require aluminum. One third of the global capacity is operating at a loss at current LME prices. Inventories of Aluminium are at their four years high at 1528400 per tonne. Additional bearish pressure to aluminum pries is huge buildup in Shanghai inventories of 204407 tons as on 24th Oct 2008.

LME Inventories data suggests that there has been a huge build up in inventories since the start of the year. Aluminium inventories which were 929450 tonnes in 2nd January 2008 are now at 1500150 tonnes on 23rd October 2008, marking an increase of 61%. During the same period the number of cancelled warrants has gone down by 43% to 15850 tonnes as against 27775 tonnes now. Cancelled warrants are the amount to be taken out of the warehouse.

The increase in LME inventories is more a movement of existing stocks into LME warehouses (movement of off-warrant to on warrant) rather than the result of oversupply. Around the world, Banks are requesting aluminum investors to move their aluminum stocks into LME warehouses in order to use the warrants as more secure collateral. In other words, it has more to do with financing deals between banks and investors.

As per International Aluminium Institute (IAI), world production growth in aluminium has increased in first nine months of 2008, to 19243 thousand as against 18428 thousand tonnes. Major growth was marked in West Europe of 8% to 3476 thousand tonnes in Jan-Sep 2008 period as against the corresponding period previous year. Asian registered a growth of 5.7% while North America and Latin America registered growth of 4% and 4.6% respectively.

Outlook:

In domestic futures markets the prices have also been bruised badly by the demand outlook and liquidity problems. The prices on MCX from hereon are looking to touch Rs 93 and 84 levels in the medium term from where recovery due to bottom fishing is likely to emerge. Around half of the Aluminium industry is now operating at a loss, and Chinese plants, which have the highest costs, have announced reductions.

In the first half of 2008, disruptions to electricity supplies in China, South Africa and New Zealand resulted in reduced availability of power and lower than expected growth in aluminium production. This was a key driver of the 2 per cent increase in aluminium prices in the first six months of 2008, compared with the corresponding period in 2007. However, the United States and Europe, motor vehicle production and housing construction account for a large proportion of aluminium consumption. The US housing market is expected to remain weak, contributing to lower aluminium demand. And this will suffice the power problems experienced by major producing countries. Inventories levels are already at 4 years high which will be pressurizing the prices.

RBI Watches Sharp Rally In Dollar Against Rupee

FOREX:

Rupee touched five year low against the Dollar in September 2008 on economic slowdown and lack of inflows. The movements in Dollar turned out to be rapid against the Rupee during the month as global financial turmoil gripped the market. Major financial banks and insurance companies filed bankruptcies or were sold out in order to save their existence. Central banks across the globe steeped up to infuse liquidity in the jittery financial markets. The firm tone of Dollar made the importers worried including the Oil marketing companies which had earlier thought of some respite after the price hikes in petroleum products by the government in previous months. Rupee lost sharply in the initial days of the month and further impetus was provided at the end of the month.

The rise was on account of gradual shrinkage in global oil output. OPEC's decided earlier in the month to cut production by 520000 barrels a day, militant threats to Nigerian oil supplies and output shutdowns and damage to oil installations on the Gulf of Mexico coast caused by Ike and Gustav helped spark the jump in oil prices.

Equity markets were dull due to disarray in global financial markets and FIIs frail response. FIIs data showed lack of buying interest but some pull back in Inflation can bring relief in the markets. Bears are still gripping the markets during the month ending on liquidity concerns. Rupee settled the month at 46.94 against the Dollar.

From RBI front, Duvvuri Subbarao substituted Y.V Reddy as the new governor of RBI.

Rupee vs Dollar:

The Rupee touched a low of 46.94 on 29th September 2008, its lowest since 2nd June 2003 and a high of 44.21 on 1st September 2008. Rupee depreciated by 7.19 % against the Dollar during the month. FOREX markets were volatile as the demand for Dollar increased from the banks which entered in swap agreements buying Dollar in spot markets and selling them in forward markets. Dollar demand from Oil companies capped the rise of Rupee and pressurized the domestic currency. Most of the Oil companies and importers were in open market in search of Dollars. Oil companies were earlier using the special window by RBI to buy foreign exchange but that facility by RBI came to an end bringing the companies to search dollars in open market. Crude Oil lost the show as demand got feeble by the US economic concerns and piling inventories. However, the supply disruptions due to tropical storms Gustav and Ike muted the fall. OPEC also cut the supply cartel in order to reduce the speed of fall.

The Indices of Industrial Production (IIP) data released for the month of July 2008 showed a increase on a monthly basis. The IIP for the Mining, Manufacturing and Electricity sectors stood at 164.9, 293.3, and 225.9 respectively, in July 2008 with the corresponding growth rates of 5%, 7.5% and 4.5% from July 2007. The IIP for the Mining, Manufacturing and Electricity sectors stood at 163.2, 289.8, and 217.1 respectively in June 2008. The cumulative growth during April-July, 2008-09 stood at 4.5%, 6.1% and 2.6% in the three sectors over corresponding period previous year.

Ministry Of Commerce Foreign Trade Data showed the burgeoning problem of Trade Deficit in India with Crude oil imports remaining strong. India’s Foreign Trade Statistics for the month of July 2008 showed a rise of 48.1 % in imports to $ 27143 million as against $ 18333 million in July 2007. Exports during June 2008 were valued at $ 16345 million, 31.2 per cent higher than corresponding period previous year. Oil imports were valued at $ 9480 million up 69.3 % on a y-o-y basis. Oil imports for the corresponding period last year were $ 5600 million. Oil imports during April-July 2008 was at $ 35006 million, 55 % higher than oil imports valued at $ 22596 million in the corresponding period last year.

Rupee Vs Other Major Currencies:

July month turned out to be depressive for Rupee against other major currencies. Rupee ended at 67.79 against the EURO, during this period Rupee lost 5% with a high of 63.33 and a low of 68.11. Pound gained 7% against the domestic currency. Rupee started the month at 79.76 against GBP on September 2008 and ended the month at 85.57 on 29th September 2008. During the month, Rupee touched a high of 78.09 and a low of 85.92. Rupee also lost momentum heavily against Yen. Rupee started at 40.76 against the Yen and ended the month at 44.49, thereby marking a fall of 10 % against the Japanese Currency.

Financial System Derails On Sub prime Front:

Major investment banks faced the heat on account of Sub prime losses These jitters shook the Wall Street and other major markets including India. Barclays Plc announced that Lehman brothers have begun to re-open for businesses under the ownership of Barclays capital. The actions were followed after the bankruptcy court approved Barclays agreement to acquire Lehman brothers. In another major event, Bank of America Corporation agreed to acquire Merrill Lynch. in a $50 billion all-stock transaction. AIG got a new lease of life from the Federal Bank.

Federal Reserve Bank of New York provided a two-year, $85 billion secured revolving credit facility to AIG that ensured that the company can meet its liquidity needs. American International Group posted its biggest-ever quarterly loss, after being hurt by a write-down of securities exposed to bad mortgage investments. The world's largest insurer posted a $ 5.29 billion loss, the largest in the company's 89-year history. To make matters worse, Mitsubishi UFJ Financial Group announced that it will buy a 21% stake in the second-largest U.S. brokerage Morgan Stanley for $ 9 billion.

India also felt the shocks on Sub prime front. ICICI Bank's overseas operations reported a loss of 264.34 million dollars following the sub-prime crisis. Central banks across the globe announced coordinated efforts to pump massive amounts of liquidity into the financial system to ease pressures. Federal Bank and Finance ministry of the US also urged the congress to pass a $ 700 billion bailout of beleaguered Wall Street banks. But the bailout plan met with stiff opposition from the lawmakers. The U.S. Congress rejected the financial rescue plan on 29th September 2008, which sent the Dow Jones tumbling 705 points shortly after the break of the news. Later on the plan got accepted, yet it left lawmakers with several questions to be unanswered. One big question is What happen if more banks emerge on the bankruptcy front?

