Tuesday, February 5, 2008
Acceptance of Deposits - Revised Guidelines
RBI has prohibited persons other than Authorised Dealers/Authorised Banks to accept deposits from NRIs out of inward remittances from overseas or by debit to NRE/ FCNR (B) Accounts.
NRE Savings Bank Deposits - Interest Revised
Interest rate on NRE Savings Bank Deposits with effect from November 18, 2005 is 3.50%
Interest Rate Ceiling on FCNR(B) Deposits Revised
Reserve Bank of India has revised the interest rates on FCNR(B) deposits of all maturities contracted effective close of business in India on March 28, 2006 should not exceed LIBOR/ SWAP rate (as against 25 basis points below the LIBOR/SWAP) prevailing on the last working day of the previous month for relevant maturity and currency.
RBI revises the interest rates on FCNR (B)
Reserve Bank of India has revised the interest rates on FCNR (B) deposits of all maturities contracted effective close of business in India on January 31, 2007 are subject to a ceiling of LIBOR/SWAP rates for the corresponding maturities MINUS 25 basis points (as against should not exceed LIBOR/SWAP rate) prevailing on the last working day of the previous month for relevant maturity and currency.
NRE Term Deposit - Interest Rates revised
The NRE Term Deposit Rates are revised with effect from October 01, 2007. Now, you get 4.9% for deposits above one year but below two years. 4.59% for deposits above two years but below three years. 4.64% for deposits of three years upto ten years only.
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Find the latest in the world of Foreign Exchange Markets both at TMB, Nationally and Internationally. Get the latest upto date news / report about the forex related information from us. Learn about the interest rate movements as and when they happen right here right now. This can be your one stop forex news point for the latest and upto date news about forex markets.
The latest market alerts and analysis
Steady UK data. The UK PMI services data rose to 52.5 in January from 52.4 in December which should provide some Sterling relief
Weak Euro data. The German, Spanish and Italian PMI services indices were all below the 50.0 level for January which will increase fears over a sharp slowdown. The Euro-zone PMI index as a whole dipped to 50.6.
UK house prices steady. The Halifax house price index was unchanged in January which will provide some relief for Sterling
04-02-08. US factory orders: US factory orders rose 2.3% which should not have a significant impact
01-02-08. Stronger ISM. The ISM index for the manufacturing sector rose to 50.7 in January from 48.4 with a strong reading for prices
Instant view: The components were a bit disappointing, but the data will provide some dollar relief in choppy trading
US employment falls. US non-farm payrolls fell by 17,000 in January as manufacturing and construction jobs continued to fall. There was a slowdown in services growth. Government employment recorded a 18,000 drop, but the last time this happened there was a revision the following the month
Instant view: The headline figure is dollar negative, but upward revisions and a lower unemployment rate should curb aggressive selling
Weak UK PMI report. The UK PMI index for the manufacturing sector fell to 50.6 in January from 52.9 the previous month which will increase fears over the UK economy and will increase pressure for a 0.50% Bank of England rate cut next week
Firm Swiss PMI. The Swiss PMI index was solid at 61.6 in January from 61.3 the previous month which will underpin confidence
31-01-08. Higher US jobless claims. US jobless claims rose sharply to 375,000 in the latest week from 306,000 previously which corrects the surprisingly low data seen over the past few weeks and will cause some unease over Friday's payroll data.
Lower UK prices. The Nationwide Bank reported a 0.1% drop in house prices for January.
30-01-08. Fed cuts again. The Federal Reserve has cut interest rates by a further 0.50% to 3.00% with the discount rate also cut by 0.50%. The statement was generally downbeat on prospects.
Instant view: The 0.50% cut will provide near-term support to carry trades and tend to keep the dollar on the defensive.
Weaker US GDP. The fourth-quarter GDP recorded a drop to 0.6% from 4.9% previously, while the core deflator was above expectations.
Instant view: The figure is below expectations, but there should be some relief that the figure was not negative and all eyes will be on the Fed.
Higher US employment. The ADP report recorded an employment increase of 130,000 for January after a revised 37,000 increase in December which will provide some relief over US employment trends, but the GDP data will be watched closely
Fed Preview - For a preview of the Federal Reserve interest rate decision, please click: Fed Preview
Swiss KOF drop. The Swiss KOF index weakened to 1.70 in January from a revised 1.84 previously which was the lowest for close to two years and illustrates that the Swiss economy is not immune from the slowdown pressures.
King reappointed. UK Bank of England Governor King has been nominated for a second five-year term which should provide some slight Sterling support
Weak UK housing. UK mortgage approvals fell to 73,000 in December from 81,000 the previous month, but net lending was stronger than expected.
29-01-08. Lower US house prices. The latest Case-Shiller house price index recorded a decline of 7.7% in the year to November
Firm US orders. US durable goods orders rose 5.2% in December after a revised 0.5% increase in November. There was a 2.9% core increase while the November underlying figure was revised up to -0.4% from -0.7%.
Instant view: The data will ease immediate fears over the industrial sector and may cause some uncertainty over the Fed decision.
UK sales dip. The CBI retail survey recorded a drop in realised sales to +4 in January from +8 previously, although the expected trend for February was stronger which will provide some relief.
