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.