Outlook:

Rupee is now at its 5 year low against the Dollar, situation is likely to remain the same in days to come. RBI will be intervening in the markets to check the fall in Rupee. On the other hand, weak data from the US is slowly turning the tide against greenback. The bailout plan of $ 700 billion which would have provided some heal to the financial markets was rejected. Now US will try to support its jittery financial system by other measures. One such measure will be the cut of interest rates. This will ensure some liquidity pumping in the system but will also affect the Dollar adversely. Rupee is not likely to gain from the regime due to the fact that inflation is still not showing signs of easing down and commodities prices are on a high. Therefore widening trade deficit will keep the Rupee checked on every rise.

Zinc- Rise In The Making

Zinc prices are showing signs of progression in days to come. Depleting Inventories and rise of demand is setting the tone for the better future of the metal. In domestic futures market Zinc broke crucial resistances of 86 per kg mark on 13th Sep 2008 and this is not the end of the road yet. Bargain hunting will further elevate the levels.

Zinc prices are forecast to remain high in 2008-09 as global demand, particularly from Asia which will continue to expand. On the account of higher consumption of zinc in coming days, there is a possibility of another drawdown in global zinc stocks.

Zinc is the fourth most used metal and has applications in a wide range of industries. Zinc deposits often contain other base metals such as lead and copper or precious metals such as silver. The three leading uses of zinc are in steel galvanization, in brass production and in other alloys. Galvanization, where zinc is used to protect steel against corrosion, is a rapidly growing use of zinc and constitutes its main market. Brass is an alloy made up of zinc (10% to 40%) and copper and is widely used in the construction sector. Zinc oxide is used in the production of paint, printing ink, cosmetic products, soaps and other pharmaceutical products.

A recent report from International Lead and Zinc Study group showed the trend for Zinc. According to the report mine production has increased by 21% during January- June period, and reached to 1107 thousand tonnes. On the other hand metal production was also up by 8% during the same period. Refined metal usage was at 1036 thousand tonnes in June as against 910 thousand tonnes in January, registering a rise of 14%. The interesting fact to note is that the demand has outpaced supply in May and June by 15.9 and 4.5 thousand tonnes respectively.

Global refined zinc metal demand has increased by 2.1% mainly due to rise in China while the World production of refined zinc metal rose by 3.2%. This was mainly a result of increases in China, India, Japan and the Republic of Korea. As per the latest release from Australian Bureau of Agricultural and Resource Economics (ABARE) it is expected that in days to come, the majority of the increase in world zinc consumption is expected to be driven by growing demand in Asia. Zinc consumption in major consuming countries such as China, India, and the Republic of Korea is expected to increase by 10 per cent, 6.5 per cent and 6.4 per cent a year respectively in 2008 and 2009.

LME Zinc prices were in the range of $ 2400 per tonne at the start of this year, but lack of demand has pulled the prices towards $ 1842 per tonne levels, registering a fall of 23%. In Domestic futures markets, Zinc prices were in the range of Rs 94 per kg at the start of the year, it then went up towards 116 levels in March and since then there was a incessant fall in prices till mid- August. Since March the prices depleted by 40%. With a hefty correction the equilibrium is shifted in favor of Zinc. In the last few months a sharp appreciation was registered in the value of Dollar as the Euro zone faced the problems of weak economic health, this helped the bears take advantage and Base metals prices corrected sharply. But recently financial trouble again barged in US, as the major financial institutions Lehman brothers and Merill Lynch posted hefty losses from sup prime mortgages.

Lehman Brothers filed bankruptcy under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court. Merrill Lynch & Co, the third largest U.S. investment bank, agreed on 14th Sep 2008 to sell itself to Bank of America Corp. for roughly $ 44 billion. According to the deal, Bank of America will pay $ 29 per share for the 94-year-old Merrill Lynch. Dollar was jolted after the news and provided dollar denominated commodities like Zinc to boost.

Zinc prices are expected to remain firm in days to come, although slight hiccups can take the prices near to its lows but strong consumption patterns from the user industry will ensure that the demand supply gap is maintained. Any sharp fall if any, will be checked by the supply cuts, as was seen earlier from major smelters earlier this year. Initially the rally in Zinc was linked to short covering by the participants, in coming days it will be bargain hunting at lower levels. MCX Zinc futures for September expiry is expected to find supports at 82 and 80 levels, with targets of 97 in medium term.

DOLLAR- ROCK ON!!!!

Dollar has been ROCKIN ON!!!!! against EURO. As I write this report Dollar has gained 978 pips or 6% in a short span of one and a half months (from 16th July 2008: 1.5477 to 1.4499 on 3rd Sep 2008). Before 16th July 2008 the story was altogether different with Dollar loosing 1236 pips or 8% since the initiation of the year when it quoted at 1.4594. The reports which were earlier inclined towards the EURO have now started singing tones of rising Dollar. EURO has been off-color due to the frail reports from majors like Germany, France and Italy to name a few.

The purchasing manager’s index for the manufacturing sector in the euro zone rose to 47.6 in August from a reading of 47.4 in July, up slightly from an initial estimate of 47.5. The reading still indicates a contraction in the manufacturing sector. A figure of less than 50 means a majority of purchasing managers saw a decline in activity. August was the third consecutive month when the manufacturing activity was below 50. Germany along with France and Italy recorded the sharpest rates of contraction. Automobile Sales have also been lopsided. Car sales fell in Spain, Ireland and France in August, signaling that European consumers are delaying purchases of big-ticket goods.

Although, Euro zone Inflation has eased a bit in August. The euro zone's annual rate of inflation fell to 3.8% in August from 4% in July, adding to signs that price pressures are easing. The decline in the inflation rate was the first since March, although it remains above the European Central Bank's target of just below 2%. However, economists expect the inflation rate to fall further, with some forecasting that it will slip below 3% by the end of the year.

The decline in food and oil prices since June has had an immediate impact on inflation expectations, a key concern for the central bank. The commission's survey also recorded a slight pickup in consumer confidence, although it remains low. However, the Economic Sentiment Index that measures both business and consumer confidence fell again, to 88.8 from 89.5, its lowest level since March 2003.

Have a look at US, Orders for manufactured goods increased by more than expected in the month of July, according to a report released by the Department of Commerce, with the increase reflecting growth in orders for both durable and non-durable goods. The report showed that factory orders increased by 1.3 percent in July following an upwardly revised increase of 2.1 percent in June. Economists had expected orders to increase by about 0.8 percent compared to the 1.7 percent increase originally reported for the previous month.

Crude Oil prices have also been easing as the storm threats from Gustav being wiped out. The movement will be closely watched as few more tropical depressions will shape themselves in Hurricanes. One can say that till the time Crude Oil prices keep mum the Dollar is away from the heat. Nothing has changed on economic front in US. It is only the way we look at situations, earlier we were monitoring US now we are monitoring EURO. Till the time keep ROCKING ON with Dollar.

FOREX
RBI handled the inflationary pressures in a stricter manner in its Credit policy released on 29th July 2008. The interest rates were hiked again in the form of CRR and Repo rates while Bank Rate and Reverse Repo Rates were kept unchanged. Rupee gained in the initial days of the month and further impetus was provided at the end of the month. Throughout the month domestic currency was well supported by the falling Crude Oil prices. Decreasing Crude Oil prices reduce the pressure on imports thereby relaxing the trade deficit figures. Light Sweet Crude Oil touched all time highs of 147.27 per barrel in international futures markets on 11th July 2008. However the same got eased to 120 levels after the rise in stockpiles of Crude Oil. Lower demand from the Industry users and consumers in the US was the main setback for Crude Oil prices thereby increasing the inventory levels.