28-01-08. Weak US home sales. US new home sales fell to an annual rate of 604,000 for December from a revised 634,000 previously which will maintain a lack of confidence in the housing sector
Lower M3 growth. Euro-zone money supply growth slowed to 11.5% in the year to December from 12.3% previously which will provide some relief to the bank.
25-01-08. Weber talks tough. ECB member Weber has again talked tough on Friday which will provide some Euro support, but divisions are liable to increase
Lower Canada CPI. Canadian core consumer prices fell 0.3% in December with the annual rate dropping to 1.5% which will maintain pressure for lower interest rates
24-01-08. Steady US home sales. US existing home sales were little changed in December at an annual rate of 4.89mn from 5.00mn the previous month
Lower jobless claims. The US jobless claims were at 301,000 in the latest week from 302,000 previously.
Instant view: The jobless claims data still does support the severe pessimism over the US economy.
Stronger German index. The German IFO index rose to 103.4 in January from 103.0 the previous month which will help ease immediate pessimism towards the Euro-zone to some extent.
23-01-08. 8-1 MPC vote. The January minutes recorded a 8-1 vote for interest rates to be unchanged with the bank looking to wait for February, especially as inflation fears increased. Sterling will struggle to secure more than limited relief.
Mixed PMI reports. The Euro-zone PMI manufacturing index was stronger than expected, but the services index fell to 52.0 from 53.1 which will reinforce concerns over a Euro-zone slowdown
Trichet concerns. ECB President Trichet has stated that the bank must be prepared to deal with a crisis situation which will fuel talk of a cut in interest rates.
22-01-08. Canada cuts rates. The Bank of Canada has cut interest rates by 0.25% to 4.00% and suggested that rates will be cut again in the short term
Fed cuts rates. The Fed has cut interest rates by 0.75%. This looks like a panic move and could further destabilise markets with the dollar under pressure
Rate cut rumours. There have been rumours of co-ordinated interest rate cuts by the ECB and Federal Reserve which has undermined immediate demand for defensive currencies as global stock markets attempt to rally.
21-01-08. Stocks sharply lower. Global stock markets have weakened sharply with the German Dax index down close to 5.0% which is supporting the yen
UK house prices lower. UK house prices fell by 0.8% in January according to the Rightmove organisation
18-01-08. US confidence recovers. The US Michigan consumer confidence index rose to 80.5 in January from 74.8 which will steady market sentiment towards the US economy to some extent.
Firm RBA comments. The Reserve Bank of Australia governor has called inflation uncomfortably high which will boost the Australian dollar initially
UK sales fall. UK retail sales fell 0.4% in December with the annual increase falling to 2.7%.
Instant view: The UK retail sales data will reinforce concerns over the UK economy and undermine Sterling confidence
17-01-08. Weak Phil index. The Philadelphia Fed index fell sharply to -20.9 in January which will reinforce economic fears, although the price indices were strong.
Weak US housing. The continuing weakness in US housing data was confirmed by a drop in housing starts to 1.01mn in December from 1.17mn previously while permits were also weak. Jobless claims, however, fell to 301,000 in the latest week which will provide some relief.
ECB undermines Euro. There has been a significant shift in ECB rhetoric this week which has undermined the Euro. Today, ECB member Mersch stated that the downside risks to the Euro-zone economy had increased and that the 2008 GDP forecasts may be revised lower. He also stated that the ECB should be cautious given the uncertainties which will curb expectations of higher Euro interest rates.
Instant view: Despite the major US concerns, the Euro fundamentals increasingly do not look strong enough to justify levels above 1.49 against the dollar
Firm US inflows. US long-term capital flows remained firm at US$90bn in November which will provide some near-term support to the US dollar.
US core CPI in line. US core consumer prices rose 0.2% in December with a 2.4% annual increase while headline prices rose 0.3% compared with expectations of a 0.2% increase
Instant view: The data will not disrupt expectations of Fed rate cuts at the end of January.
Steady UK data. Headline UK average earnings growth rose to 4.0% in November from 3.9% while there was a further 6,400 drop in unemployment. The market impact should be limited
15-01-07. Weaker US sales. US retail sales fell 0.4% in December with core sales also falling by 0.4% over the month. There were small downward revisions to December's data.
Instant view: The data was weak which will undermine the dollar, but the impact should be measured as expectations have already deteriorated sharply.
Mixed UK CPI. Headline consumer inflation was unchanged at 2.1% in December compared with expectations of 2.0% while the core rate was unchanged at 1.4%. The data should not have a major impact on interest rate expectations
14-01-08. Higher UK PPI. UK producer prices rose 0.5% in December and the 0.4% increase in core prices will cause some concern within the Bank of England
11-01-08. Higher US deficit. The US trade deficit widened to US$63.1bn in November, but the initial impact has been limited
Canadian employment falls. There was a 18,700 drop in Canadian employment for December. Although unemployment held steady at 5.9%, the data will reinforce the near-term lack of confidence in the Canadian dollar.
