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.