Equity markets also saw recovery coming during the month after the UPA government won the required support to remain in power. This brought back the confidence in FIIs, removing the uncertainty in the markets. However the recovery didn’t seem to last longer and bears gripped the markets during the month ending on liquidity concerns after the hike. Rupee settled the month at 42.49 against the Dollar.

Rupee vs Dollar:
RBI moves brought Rupee in a spot of bother against the Dollar but that didn’t last longer as banks searched the opportunity to sell Dollars in order to raise more funds. Rupee touched a low of 43.37 on 8th July 2008 and a high of 41.96 on 24th July 2008. During the month Rupee appreciated by 1.07 % against the Dollar. After the UPA Government won the support on crucial nuclear deal with US, movements in rupee were impressive, as the participants expected reform process to be faster. Also assisting the prices was the fact that Crude Oil prices eased by a considerable margin. Crude Oil which was hovering at $ 147.27 per barrel on 11th July 2008 melted by 16 % to close the month at Rs 124.09 per barrel. Crude Oil lost the show as demand got feeble by the US economic concerns and piling inventories. Heavy selling of Dollars by the banks also cushioned Rupee. According to dealers banks are in rush to raise funds after the CRR requirements has gone up.

IIP data released for the month of May 2008 showed a constant phenomenon of rise in trade deficit. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of May 2008 stand at 176.8, 291.5, and 230.1 respectively, with the corresponding growth rates of 5.2%, 3.9% and 2.0% as compared to May 2007.The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of April 2008 stood at 175.0, 287.0, and 218.2. The cumulative growth for the period April-May 2008-09 stood at 5.0% over the corresponding period of the pervious year.

Ministry Of Commerce Foreign Trade Data showed the burgeoning problem of Trade Deficit in India with Crude oil imports remaining strong. India’s Foreign Trade Statistics for the month of May 2008 showed a rise of 27.1 % in imports to $24548 million. Oil exports which were already getting affected by the appreciation in Rupee were valued at US $ 13782 million up 12.9% higher than the level of $ 12210 million during May 2007.

Oil imports during May, 2008 was at $ 8465 million, 50.8% higher than oil imports valued at $ 5613 million in the corresponding period last year. Oil imports during April- May, 2008 were at $ 16494 million, 48.5% higher than $ 11106 million in the corresponding period last year.

Rupee Vs Other Major Currencies:
July month turned out to be impressive for Rupee against other major currencies. Rupee ended at 66.33 against the EURO on 31st July 2008, during this period Rupee gained 2.18% with a high of 65.82 and a low of 68.78. Pound lost 1.65% against the domestic currency. Rupee started the month at 86.28 against GBP 2008 and ended the month at 84.21 on 31st July 2008. During the month, Rupee touched a high of 83.78 and a low of 86.53. Rupee also gained momentum against Yen. Rupee started at 40.98 against the Yen on 1st July and ended the month at 39.42, thereby marking a rise of 3.03% against the Japanese Currency.

Rate Hike Process By RBI Continues:
RBI rate hikes processs continued in the month of July as well. In its monetary policy on 29th July 2008, the Apex banker hiked CRR (The amount which Banks need to keep with RBI) by 25 basis points to 9% while the Repo rate ( The rate at which RBI lends funds to Banks) was hiked by another 50 basis points to 9% with immediate affect. CRR rise will be effective from fortnight starting 30th August 2008 while Repo rates were increased from immediate effect. The rise in CRR will put additional burden on Banks as it will suck Rs 9000 crores from the system. Repo rate hikes will be a bad news for the borrowing banks as well as Corporate and Individual Borrowers which will now have to bear the additional costs in the form of interest rates.

In its monetary policy RBI emphasized the fact that the projection of real GDP growth expectations of 8.0- 8.5 per cent in the Annual Policy Statement of April 2008 was a little optimistic and now 8.0 per cent growth rates should be considered as realistic. RBI also highlighted the facts of rising inflation saying that “The upsurge in inflation during the current financial year reflects a combination of forces at work: the pass-through of international crude prices to domestic administered prices effected on 5th June 2008, inflationary pressures in addition to crude oil prices, and movements in international prices of key commodities indicating elevated upside pressures for domestic prices of a number of commodities. The overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.”

Forward Looking Statements:
Macro-economic events from the US will be watched out for by FOREX experts in days to come. Last month strong data releases from the US helped Dollar to recover against the majors. Fed Governor also stated in his testimony on 15th July 2008 that “Developments in financial markets and their implications for the macroeconomic outlook have been a focus of monetary policy makers over the past year. Monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. “

The strict stance by RBI is a clear indicator of the fact that the preference will be given to reduce the inflationary pressures on Indian economy. Rupee is likely to find a sweet spot against the Dollar in days to come as this is not the end of the road for RBI to raise interest rates. Further appreciation in the rates is expected. Crude have also been derailed by the slowness in demand and rising stockpiles which have so far proved beneficial for easing the economic worries on account of trade deficits. Rupee is likely to benefit from the fact that the rates rise will cause panic in Banks to raise more and more funds. It will also enthuse confidence in the consumers that the will not have to shell more money from their pockets.

Copper- Bear Phase Started

Copper prices corrected recently by 12 % in LME to touch a low of 7835 per tonne and the trend don’t seem to be over yet. Fundamentals are pointing further selling in Copper prices as the current inventories are piling up to comfortable levels. It is the beginning of bear phase in Copper. The Bulls have taken backseat against the bears, as the collapse in Copper prices now seem probable with negative undercurrents flowing. Copper has been a highly volatile Base metal this year. The prices touched an all time high of 8900 per tonne on 2nd July 2008 in LME after that it corrected to test its one month low of $ 7835 per tonne on 30th July 2007. The returns in Copper so far this year have been lower when compared to peers. Copper three month forward contract on LME has given a return of 20% so far this year, as compared to 37% return in Tin and 24% returns in Aluminium respectively.

Since the start of this year Copper prices were reeling nicely in major exchanges because of the adverse weather conditions in China and operational and labour related issues in major mines of Chile, Mexico, Australia and Indonesia. But this news have so far been factored in Copper contracts. Copper is the best non- precious metal conductor of electricity as it encounters much less resistance compared with other commonly used metals. It sets the standard to which other conductors are compared. Copper is also used in power cables, either insulated or uninsulated, for high, medium and low voltage applications. Copper is an essential component of energy efficient generators, motors, transformers and renewable energy production systems.

Inventories in Copper have been rising. LME-registered stocks of copper have increased by 18450 tonnes in July to 142400 tonnes, recording a rise of 15%. Meanwhile the prices on MCX turned down from Rs 372 per kg on 1st July to Rs 343.50 per kg on 31st July down 8%, it would also be worth mentioning that during this period open interest in the contract depleted from 15137 to 9935 contracts which points out the increase of short positions by 34% in the contract and squaring off long positions simultaneously.

Analysts believe that as the whistle for Beijing Olympics blow, the demand for Copper will ease further. As it is the London-Shanghai arbitrage is contrary for imports of Copper in China. London-Shanghai arbitrage opportunity arises when the prices in LME of Copper are lower than the landed cost in Shanghai. So far the situation has been that the prices in LME three month forward market is quite high when compared to landed costs in Shanghai and thereby the demand from importers in China is lull. This is indicated in the fact that Chinese copper imports fell by around 24.4 % in June from the corresponding period previous year. Whatever demand is seen in Copper is the resultant of term contracts by Importers in China which they entered to hedge their portfolios.