Subdued UK output. There was a 0.1% drop in industrial production and manufacturing output for November which will reinforce negative confidence
10-01-08. Bernanke suggests more rate cuts. Fed Chairman Bernanke has stated that additional policy action may be required and that the Fed is ready to take substantive action
Instant view: The aggressive Bernanke comments will undermine the dollar in the short term and revive speculation over a 0.50% interest rate cut
Firm ECB stance. After leaving rates on hold at 4.00%, ECB president Trichet stated that inflation pressures are still strong and that the ECB will act pre-emptively, but that there are downside risks to growth
Instant view: The firm ECB rhetoric does not appear to be convincing the markets, but should curb Euro losses
Lower jobless claims. US jobless claims fell to 322,000 in the latest week from 340,000 which will provide some hopes over the labour-market trends
UK rates on hold. The Bank of England has left interest rates on hold at 5.50%
UK deficit little changed. The UK visible trade deficit was at GBP7.4bn in November from a revised 7.4bn the previous month
09-01-08. German output falls. German industrial production fell 0.8% for November, maintaining a disappointing tone for European data
Sterling under pressure. The UK currency has dipped below the 1.9650 level against the US dollar
Weak Euro sales. German retail sales fell 1.3% in November after a 2.3% drop the previous month which will maintain unease over underlying growth trends
08-01-08. Yen boost. A sharp drop on Wall Street has pushed the yen stronger in New York
Lower US home sales. US pending home sales fell by 2.6% in November, but the October increase was revised up to 3.7% and the impact should be limited.
Weak EU sales. Euro-zone retail sales fell 0.5% in November to give a 1.5% annual decline which will reinforce fears over a Euro-zone slowdown
Mixed UK data: The latest BRC retail sales report recorded a 0.3% increase in like-for-like retail sales for December which was the lowest figure for three years. In contrast, the latest Halifax house-price index rose 1.3% in December after a 1.1% drop the previous month which will lessen fears over a market slump.
07-01-08. Wall Street influences yen. The Japanese currency moves on Monday have been influenced to a significant extent by trends on Wall Street with US stock market rallies attracting yen selling
Shadow MPC cut vote. The shadow MPC voted by 5-4 for a rate cut in January. This is the same decision as before the December rate cut by the official MPC and will maintain speculation over a rate cut this week
04-01-08. PMI relief. The US PMI index for the services sector was little changed at 53.9 in December from 54.1 with the employment index firmer.
Instant view: The report will provide some short-term relief for the dollar as it still suggests growth in the services sector
Weak US payroll data. US non-farm payrolls rose only 18,000 in December while the unemployment rate rose to 5.0% from 4.7% previously. There were monthly falls in manufacturing, construction and retail employment.
Instant view: The report will increase pressure for a more aggressive Fed policy and undermine the dollar, but market positioning will be crucial.
Solid UK data. The UK PMI index for the services sector rose to 52.4 in December from 51.9 while net lending was also firmer which will provide some initial Sterling relief.
Euro PMI edges lower. The Euro-zone PMI index for services edged weaker to 53.1 in December from a provisional 53.2 with the Italian index below the 50.0 level.
Weak Euro data. The German, Spanish and Italian PMI services indices were all below the 50.0 level for January which will increase fears over a sharp slowdown. The Euro-zone PMI index as a whole dipped to 50.6.
UK house prices steady. The Halifax house price index was unchanged in January which will provide some relief for Sterling
04-02-08. US factory orders: US factory orders rose 2.3% which should not have a significant impact
01-02-08. Stronger ISM. The ISM index for the manufacturing sector rose to 50.7 in January from 48.4 with a strong reading for prices
Instant view: The components were a bit disappointing, but the data will provide some dollar relief in choppy trading
US employment falls. US non-farm payrolls fell by 17,000 in January as manufacturing and construction jobs continued to fall. There was a slowdown in services growth. Government employment recorded a 18,000 drop, but the last time this happened there was a revision the following the month
Instant view: The headline figure is dollar negative, but upward revisions and a lower unemployment rate should curb aggressive selling
Weak UK PMI report. The UK PMI index for the manufacturing sector fell to 50.6 in January from 52.9 the previous month which will increase fears over the UK economy and will increase pressure for a 0.50% Bank of England rate cut next week
Firm Swiss PMI. The Swiss PMI index was solid at 61.6 in January from 61.3 the previous month which will underpin confidence
31-01-08. Higher US jobless claims. US jobless claims rose sharply to 375,000 in the latest week from 306,000 previously which corrects the surprisingly low data seen over the past few weeks and will cause some unease over Friday's payroll data.
Lower UK prices. The Nationwide Bank reported a 0.1% drop in house prices for January.
30-01-08. Fed cuts again. The Federal Reserve has cut interest rates by a further 0.50% to 3.00% with the discount rate also cut by 0.50%. The statement was generally downbeat on prospects.
Instant view: The 0.50% cut will provide near-term support to carry trades and tend to keep the dollar on the defensive.
Weaker US GDP. The fourth-quarter GDP recorded a drop to 0.6% from 4.9% previously, while the core deflator was above expectations.
Instant view: The figure is below expectations, but there should be some relief that the figure was not negative and all eyes will be on the Fed.