On 21st July 2008, International Copper Study Group (ICSG) released preliminary data for World Copper demand and supply scenario for the month of April 2008. World Refined Copper production increased by 1.7% in the first four months of the year compared to corresponding period last year. Interesting to note is the fact that World Refined Copper usage declined by a marginal 0.5% due to decline in apparent usage by EU countries by 7% and China and US of 1%. This offsetted the growth in Japan by 3% and remaining countries by 3.4%.

Australian Bureau of Agricultural and Resource Economics (ABARE) in its latest report has also mentioned a slow pace of demand in the second half of 2008 and a decline in demand from the start of 2009. In 2009, World copper prices are forecasted to decline by 8% to average around $ 7169 a tonne. Further additions to supply capacity are forecasted to outpace growth in demand, allowing stocks to increase to 2.3 weeks of consumption. From January-June period the consumption of refined Copper in US declined by 7% reflecting a slowdown in manufacturing and housing sector. For 2008 ABARE expects an increase of 5% in World Mine production to 16.3 million tonnes. In 2009 the World Mine production is expected to increase by another 8% to 17.5 million tonnes. World production of refined copper is forecasted to increase by 4 % in 2008 to around 18.8 million tonnes, and by a further 7% to 20 million tonnes in 2009.

Writer's Comments:
Copper prices have been volatile since the start of the year. As the days pass the prices are looking to correct in the domestic as well as international markets. Slowness of demand in US and Europe was already factored in but the rising interest rates in India will be bringing the Industrial growth down. It is expected that the borrowing costs of the major manufacturers in India will rise further after the Inflation curbing regime by RBI. In China the traders are already pulling off from the imports due to negative arbitrage.

On the other hand, Dollar has seen some fresh bouts of rally against the EURO on the back of falling Crude prices which are expected to go down futher. This will ensure that the Staginflationary pressures in US will calm down in days to come. Therefore the commodities such as Copper which is also used as a hedge against Inflation will turn down. Copper is likely to ease towards 7700 per tonne on LME and 318 per kg on MCX.

RBI Bound To Curb Demand, Rupee Will Deteriorate Further

RBI tightened its grip during the month of June against the rising Inflation, by its monetary policies. Rupee commenced on a lower note against the Dollar and remained static with weak undertone, but after the RBI monetary measures were announced some bounce back in the domestic currency was witnessed against the greenback but that too for a short period. Rupee touched a low of 42.97 on 23rd and 20th June 2008. RBI hiked CRR and Repo rates in order to curb demand pressures on prices. RBI is believed to have sucked more than 16000 crores from the system with this hike. The after affects of the hike was that most of the banks raised their deposit and lending rates. On the other hand, the prices of Crude kept piping their new all time highs throughout the month and in turn compelled the Crude Oil companies to purchase dollars against the domestic currency.

Light Sweet Crude Oil touched all time highs of 143.67 per barrel in international futures markets on the last trading day of the month (30th June 2008). Financial markets which are already facing frail response from FIIs, witnessed heavy selling in the concluding days of the month after Inflation India's WPI- Inflation rate zoomed to a new 13-year high of 11.42 per cent for the week ended 14th June 2008.

Rupee vs Dollar:

At the initiation of the month, Dollar gained against the majors including Rupee, triggered by Federal Bank decision to hold the interest rates to 2% on 25th June 2008. The Federal Reserve sharpened its focus on inflation, saying that the upside risks to inflation are of a high magnitude. The Federal Open Market Committee (FOMC) expects Inflation to moderate later this year and next year. The economic growth prospects for India however got brim as its WPI- Inflation mounted to 13 years high to 11.42 %. Dollar also strengthened against Rupee as growth forecasts of India at 8.5% turned weak. Now calls have started coming for 7.5%-8% growth in GDP.

Rupee started the month at 42.24 per Dollar on 2nd June 2008 and ended the month at 42.95 per Dollar as per RBI reference rates, registering a fall of 0.89 % in a month. IIP data released for the month of April 2008 was not able to provide supports which was needed by the Rupee. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of April 2008 stood at 175.0, 287.0, and 218.2 respectively, with the corresponding growth rates of 8.6%, 7.5% and 1.4% as compared to April 2007. The revised annual growth in the three sectors during April-March, 2007-08 over the corresponding period of 2006-07 were 5.1%, 8.7% and 6.4% respectively, which moved the overall growth in the General Index to 8.3%.

Ministry Of Commerce Foreign Trade Data showed the burgeoning problem of Trade Deficit in India with Crude oil imports remaining strong. India’s Foreign Trade Statistics for the month of April 2008 showed a rise of 37% in imports to $ 24274 million. Exports rose by 32% to $ 14400 million. Oil imports amounted to $ 8029 million in the total imports up 46% in April 2008. Oil imports accounted to 33% in the total imports.

RBI on the other hand tried to cushion the falling Rupee by purchases of domestic currency through nationalized banks and managed to stable it to a larger extent, keeping the domestic currency beneath 43 mark. However the tightening monetary situation and rising inflation numbers will affect the growth rates adversely in coming months and therefore Rupee is likely to face the heat against the major currencies across the globe especially Dollar.

Major Currencies Overtake Rupee:

Other major currencies also registered appreciation against the Rupee, while EURO and Pound were the front runners, Yen also kept firm. EURO is expected to remain firm against the Rupee with European Central Bank likely to hike the borrowing costs by at least 25 basis points to 4.25% from the current 4% in its upcoming meeting. Rupee closed at 67.81 against EURO on 30th June 2008 marking a decline of 2.76%.

In another major event, a bilateral swap agreement was signed between India and Japan. Initiating this facility will enable both Japan and India to swap their local currencies against the Dollar for an amount of upto $ 3 billion. According to both the central banks (Bank of Japan and RBI) the agreement aimed to address short term liquidity and supplementing the existing international financial arrangements. Rupee was quoted at 40.65 against Yen to end the June month , registering a loss of 77 pips from 2nd June 2008 when it was 40.09.

Demand Was Curbed By RBI Measures:

RBI stepped into the picture after the measures from the government failed to stop the Inflationary concerns in the market. RBI governor Mr. Y.V.Reddy remarked that “There is a legitimate concern about the recent developments on the Inflation front.” Repo Rate was increased on 24th June 2008 to 8.5% from 8% with immediate effect. Cash Reserve Ratio (Amount of Reserve to be kept with RBI) was also increased to 8.75% in two stages. From 5th July 2008, CRR on net demand and time liabilities will be altered to 8.50% and from 19th July 2008 another 25 basis points increase will make it to 8.75%. RBI also highlighted the fact that vigil will be kept on the macro economic and monetary environment and appropriate measures will be taken accordingly.

India Total Foreign Exchange reserves for the week ending 20th June 2008 were $ 310687 million as against $ 316171 million on 30th May 2008, marking an decrease of 1.8%. Bond Yields which are an indicator of liquidity conditions in the markets moved northwards to 8.86% on 18th June 2008, its highest since October 2001.

Outlook:
There is no surprise now that the Inflation numbers will be in double digit in the near future and central bank will be intervening from time to time in the monetary markets. Further monetary tightening is on the cards and this will bring serious impact on the liquidity, which is all the more struggling from rising trade deficits. CRR and Repo rates will be increasing in days to come to support the government intentions of checking prices.

The challenges are many Firstly, the Political uncertainty over atomic deal will bring further negativity in the financial markets. Secondly Crude Oil and food prices across the globe are touching new highs on every passing day and therefore the Inflationary tendencies will keep on impacting the growth. Therefore, it is expected that Rupee will be trading with negative undercurrents. Spikes in Dollar movements will also be provided by Oil companies through purchases of Dollars against Rupee. These Companies had been facing crores of losses on a daily basis due to government subsidized rates of petroleum and allied products. The Apex Bank will ensure that the strong footing of Inflation is demolished in days to come. Yet this appears to be a Herculean task and till that time one should gear up to see Rupee on back foot.

China Setting Trend For Aluminium

Aluminium is keeping its winning momentum with supports provided by the Chinese production cuts by 5-10%. The fact given was that Aluminium was in surplus across the globe and these cuts will ensure the gap to be filled in days to come. Twenty companies of China signed an agreement to cut output by 5 to 10 percent. The global supply surplus was 458000 tons in the first four months of the year, the World Bureau of Metal Statistics said. Analysts expect that this will remove as much as 1.2 million metric tons of Aluminium supplies.

During the week ending 11th July Aluminium prices gained $ 167 to end the week at $ 3322 per tonne. All time high for Aluminium was 3375 per tonne on 11th July 2008. However the inventories levels are in quite comfortable position at 1088675 tonnes up 500 tonnes during the week and contrary views highlight the fact that the constant decline is necessary before Aluminium takes a leap forward. On MCX July expiry Aluminium hit an all time high of 144.20 per kg.

The overall outlook remains strong, the prices of Aluminium on LME can see a upside to 3400-3500 per tonne levels, the same currently hovers at $ 3300 per tonne mark after hitting an all time high of 3370 and if this happens the prices in the domestic futures market of Aluminum can go up to 150 levels.

China was a net importer of primary Aluminium again in May, according to the full metals trade report. Exports were just 4022 tonnes, down by 72% year-on-year, while cumulative exports were 26103 tonnes in the Jan-May 2008 period down by 79.5% from the 88500 tonnes exported in the year-earlier level. Imports, meanwhile, have been running at very steady levels so far this year. At 59299 tonnes over the first five months of 2008 cumulative imports were virtually unchanged year-on-year. The result has been a swing by China from net exporter of primary metal to net importer. Net imports were 6823 tonnes in May, bringing the cumulative total to 33196 tonnes over the Jan-May 2008 period. By contrast, the country was a net exporter of primary metal to the tune of 28848 tonnes in the same five-month period of 2007.

It has become all the more certain that the prices of Aluminium will continue to remain robust in days to come. Continuous decline in Inventories and Power Shortages across the major smelters are also giving confidence to the market participants to join the rally.

Aluminium is a high power consumption sector and more often then not the prices are determined by the amount of power available for the smelters. In the last few years power is becoming scarce on the rising demand from various sectors and the supplies are not been able to handle the pressure. Aluminium majors like South Africa and China have been facing the power shortages and this trend is likely to continue in days to come.

China power costs are double when compared with that in the industry, Inflationary concerns are forcing the Chinese government to remove the tariff discounts given earlier to the Power industry and to raise the tariffs. Smelting capacities are also expected to migrate to Russia, Middle East, Africa, Indonesia, and Iceland in the years to come while India and China will lag behind improving there power generation capacities. This is expected to adversely affect the Aluminium producers.

Nickel- The Rising

The prices of Nickel are all set to make a mark after crashing hard in the month of May. LME Nickel futures prices closed at $ 21800 per tonne on 30th May 2008 declining by more than 20%. The trend is reversing fast and bargain hunting has begun in the futures market. Nickel outlook is strong in days to come.

Nickel is the most important metal from steel industry point of view. Nickel is primarily sold for first use as refined metal or ferronickel. About 65% of the nickel consumed in is used to make Austenitic stainless steel (also known as the 300 series). Another 12% goes into superalloys or nonferrous alloys. The remaining 23% of consumption is divided between alloy steels, rechargeable batteries, catalysts other chemicals, and plating.

Nickel Prices crashed both in international as well as domestic markets. LME saw a depletion from $ 28300 per tonne on 1st May 2008 to $ 21800 per tonne at the last trading day of the month, registering a decline of 23%. MCX Nickel for May month expiry was Rs 936.50 per kg on 31st May 2008 as against Rs 1161.50 at the start of the month, a fall of 20%. The prices are recovering thick and fast and in coming days the overall trend seems to be favouring growth. Looking at the LME inventories levels we found that the inventories have declined from 51432 tonnes since the initiation of May to 47238 tonnes till 11th June 2008, marking a fall of 8.1%.

Indian Steel consumption is growing at 12-13 % yearly, whereas the growth in production is less than 6 %. This is an indicator of rising demand for steel in the country. The Steel exports in 2007-08 were at 5 million tonnes, while imports stood at 7 million tonnes. Nickel, being the major raw material in Steel production is set to see increase in consumption and thereby higher prices. International Stainless Steel Forum (ISSF) expects that world steel production in 2008 would recover after never before seen stock draws, which followed the crash in nickel prices last year, leading to a 2.6% decrease in stainless steel in 2007.

International Nickel Study Group (INSG) studied the consumption pattern of Nickel, indicating that the consumption was strong till the first half of 2007. During the second half, the production of high nickel-content stainless steels declined in most parts of the world, reducing the consumption of primary nickel and nickel containing scrap. However, world primary nickel usage in 2008 is anticipated to reach a record level due to a recovery in nickel containing stainless steel production around the world and particularly in Asian markets including China. As per INSG, World primary refined nickel production was 1.44 MT in 2007, and is expected to increase to a record level of 1.54 MT in 2008. World primary nickel usage was 1.30 MT in 2007, and is estimated at 1.47 MT in 2008. For the year 2008 a broad based recovery of nickel usage is anticipated. Thereby, indicating that the demand will be strong.

China was the net importer of refined nickel and nickel alloy to the tune of 44661 tonnes in the first four months of this year. That represented a 42.5% rise on a YOY basis. Net Imports for the year 2007 were 31300 tonnes. In April, Chinese net imports were 10320 tonnes with exports remaining very low at 456 tonnes. This marked the fifth consecutive month when exports kept under 500 tonne level. It is clear that Chinese buyers have been capitalizing on relatively low LME prices to do a little bit of stock rebuilding.

Another renowned agency, The World Bureau of Metal Statistics (WBMS) said it calculated the global refined nickel market which showed a production-consumption deficit of 9300 tonnes in the first quarter of the year 2008. The report estimated that global demand fell by 12 % year-on-year but that refined production also fell by 8 % over the same period. It includes in its figures production of nickel pig iron in China, but noted that the quantity of this material produced in the last few months has fallen due to lower availability of imported feed materials.

Outlook:
Nickel prices are expected to remain firm in days to come, although slight hiccups can take the prices near to its lows but strong consumption patterns from the user industry will ensure that the demand supply gap is maintained. MCX Nickel futures for June expiry is expected to find supports at 937 and 917 levels, with targets of 1100 in medium term. MCX June month has assured some positive beginning in Nickel, with prices registering a growth of 5.1 % by 10th June 2008. But this rise has been due to short covering by market participants, in coming days one can see some fresh longs emerging in the near month contract. LME Inventories downfall will also ensure that prices keep rolling higher. Consumption of Nickel in China is growing at a hefty pace. China has been the net importer of Nickel so far and healthy demand is likely to continue in remaining quarters as well.

Changing Ends- USD/INR

RBI kept silent in the begining of the month and witnessed the downtrend which was not reported in Rupee market since last one year. Rupee touched a low of 43.15 on 22nd May 2008 and recovered afterwards on the back of RBI’s intervention. However the domestic currency kept the bearish undertone throughout the month. Numerous factors were responsible for the declination of Rupee, such as dismal IIP numbers, Rise in Crude Oil prices, Lack of Inflows by FIIs. But rise in Crude Oil prices was the strongest of them all. The prices of Crude kept piping their new all time highs throughout the month and in turn compelled the Crude Oil companies to purchase dollars against the domestic currency.