Higher US employment. The ADP report recorded an employment increase of 130,000 for January after a revised 37,000 increase in December which will provide some relief over US employment trends, but the GDP data will be watched closely
Fed Preview - For a preview of the Federal Reserve interest rate decision, please click: Fed Preview
Swiss KOF drop. The Swiss KOF index weakened to 1.70 in January from a revised 1.84 previously which was the lowest for close to two years and illustrates that the Swiss economy is not immune from the slowdown pressures.
King reappointed. UK Bank of England Governor King has been nominated for a second five-year term which should provide some slight Sterling support
Weak UK housing. UK mortgage approvals fell to 73,000 in December from 81,000 the previous month, but net lending was stronger than expected.
29-01-08. Lower US house prices. The latest Case-Shiller house price index recorded a decline of 7.7% in the year to November
Firm US orders. US durable goods orders rose 5.2% in December after a revised 0.5% increase in November. There was a 2.9% core increase while the November underlying figure was revised up to -0.4% from -0.7%.
Instant view: The data will ease immediate fears over the industrial sector and may cause some uncertainty over the Fed decision.
UK sales dip. The CBI retail survey recorded a drop in realised sales to +4 in January from +8 previously, although the expected trend for February was stronger which will provide some relief.
28-01-08. Weak US home sales. US new home sales fell to an annual rate of 604,000 for December from a revised 634,000 previously which will maintain a lack of confidence in the housing sector
Lower M3 growth. Euro-zone money supply growth slowed to 11.5% in the year to December from 12.3% previously which will provide some relief to the bank.
25-01-08. Weber talks tough. ECB member Weber has again talked tough on Friday which will provide some Euro support, but divisions are liable to increase
Lower Canada CPI. Canadian core consumer prices fell 0.3% in December with the annual rate dropping to 1.5% which will maintain pressure for lower interest rates
24-01-08. Steady US home sales. US existing home sales were little changed in December at an annual rate of 4.89mn from 5.00mn the previous month
Lower jobless claims. The US jobless claims were at 301,000 in the latest week from 302,000 previously.
Instant view: The jobless claims data still does support the severe pessimism over the US economy.
Stronger German index. The German IFO index rose to 103.4 in January from 103.0 the previous month which will help ease immediate pessimism towards the Euro-zone to some extent.
23-01-08. 8-1 MPC vote. The January minutes recorded a 8-1 vote for interest rates to be unchanged with the bank looking to wait for February, especially as inflation fears increased. Sterling will struggle to secure more than limited relief.
Mixed PMI reports. The Euro-zone PMI manufacturing index was stronger than expected, but the services index fell to 52.0 from 53.1 which will reinforce concerns over a Euro-zone slowdown
Trichet concerns. ECB President Trichet has stated that the bank must be prepared to deal with a crisis situation which will fuel talk of a cut in interest rates.
22-01-08. Canada cuts rates. The Bank of Canada has cut interest rates by 0.25% to 4.00% and suggested that rates will be cut again in the short term
Fed cuts rates. The Fed has cut interest rates by 0.75%. This looks like a panic move and could further destabilise markets with the dollar under pressure
Rate cut rumours. There have been rumours of co-ordinated interest rate cuts by the ECB and Federal Reserve which has undermined immediate demand for defensive currencies as global stock markets attempt to rally.
21-01-08. Stocks sharply lower. Global stock markets have weakened sharply with the German Dax index down close to 5.0% which is supporting the yen
UK house prices lower. UK house prices fell by 0.8% in January according to the Rightmove organisation
18-01-08. US confidence recovers. The US Michigan consumer confidence index rose to 80.5 in January from 74.8 which will steady market sentiment towards the US economy to some extent.
Firm RBA comments. The Reserve Bank of Australia governor has called inflation uncomfortably high which will boost the Australian dollar initially
UK sales fall. UK retail sales fell 0.4% in December with the annual increase falling to 2.7%.
Instant view: The UK retail sales data will reinforce concerns over the UK economy and undermine Sterling confidence
17-01-08. Weak Phil index. The Philadelphia Fed index fell sharply to -20.9 in January which will reinforce economic fears, although the price indices were strong.
Weak US housing. The continuing weakness in US housing data was confirmed by a drop in housing starts to 1.01mn in December from 1.17mn previously while permits were also weak. Jobless claims, however, fell to 301,000 in the latest week which will provide some relief.
ECB undermines Euro. There has been a significant shift in ECB rhetoric this week which has undermined the Euro. Today, ECB member Mersch stated that the downside risks to the Euro-zone economy had increased and that the 2008 GDP forecasts may be revised lower. He also stated that the ECB should be cautious given the uncertainties which will curb expectations of higher Euro interest rates.
Instant view: Despite the major US concerns, the Euro fundamentals increasingly do not look strong enough to justify levels above 1.49 against the dollar
Firm US inflows. US long-term capital flows remained firm at US$90bn in November which will provide some near-term support to the US dollar.
US core CPI in line. US core consumer prices rose 0.2% in December with a 2.4% annual increase while headline prices rose 0.3% compared with expectations of a 0.2% increase
Instant view: The data will not disrupt expectations of Fed rate cuts at the end of January.