India imports more than 70% of its Crude requirements therefore the sharp correction was unwelcomed by the importers. FII kept their backs on Indian equity markets on the worries of rising Inflation and overrun fundamentals in most of the companies, this created dearth of liquidity in the markets and in turn pressurized the Rupee. To make sublime ridiculous came in the IIP data, the General Index stood at 297.8, which was 3.0% higher as compared to the level in the month of March 2007, but worst in last 6 years.

Rupee vs Dollar:
It is surprising to see how the Dollar movement can contradict against various currencies. Since last one year the Dollar has lost against the Rupee and Euro on the aspect of sub prime crisis and Inflationary concerns in front of US economy and Federal Reserve. Keeping these factors constant, Euro maintained its appreciation against the Dollar. On the other side, elements like slow IIP growth and galloping Crude Oil lead Rupee to decline against the Dollar.

The Indices of Industrial Production (IIP) for the Mining, Manufacturing and Electricity sectors for the month of March 2008 witnessed growth rates of 3.8%, 2.9% and 3.7% as compared to March 2007, dismal data continued to degrade the domestic currency. This along with strong demand from Oil companies for Dollar also added pressure on Rupee.

Demand of Dollar also kept coming from Non Deliverable Forward Markets. Non-deliverable forward (NDF) markets trade mainly in six Asian currencies. These offshore markets form an important part of the global and Asian foreign exchange markets, equilibrating market demand and supply in the presence of capital controls. The NDF market offers an alternative hedging tool for foreign investors with local currency exposure or a speculative instrument for them to take positions offshore in the local currency.

Rupee started the month at 40.46 per Dollar on 1st May 2008 and ended the month at 42.59 per Dollar registering a fall of 6.65 % in a month. Rupee passed the comfort zone of RBI 43 per Dollar, touching a one year low of 43.15 on 22nd May 2008. The currency saw a high of 40.55 on 5th May 2008 against the Dollar.

Eyeing the last month, RBI made a decision to hike CRR by 50 basis points to 8% during the month of April. The measure proved to be insufficient to tame the rising Inflation (WPI) which was 8.1% for the week ending 17th May 2008. RBI through this measure sucked Rs 18500 crores from the system, however the burgeoning demand for Dollar on the course of rising current account deficit ensured that the affect of rise in CRR was nullified.

Call rates were hovering around 8 % mark as banks tried to adjust their liquidity by borrowing funds from their peers. On the verge of month ending, state run banks stepped up to sell Dollars heavily against the Rupee on behalf of the Central Bank and this lead Rupee to trim some of the losses. The market estimated that central bank sold dollars worth around $ 1 billion in a single day (27th May) to help Rupee stability, Foreign Banks bought Dollar worth $ 500 Million on the very same day. As per RBI monthly bulletin, data for March 2008 showed that the RBI was net purchaser of Dollar to the tune of $ 2809 million as against $ 2307 million on March 2007, marking a rise of 22% on a YOY basis.

On the other hand, Foreign Investment data showed a very disconfirming approach by Foreign Institutional Investors (FIIs). Total outflows were $ 8991 million in February while in March the outflows were $ 1643 million. This was against the inflow of $ 2385 million in February 2007 and a outflow $ 2433 million in March 2007. These outflows have reflected themselves on the domestic indexes, The Nifty and Sensex.

On month ending, Indian Rupee rose sharply against the U.S. dollar on 30th May, on expectations that capital inflows to the country will increase after the government allowed local companies to borrow more overseas. The Indian government on 29th May 2008, allowed local infrastructure companies to borrow up to $100 million overseas, while other companies were allowed to borrow up to $50 million overseas for local expenditure. The previous limit for overseas borrowing was $20 million for all local companies.The government also raised the foreign investment limit in government securities to $5 billion from $3.2 billion, and the limit of such investments in corporate bonds to $3 billion from the previous $1.5 billion.

Rupee Vs Other Major Currencies:
Depreciation of Rupee was not only against the Dollar but other currencies too. EURO appreciated sharply by 7.02 % in May against Rupee ending at 84.16. he same story followed in Yen and Pound. Against Pound the Rupee was down by 7.02 % while Yen appreciated by 7.26%, ending at 84.16 and 40.42 respectively. Indian Rupee remained as the second worst performer among the Asian Currencies after Korean Won.

Widening Trade Deficit Will Pressurize Rupee Further:
Ministry of Commerce, Foreign Trade Data, insures the fact that the weakness in Rupee is not for short term and the curve looks inclined towards greenback augmentation in days to come. India’s imports during March, 2008 were valued at US $ 23174.94 million representing an increase of 35% over the level of imports valued at US $ 17136.46 million in March, 2007. India’s exports during March, 2008 were valued at US $ 16282.79 million which was 26.59 % higher than the preceding year. The important thing to note in the imports figure is that, Crude Oil imports shooted up by 77% on a YOY basis. Oil imports during March, 2008 were valued at US $ 8633.14 million as against US $ 4888.47 million in the corresponding period last year.


The trade deficit for April- March, 2008 was estimated at US $ 80398.24 million which was higher than the deficit at US $ 59321.18 million during April- March, 2007, a rise of 36%. With calls coming by analysts of Crude Oil touching $150 per barrel by the year end, the problem of Trade Deficit will mount further making Import Bills to pile up and inturn throwing Rupee near to bearish clutches.

Outlook:
Considering the scenario which Crude has built on Trade Deficit front along with lack of interest shown by FIIs in the Equity markets arena, liquidity is bound to remain tight in days to come. Problem with RBI is that the Inflation has passed the comfort zone by quite a margin now and this calls for soaking up of liquidity from the system, considering this the road of liquidity becomes all the more bumpy.


Meanwhile, RBI will be cautious of Rupee’s sharp declination against the Dollar, however the Central Banker will be eyeing on export competitiveness due to which we might see some depreciation in Rupee without any interference, as it did at the start of the month. Macro economic fundamentals of the country are also suggesting bearish undertone in domestic currency. Exporters are expected to cover their positions in FOREX markets if the movement of Rupee witnesses some trend reversal. This will be providing some support to the Dollar. Going forward Dollar is expected to trade in the range of 42.32 and 43.20, if it breaks the upper range then Rupee might test 43.50 in days to come.

Inflation Perturbs Rupee

Earlier it was the buying from Crude Oil producers in the domestic markets which were hedging their positions against the rise in Crude Oil prices which was the main culprit of falling Rupee, now it is the inflationary concerns which has bugged out to vex the domestic currency. Having, said that we haven’t undermined the affect of Inflation in the previous weeks but have just tried to bring in as an additional induction to the Rupee depression. Inflation (WPI) for the week ending 2nd May 2008 is 7.80%. We are more worried about the method of calculation of WPI although Inflation remains in our radar.

These WPI numbers calculated by MOSPI (Ministry of Statistics, Programme And Implementation) is questioned by many including us, the Staticians normally do not get the actual rates from the markets which is used to calculate much hyped WPI, and if they don’t get the rates they use the ones which were earlier taken to calculate the WPI. This WPI is not real as is highlighted because till the time you get the real quotes the prices have shooted to a much larger extent.

The never ending debate CPI Vs WPI continues, CPI is the measure of calculation of Inflation on a Retail Basis, or the Consumer’s point of view, where the prices are much more high-pitched than that in WPI arena. But the government still is numb on that part, because WHO LIKES HIGH NUMBERS IN INFLATION?..... and at the time when elections are round the corner.

Now the other side of the coin, Demand has also been seen picking up from Non Deliverable Forward Markets for Dollars, these our markets where arbitrage positions are taken in Dollar and Rupee and are mostly operated from Singapore.Government has already sucked Rs 18500 crores from the system by hiking CRR in back to back tranches. Foreign Exchange funds by FIIs have continued to demotivate, as the markets remain lackluster and making sublime to ridiculous is the fact that these investors are waiting markets to correct further which suggests that the dismal performance of Rupee against Dollar will continue as the bankers get busy setting aside funds for CRR.