Steady UK data. Headline UK average earnings growth rose to 4.0% in November from 3.9% while there was a further 6,400 drop in unemployment. The market impact should be limited
15-01-07. Weaker US sales. US retail sales fell 0.4% in December with core sales also falling by 0.4% over the month. There were small downward revisions to December's data.
Instant view: The data was weak which will undermine the dollar, but the impact should be measured as expectations have already deteriorated sharply.
Mixed UK CPI. Headline consumer inflation was unchanged at 2.1% in December compared with expectations of 2.0% while the core rate was unchanged at 1.4%. The data should not have a major impact on interest rate expectations
14-01-08. Higher UK PPI. UK producer prices rose 0.5% in December and the 0.4% increase in core prices will cause some concern within the Bank of England
11-01-08. Higher US deficit. The US trade deficit widened to US$63.1bn in November, but the initial impact has been limited
Canadian employment falls. There was a 18,700 drop in Canadian employment for December. Although unemployment held steady at 5.9%, the data will reinforce the near-term lack of confidence in the Canadian dollar.
Subdued UK output. There was a 0.1% drop in industrial production and manufacturing output for November which will reinforce negative confidence
10-01-08. Bernanke suggests more rate cuts. Fed Chairman Bernanke has stated that additional policy action may be required and that the Fed is ready to take substantive action
Instant view: The aggressive Bernanke comments will undermine the dollar in the short term and revive speculation over a 0.50% interest rate cut
Firm ECB stance. After leaving rates on hold at 4.00%, ECB president Trichet stated that inflation pressures are still strong and that the ECB will act pre-emptively, but that there are downside risks to growth
Instant view: The firm ECB rhetoric does not appear to be convincing the markets, but should curb Euro losses
Lower jobless claims. US jobless claims fell to 322,000 in the latest week from 340,000 which will provide some hopes over the labour-market trends
UK rates on hold. The Bank of England has left interest rates on hold at 5.50%
UK deficit little changed. The UK visible trade deficit was at GBP7.4bn in November from a revised 7.4bn the previous month
09-01-08. German output falls. German industrial production fell 0.8% for November, maintaining a disappointing tone for European data
Sterling under pressure. The UK currency has dipped below the 1.9650 level against the US dollar
Weak Euro sales. German retail sales fell 1.3% in November after a 2.3% drop the previous month which will maintain unease over underlying growth trends
08-01-08. Yen boost. A sharp drop on Wall Street has pushed the yen stronger in New York
Lower US home sales. US pending home sales fell by 2.6% in November, but the October increase was revised up to 3.7% and the impact should be limited.
Weak EU sales. Euro-zone retail sales fell 0.5% in November to give a 1.5% annual decline which will reinforce fears over a Euro-zone slowdown
Mixed UK data: The latest BRC retail sales report recorded a 0.3% increase in like-for-like retail sales for December which was the lowest figure for three years. In contrast, the latest Halifax house-price index rose 1.3% in December after a 1.1% drop the previous month which will lessen fears over a market slump.
07-01-08. Wall Street influences yen. The Japanese currency moves on Monday have been influenced to a significant extent by trends on Wall Street with US stock market rallies attracting yen selling
Shadow MPC cut vote. The shadow MPC voted by 5-4 for a rate cut in January. This is the same decision as before the December rate cut by the official MPC and will maintain speculation over a rate cut this week
04-01-08. PMI relief. The US PMI index for the services sector was little changed at 53.9 in December from 54.1 with the employment index firmer.
Instant view: The report will provide some short-term relief for the dollar as it still suggests growth in the services sector
Weak US payroll data. US non-farm payrolls rose only 18,000 in December while the unemployment rate rose to 5.0% from 4.7% previously. There were monthly falls in manufacturing, construction and retail employment.
Instant view: The report will increase pressure for a more aggressive Fed policy and undermine the dollar, but market positioning will be crucial.
Solid UK data. The UK PMI index for the services sector rose to 52.4 in December from 51.9 while net lending was also firmer which will provide some initial Sterling relief.
Euro PMI edges lower. The Euro-zone PMI index for services edged weaker to 53.1 in December from a provisional 53.2 with the Italian index below the 50.0 level.
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DSP Merrill Lynch forex report is bullish on the rupeenews
The latest DSP Merrill Lynch forex report (Cause & FX - INR: Stronger into 2005, January 2005) predicts that the rupee would strengthen against the US dollar in 2005.
While recent events have brought forward FX strength, says the report, the expectation of a revaluation of China's currency, the reminbi, is expected to fuel the rupee's medium-term performance. Market participants will continue to strengthen the rupee, and any weakness in it will remain shallow and short-lived.
The report notes that 2004 started with the rupee at Rs45.6 to the dollar, it weakened to Rs46.5 in July and then rose to Rs43.5 at year end. Its strong finish made it the best performing Asian currency against the dollar in December (2004), breaching a five-year high both as a result of a weakening dollar and substantial inflows into India.
Though dollar weakness played a part, the December move was reinforced by inflows on the back of a strengthening macroeconomic environment. Visible flows were mostly from foreign institutional investors, who bought $2.2bn worth of equities and debt in December, taking the full year total to $9.2bn in 2004. In hindsight, the forward premium had been slow to react and did not reflect actual strengthening that took place in December.