Rupee is now trading at 42.89 against the Dollar after touching 42.93, which is so far its intra day high. Rupee will keep its bearish undertone because of the strength in Crude oil ahead of US summer driving season, on the other hand FIIs seem to have a pessimistic outlook on the Indian markets which will also be impacting it negatively, and please don’t forget INFLATION in the process…...

Is Only Food Burning ?....... Have A Look At Crude Than

Crude Oil Prices in NYMEX set new records spiking to $119.90 a barrel on 22nd April 2008, this has augmented uncertainties in the minds of economists who were so far been finding Food as a hot topic.

Crude oil prices have oflate been on the hit list of many Governments and Economists, as one of the cause of inflation. The rise in Crude has been well supported by a variety of news, summer driving season in US, Dollar touching all time lows against the EURO, OPEC stance of not to increase the supply of Oil and if this was not all the dicey nature of Crude surprised everyone especially those who were predicting a constant rise in inventories.

The Energy Information Administration data indicates that the US Crude Oil ending stocks since 1999 have been on the rise barring a fall in the year 2000 in stockpiles by 4.6% to 10232.92 per thousand barrel as against 10726.80 per thousand barrel. Till the end of 2007 the increase in US Crude Oil ending stocks have rose to 12182.78 per thousand barrel marking a rise of 13.5%. In the first month of 2008 US crude Stocks were 994.771 per thousand barrel a decline of almost 2%.

The latest EIA report on oil inventories in the week ended April 18th, demonstrated that crude oil inventories increased by more than expected after falling in the two previous weeks. The report showed that crude oil inventories increased by 2.4 million barrels, offsetting the 2.4 million barrel decrease seen in the previous week.

Crude Prices normally rise in the spring as suppliers stock up in advance of peak summer driving season, and as refiners switch over from making winter grade gasoline to the more expensive, but less polluting, summer version of the fuel. As they perform this switch, refiners try to sell off all of their winter grade fuel, driving overall supplies down. This year, refiners are also facing short supplies of alkylate, a key ingredient in summer grade fuel.

Tensions in Nigeria also ignited the prices. Nigeria is the fifth-largest exporter to the U.S. last year and produces low-sulfur crude highly valued by refiners because of the proportion of high-value gasoline it yields. The country pumped 1.96 million barrels a day of crude in March down from 2.4 million barrels a day at the end of 2005 as militant attacks have increased.

World finest variety The West Texas Intermediate (WTI) also known as Light Sweet Crude due to its low sulphur contents was $ 19 per barrel in the year 1999, now the same trades at $ 118 per barrel in 2008, registering a rise of more than 500% in 10 years. If one compares it with EURO- Dollar exchange rates the relation is clear as the Dollar subdued its position against the EURO since 1999, when EURO came as the single currency for all the member countries, Crude has inched up. It therefore signifies the fact that Dollar moves in inverse proportion as that of Crude Oil and whenever Dollar is declining it augments the lure of Crude for the traders and participants as Dollar denominated currencies become cheap. Dollar has lost by 50% since the initiation of EURO in 1999, however in case of Crude several other factors act as triggers which determine the trend from time to time.

In Domestic Markets MCX Benchmark Futures for June expiry touched a high of Rs 4734 per barrel on 22nd April 2008. The prices were hovering in the range of 3718 per barrel at the start of this year, marking a rise of 27% in barely four months.

The immediate move of the rising Crude Prices came from Venezuelan President Hugo Chavez, Venezuela began taking a bigger cut of foreign oil company’s windfall profits, applying a new and higher tax on earnings. Under a law approved on 16th April 2008 by the National Assembly, Hugo Chavez's government started charging a 50 percent tax on additional earnings when crude prices pass $70 per barrel in U.S. dollars and 60 % on additional earnings when prices top $100 per barrel. The new levy came on top of income taxes currently set at 50 percent for foreign oil companies. The amounts paid will be deductible from the oil companies' income tax payments.

Outlook:

As per Energy Information Administration, the global oil market remains fundamentally tight entering the second quarter of 2008, despite a slowdown in U.S. oil consumption and growing risks to global economic growth, the combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices.

World oil consumption is expected to grow by 1.2 million billion barrel per day in 2008. Non-OECD countries are expected to account for over 1 million billion barrel per day of world consumption growth, while OECD consumption is expected to climb by 90000 billion barrel per day. Higher oil prices and slower economic growth have dampened consumption in the United States, but global oil consumption is still increasing because of continued growth in China, India, Russia, and the Middle East oil-exporting countries. OPEC crude oil production is expected to average 32.3 million billion barrel per day during the first quarter of 2008, or about 700000 billion barrel per day above fourth quarter 2007 levels.

Prices are in unchartered zone from where further triggers will enthuse more consolidation at the upper levels.

Asian Economies- Spiraling Food and Oil Prices Will Keep Fuelling Inflation

Recently Asian Development Bank released its Outlook on Asian Economies for the year 2008. The key factors of the report suggested that although the Credit markets will be working in a sound manner in the Asian Economies, Inflationary risks will keep hovering over these economies lead by spiraling Food and Oil Prices.

Developing Asia registered its highest growth in 20 years averaging around 8.7% in the year 2007. This year the growth is likely to be at 7.6% as per expectations, this will be because of the trend prevailing in the Global markets including surging Food and Fuel prices. The report suggested that the road to success is dependent on how successfully the countries manage these constraints.

Signs of overheating are prevalent in China where the Inflation figures touched a 11 year high in November 2007, India was no different with Inflationary figures reaching to as high as 7%, a three-year high in the week ended March 22 as against 6.68% in the previous week. The WPI for all commodities rose by 0.5% to 224.8 from 223.6 in the week ended March 15, the Commerce & Industry Ministry said. The latest inflation rate was above the average forecast of 6.62% and is the highest reading since Dec. 4, 2004 when it was 7.07%. The annual inflation rate was 6.54% during the corresponding week of the previous year.

Inflation pressures were also very high in Sri Lanka, and inflation accelerated to 20%. Bangladesh and Pakistan also had comparatively high rates of 7.2% and 7.8%, respectively.

Road Ahead:

Commodity market prices have also soared again testing new highs, Food Prices have been on a roll with Rice, Soybean and Wheat all touching new resistances in International markets. Crude Oil is also near to its all time high figure, and with summer driving season in picture the demand is expected to emerge from the US, with Dollar trading near to its lows against the majors is making the traders of Black Gold attracted towards the prices.

Hue and Cry emerged in Rice markets in Asia after the prices touched to as high as $ 20 in Chicago more than double of what it used to be in the year 2007. India, the world's second-biggest rice producer, increased the minimum export price for the grain to boost local supplies and curb inflation. The minimum price for non-basmati rice exports were raised to $1,000 per tonne from $650 per tonne free on board, in a move to slow down exports and to tame rising inflation. Most of the other major’s producers and consumers of Rice have banned the exports of Rice in order to supply the commodity to its hungry economies. Incessant rains in India have damaged the standing crops of Wheat in North and South India and this will adversely affect the prices in the country where the Inflation is as it is on a higher end.

However, the turmoil in Global Financial Markets especially in US, European Union and Japan will bring slowdown in growth prospects of other emerging economies. First half of the financial year 2008 is expected to be weak, but the performance of the second half especially in the US can pick up after the aggressive rate cuts and financial stimulation strategies. Fed is likely to cut interest rates several more times this year but the counter affects will only be clear in the second half of 2008.

Concerns about the outlook for the economy contributed to the Federal Reserve’s latest decision to cut interest rates, according to the minutes of 18th March 2008 Federal Open Market Committee meeting released on 8th April 2008. The minutes showed that most members of the committee determined that a substantial easing in the stance of monetary policy was warranted in light of the belief that the outlook for economic activity had weakened considerably since the January meeting.Some members viewed the downside risks to economic growth as having increased and some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market.