Highlights: The prognosis for the rupee in 2005 remains positive. First, we expect foreign investors to become increasingly comfortable with the policy environment as confidence surrounding the new government's ability to attract FDI improves.
Second, we expect the current account balance to remain in positive territory. Higher oil prices might be a drag but are not expected to pull the current account into deficit.
Third, dollar weakness and more specifically regional currency strength, which is reflected in our top themes for 2005, should provide support for a stronger INR. At the same time, Reserve Bank of India's (RBI) inflation concerns coupled with liquidity management challenges should allow the burden of adjustment of inflows to fall increasingly on the exchange rate.
We believe that the first half of 2005 will see INR strength. The risks to our view come from sustained high oil prices, China taking time to revalue, and unexpected US economic strength that could elicit an unwinding of short USD positions. Persistently high oil prices will also moderate flows and trigger the RBI to tighten monetary policy on inflation worries.
also see : Click here to view the complete report
RBI will be focused on inflation in 2005: DSP Merril Lynch report
Other reports by DSP Merrill Lynch
While recent events have brought forward FX strength, says the report, the expectation of a revaluation of China's currency, the reminbi, is expected to fuel the rupee's medium-term performance. Market participants will continue to strengthen the rupee, and any weakness in it will remain shallow and short-lived.
The report notes that 2004 started with the rupee at Rs45.6 to the dollar, it weakened to Rs46.5 in July and then rose to Rs43.5 at year end. Its strong finish made it the best performing Asian currency against the dollar in December (2004), breaching a five-year high both as a result of a weakening dollar and substantial inflows into India.
Though dollar weakness played a part, the December move was reinforced by inflows on the back of a strengthening macroeconomic environment. Visible flows were mostly from foreign institutional investors, who bought $2.2bn worth of equities and debt in December, taking the full year total to $9.2bn in 2004. In hindsight, the forward premium had been slow to react and did not reflect actual strengthening that took place in December.
Highlights: The prognosis for the rupee in 2005 remains positive. First, we expect foreign investors to become increasingly comfortable with the policy environment as confidence surrounding the new government's ability to attract FDI improves.
Second, we expect the current account balance to remain in positive territory. Higher oil prices might be a drag but are not expected to pull the current account into deficit.
Third, dollar weakness and more specifically regional currency strength, which is reflected in our top themes for 2005, should provide support for a stronger INR. At the same time, Reserve Bank of India's (RBI) inflation concerns coupled with liquidity management challenges should allow the burden of adjustment of inflows to fall increasingly on the exchange rate.
We believe that the first half of 2005 will see INR strength. The risks to our view come from sustained high oil prices, China taking time to revalue, and unexpected US economic strength that could elicit an unwinding of short USD positions. Persistently high oil prices will also moderate flows and trigger the RBI to tighten monetary policy on inflation worries.
also see : Click here to view the complete report
RBI will be focused on inflation in 2005: DSP Merril Lynch report
Other reports by DSP Merrill Lynch
RBI report on forex reserves — Tread warily amid abundance of riches
ONE of the features of recent Budget speeches, including the latest one of Mr Jaswant Singh, has been an expression of satisfaction at the level of reserves.
Mr Jaswant Singh, in particular, mentioned that the current level of reserves "liberates us from the mentality of want" — a relaxation of the forex constraints that characterised the entire history of India up to now.
The Finance Minister had referred, in particular, to the "first-ever" report of the RBI on foreign exchange reserves, released to be (fortuitously?) timed with the presentation of the Budget.
The RBI had, of course, come out with a similar, but not so comprehensive, exercise explaining the growth of forex reserves sometime back in 2003.
Anyway, exultation seems to be in order, considering the forex reserves above $100 billion.
The RBI report, however, does not content itself with merely detailing the origins of reserves.
It notes that the IMF has included India in a list of countries that have credible forex reserve management practices and seeks comfort in the IMF's plaudits for the RBI's management. Such plaudits are, indeed, richly deserved.
The RBI report is based on information up to September 2003. It is, indeed, debatable whether in these days of "real time" settlement across the world the report could have been more useful had it been more current — brought up-to-date as of December 31, 2003 or January 31, 2004, if possible.
Considering the increased technological sophistication of the RBI's management information systems, such updating of the report should not be beyond its capability.
The report is, however, on conventional lines. While it gives information as to the origin of the growth in reserves starting from the crisis year 1991 until the recent past, it also provides some information on the methods adopted to ensure that the reserves are invested in safe and liquid assets.
The fact that the reserves have had a low return of around 2 per cent in 2003 is reflective of the global low interest regime.
The causes of the rise in reserves from crisis year 1991 to September 2003 are broadly brought out in Table 1.
We observe from the Table that most of the sheen in forex reserves has come from borrowed feathers. The overall "improvement" in current account has been negative. That is to say, during the period since reform, total imports of goods and services have exceeded exports by $31 billion.
There is a slight "improvement", however, in the profile of different elements in the BoP to forex reserve growth in the recent period April-September 2003, as shown in Table 2. Foreign direct investment alone in this period amounted to $4.7 billion. The current account had shown a small surplus in this period.
The RBI's report also incorporates an interesting table (Table 3) on what it calls India's "international investment position". There is clearly an excess of liabilities over assets on the forex front.
This should raise alarm signals. One caveat is, however, in order. The figure of $91 billion mentioned in the Table under the head "Other investments" does not seem to be fully supported by data.
I hope their status and details are fully known only to the RBI. Greater transparency on the composition of the head of "Other investments" would have helped to give credibility to the RBI's measure of India's international net investment position.
The currency composition of India's reserves investments has drawn attention recently because currency risk is attributed to certain currencies, like the dollar. The RBI's report, however, discloses little new information on the currency composition.
The IMF's related document, which the RBI report cites as describing currency reserve management practices among various countries, also reveals little of significance.
Some requirements mentioned in the IMF report note that in the case of Hong Kong (SFR), a specific percentage of its assets should be deployed in dollar assets and another specific percentage in Euro.
But there are also instances of countries, which seek refuge under cover of the statutory need for security and do not disclose the precise currency composition of their reserves. It is perhaps symptomatic of central banks that they tend to be secretive about how they invest their reserves.
The RBI report, however, gives some information on the broad distribution of investments as shown in Table 4.
The report adds that the RBI's practices ensure that securities in which it invested have the highest credit ratings and are above all eminently liquid. Deposits with foreign commercial banks account for $15.83 billion. Some of these, however, flow back to India as external commercial borrowings by Indian corporates.
The RBI might well keep a part of its reserves as deposits with select Indian banks for being on-lent to Indian entities in place of external commercial borrowing, but at reasonable spreads of rates of interest. This will be definitely more remunerative than the current practice.
Overall, the RBI's latest report on forex reserves is a treasure-house of information, although it takes some of the joy out of our gloating over the $100 billion of reserves.
It raises alarm signals about the need to depend less on foreign borrowals and portfolio investment and more on current account surpluses. Not that Government of India/RBI are not aware of these caveats. But it suits them to dwell less prominently on what contributes to the $100 billion that India has today. The RBI's report shows that we have to tread warily in spite of the abundance of forex riches.
In this context, the RBI report addresses specifically the frequently asked question as to what level of reserves can be considered adequate.
The RBI report discusses at length the question of the adequacy of reserves. The latest theory and practice both are cited in support of maintaining the current high level of reserves.
Portfolio investment is especially volatile. The Rangarajan Committee on Balance of Payments had suggested that in addition to the traditional measure of import cover of up to three to four months, attention should be paid to repayment obligations.
The Tarapore Committee on Capital Account Convertibility had also suggested alternative measures of adequacy, which in addition to trade-based indicators also included money-based and debt-based indicators. In the recent period, assessment of reserve adequacy has been influenced by the addition of more sophisticated measures relevant to emerging market economies like India.
One such measure requires that the usable forex reserves should exceed scheduled amortisation of foreign exchange debts assuming no rollover the following year.
The other measure is based on a "liquidity at risk" rule that takes into account risks that a country could foresee.
This implies that a country's forex reserves liquidity position should be calculated under a range of possible outcomes for various relevant financial variables, such as exchange rates, commodity prices (such as oil), credit spreads, etc.
The RBI has done various exercises "based on intuition and risk models" in order to estimate such liquidity at risk of the level of reserves. Hopefully, the RBI is auditing its models with expert advice from experienced analysts and institutions.
Overall, the level of reserves is such as to dispel suspicions of vulnerability. The import cover of reserves, which fell to a low of three weeks of imports, has risen to around 14 months of cover now. It has also about five years of debt servicing as at the end of March 2003.
At the end of September 2003, the import cover was five-six months. It is significantly higher now. More importantly, the ratio of short-term debt to foreign exchange reserves declined from 46.5 per cent at the end of March 1991 to 6.1 per cent at the end of March 2003.
The ratio of volatile flows defined as cumulative portfolio flows and short-term debt has also declined to 36 per cent as at the end of March 2003 from 146 per cent in end March 1991. All in all, an adequate level of reserves, in spite of the reservations disclosed in the RBI's latest report!
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Mr Jaswant Singh, in particular, mentioned that the current level of reserves "liberates us from the mentality of want" — a relaxation of the forex constraints that characterised the entire history of India up to now.
The Finance Minister had referred, in particular, to the "first-ever" report of the RBI on foreign exchange reserves, released to be (fortuitously?) timed with the presentation of the Budget.
The RBI had, of course, come out with a similar, but not so comprehensive, exercise explaining the growth of forex reserves sometime back in 2003.
Anyway, exultation seems to be in order, considering the forex reserves above $100 billion.
The RBI report, however, does not content itself with merely detailing the origins of reserves.
It notes that the IMF has included India in a list of countries that have credible forex reserve management practices and seeks comfort in the IMF's plaudits for the RBI's management. Such plaudits are, indeed, richly deserved.
The RBI report is based on information up to September 2003. It is, indeed, debatable whether in these days of "real time" settlement across the world the report could have been more useful had it been more current — brought up-to-date as of December 31, 2003 or January 31, 2004, if possible.