The Fed acknowledged that the outlook for economic activity has weakened further, with consumer spending and the labor market decelerating in reaction to the slowdown. The central bank also cautioned that the financial market stress, tighter credit conditions and the deepening housing market contraction will weigh on growth over the next few quarters


Outlook:

The anticipations in the report are that the Trade Deficits are likely to move up in the developing nations due to there voracious appetite for the commodities. The subsidies provided to ease the pressure of price rise will keep on hurting the governments in the days to come. Inflationary pressures should recede slightly in 2009. The forecast deceleration in inflation is based on an assumption of some moderation in commodity prices through 2009 and monetary policies that lean against inflation pressures. Current account surpluses are expected to narrow further in 2009, and should help rebalancing, and at an aggregate regional level may fall below 5% of GDP. Even if global demand growth recovers, it is likely to be modest, and real exchange rates are expected to appreciate for many Asian economies.”

COPPER- UPPER End Skepticism

This is what we call as a resounding journey in Copper, Inventories kept on exhausting on LME and this assisted the bulls to get hold of the bears in rallies. But the upper end journey is also letting skepticism to dig in participant’s minds and this can see some volatile sessions in the days to come.

Copper is the best non- precious metal conductor of electricity as it encounters much less resistance compared with other commonly used metals. It sets the standard to which other conductors are compared. Copper is also used in power cables, either insulated or uninsulated, for high, medium and low voltage applications. In addition, copper's exceptional strength, ductility and resistance to creeping and corrosion makes it the preferred and safest conductor for commercial and residential building wiring. Copper is an essential component of energy efficient generators, motors, transformers and renewable energy production systems.

LME inventories recently touched its five month lows on 10th March 2008. LME-registered stocks of copper fell by 9450 tones (3rd March- 10t March) with the headline figure recording a fresh 2008 low and ending the week at its lowest level since October 2007. Meanwhile the prices on MCX turned down from Rs 345.50 per kg on 3rd March to Rs 338.20 per kg on 10th March, it would also be worth mentioning that during this period open interest in the contract depleted from 9918 to 8848 contracts which points out the increase of short positions in the contract.

News from Chinese markets is also setting bearish undertones, Chinese copper imports fell by around 5% in February from 226980 tonnes from 239000 tonnes in January. While part of the decline was due to Lunar New Year holidays and severe winter storms affecting demand, concerns the Chinese market is well supplied have been weighing on prices of red metal. Rise in inventories level in Shanghai for the fifth straight week on 7th March also brought alarming bells to the traders. Shanghai inventories of Copper popped up by 3955 tonnes to 52840 tonnes.

The only supportive factor for the Base metals has been the fact that the US Dollar is plummeting against the majors and in turn making the commodities denominated in Dollar attractive for consumers। The dollar came under aggressive selling pressure against the yen, falling to its lowest level since 2000 at 101।38 as heightened risk aversion prompted a sharp rally by the Japanese currency। Against the EURO the same was 1।5366 on 10th March 2008 after touching an all time high of 1।5463 on 7th March 2008 Persistent fears of instability in the US financial markets and burgeoning concerns about an economic recession have plagued the greenback। However, the currency's rapid descent has prompted a renewed bout of verbal intervention in an effort to contain further deterioration

Outlook:

The prices have run to levels from where correction is inevitable, resurgence of Inventories will be supportive for the corrective triggers in prices. Technically speaking Copper on domestic futures markets can correct upto 323 levels in near term.

Carbon Credit Futures

New initiative- Low Volumes
Carbon Credits are components to alleviate global warming. The entities involved can get a carbon emission certificate which they can sell either immediately or through a futures market
Multi Commodity Exchange (MCX) recently launched Carbon Credit futures on 21st January 2008, the basic purpose was to invoke trading in emissions allowances between the participants। The initiative not only made it Asia's first ever commodity exchange, it also made MCX join the league with Chicago Climate Exchange and the European Climate Exchange. The volumes so far have been quite dismal but the same will increase with the passage of time and increase in knowledge.
Carbon Credits are generated by enterprises in the developing world by using cleaner technologies and in turn saving on energy consumption। This consequently reduces their greenhouse gas emissions. For each reduced tonne of carbon dioxide emission, the entity gets a carbon emission certificate which they can sell either immediately or through a futures market, just like any other commodity.
Carbon Credits are components to alleviate global warming।The mechanism were formalized by an international agreement naming Kyoto Protocol, which is being formed on the consortium of more than 170 countries.
The Protocol requires developed countries to reduce their Green house Gas (GHG) emissions below levels specified for each of them in the treaty। These targets must be met within a five-year time frame between 2008 and 2012, and add up to a total cut in GHG emissions of at least 5% against the baseline of 1990. The targets cover emissions of the six main greenhouse gases, namely: Carbon dioxide (CO2), Methane (CH4), Nitrous oxide (N2O), Hydro fluorocarbons (HFCs), Perfluorocarbons (PFCs), and Sulphur hexafluoride (SF6).

Global Exchanges:
The first exchange to start Carbon Credits trading was Chicago Climate Exchange, this is North America’s only exchange which provides platform to reduce emissions of six greenhouse gases। Total traded volume of Chicago Climate Exchange in January stood at 13,38,900 metric tonne while February comprising 99,84,400 till 27th February 2008. Year 2007 volumes surpassed 22.9 million metric tons CO2, an increase of 123% over 2006 trading volume. Highest monthly volumes were seen in February and July with 3,712,100 and 3,304,200 metric tons CO2 transacted respectively.
The European Climate Exchange (ECX) was launched by CCX in 2005, and is now the leading exchange operating in the European Union Emissions Trading Scheme. In
January volumes of this exchange reached a new monthly record of 171 Metric tonnes, up 180% on January 2007. Average daily futures and options volume were 7.8 Metric tonnes. On 22nd January, ECX hit its record daily volume till date with 14.9 Metric tonnes (14,900 lots) trading

Domestic Scenario :
In MCX, five Carbon Credit contracts in total have been made available for trading, starting from 1st January 2008 to 15th December of the contract year। The first contract ends on 15th December 2008 while the last one expires on 15th December 2012. The trading unit will be of 200 tonnes, and each tonne of carbon credit will be entitled to emit one tonne of carbon dioxide equivalent gases.
Maximum order size will be 10000 tonnes, with Tick size of 50 paise per tonne। Participant will have to keep 6% as an initial margin. In case of additional volatility, a special margin at such percentage, as deemed fit, will be imposed immediately on both buy and sale side in respect of all outstanding position, which will remain in force for next 2 days, after which the special margin will be relaxed. Delivery unit will be 200 tonnes of Carbon Credit.
The delivery center is Mumbai and at the time of delivery the member has to submit copies of relevant documents as a proof of holding Carbon credits certificates at the Exchange.
There are various price influential factors in MCX like Demand-Supply mismatch, Crude Prices, CO2 emissions, Coal Prices, and Other Global and geopolitical factors। So far MCX most actively traded contract is the December 2008 contract expiring on 15th Dec.
The prices of December expiry futures was Rs 1330 per metric tonne at the initiation on 21st January 2008, Open interest in the contract was 60, however it registered a price of Rs 1274।50 per metric tonne on 27th February 2008, a depletion of 4%, at the same time OI plummeted to 19. Volumes in the contract are 2400 metric tonnes.

Outlook:
This is still a very nascent stage for the Carbon trading in India, with most players yet to explore the benefits of Carbon futures trading, the prices and volumes can’t be taken as a benchmark for the future potential it holds. However with the passage of time, we can see a very price stable and volume driven market of Carbon Credit Futures trading.