Considering the increased technological sophistication of the RBI's management information systems, such updating of the report should not be beyond its capability.
The report is, however, on conventional lines. While it gives information as to the origin of the growth in reserves starting from the crisis year 1991 until the recent past, it also provides some information on the methods adopted to ensure that the reserves are invested in safe and liquid assets.
The fact that the reserves have had a low return of around 2 per cent in 2003 is reflective of the global low interest regime.
The causes of the rise in reserves from crisis year 1991 to September 2003 are broadly brought out in Table 1.
We observe from the Table that most of the sheen in forex reserves has come from borrowed feathers. The overall "improvement" in current account has been negative. That is to say, during the period since reform, total imports of goods and services have exceeded exports by $31 billion.
There is a slight "improvement", however, in the profile of different elements in the BoP to forex reserve growth in the recent period April-September 2003, as shown in Table 2. Foreign direct investment alone in this period amounted to $4.7 billion. The current account had shown a small surplus in this period.
The RBI's report also incorporates an interesting table (Table 3) on what it calls India's "international investment position". There is clearly an excess of liabilities over assets on the forex front.
This should raise alarm signals. One caveat is, however, in order. The figure of $91 billion mentioned in the Table under the head "Other investments" does not seem to be fully supported by data.
I hope their status and details are fully known only to the RBI. Greater transparency on the composition of the head of "Other investments" would have helped to give credibility to the RBI's measure of India's international net investment position.
The currency composition of India's reserves investments has drawn attention recently because currency risk is attributed to certain currencies, like the dollar. The RBI's report, however, discloses little new information on the currency composition.
The IMF's related document, which the RBI report cites as describing currency reserve management practices among various countries, also reveals little of significance.
Some requirements mentioned in the IMF report note that in the case of Hong Kong (SFR), a specific percentage of its assets should be deployed in dollar assets and another specific percentage in Euro.
But there are also instances of countries, which seek refuge under cover of the statutory need for security and do not disclose the precise currency composition of their reserves. It is perhaps symptomatic of central banks that they tend to be secretive about how they invest their reserves.
The RBI report, however, gives some information on the broad distribution of investments as shown in Table 4.
The report adds that the RBI's practices ensure that securities in which it invested have the highest credit ratings and are above all eminently liquid. Deposits with foreign commercial banks account for $15.83 billion. Some of these, however, flow back to India as external commercial borrowings by Indian corporates.
The RBI might well keep a part of its reserves as deposits with select Indian banks for being on-lent to Indian entities in place of external commercial borrowing, but at reasonable spreads of rates of interest. This will be definitely more remunerative than the current practice.
Overall, the RBI's latest report on forex reserves is a treasure-house of information, although it takes some of the joy out of our gloating over the $100 billion of reserves.
It raises alarm signals about the need to depend less on foreign borrowals and portfolio investment and more on current account surpluses. Not that Government of India/RBI are not aware of these caveats. But it suits them to dwell less prominently on what contributes to the $100 billion that India has today. The RBI's report shows that we have to tread warily in spite of the abundance of forex riches.
In this context, the RBI report addresses specifically the frequently asked question as to what level of reserves can be considered adequate.
The RBI report discusses at length the question of the adequacy of reserves. The latest theory and practice both are cited in support of maintaining the current high level of reserves.
Portfolio investment is especially volatile. The Rangarajan Committee on Balance of Payments had suggested that in addition to the traditional measure of import cover of up to three to four months, attention should be paid to repayment obligations.
The Tarapore Committee on Capital Account Convertibility had also suggested alternative measures of adequacy, which in addition to trade-based indicators also included money-based and debt-based indicators. In the recent period, assessment of reserve adequacy has been influenced by the addition of more sophisticated measures relevant to emerging market economies like India.
One such measure requires that the usable forex reserves should exceed scheduled amortisation of foreign exchange debts assuming no rollover the following year.
The other measure is based on a "liquidity at risk" rule that takes into account risks that a country could foresee.
This implies that a country's forex reserves liquidity position should be calculated under a range of possible outcomes for various relevant financial variables, such as exchange rates, commodity prices (such as oil), credit spreads, etc.
The RBI has done various exercises "based on intuition and risk models" in order to estimate such liquidity at risk of the level of reserves. Hopefully, the RBI is auditing its models with expert advice from experienced analysts and institutions.
Overall, the level of reserves is such as to dispel suspicions of vulnerability. The import cover of reserves, which fell to a low of three weeks of imports, has risen to around 14 months of cover now. It has also about five years of debt servicing as at the end of March 2003.
At the end of September 2003, the import cover was five-six months. It is significantly higher now. More importantly, the ratio of short-term debt to foreign exchange reserves declined from 46.5 per cent at the end of March 1991 to 6.1 per cent at the end of March 2003.
The ratio of volatile flows defined as cumulative portfolio flows and short-term debt has also declined to 36 per cent as at the end of March 2003 from 146 per cent in end March 1991. All in all, an adequate level of reserves, in spite of the reservations disclosed in the RBI's latest report!
More Stories on : Forex | Insight
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
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