4 December 2012

1



Rupee continues its search
for inspiration


INR has witnessed a complete turnaround since October after being the
best performer amongst its emerging peers, gaining 5% in the
September quarter. Since then INR had shed 7.7% of its gains, before
recovering 2 % last week. As expected the initial euphoria following the
series of announcements by the Government has faded, bringing to the
forefront the growing domestic uncertainity. At the same time global
conditions have not been supportive with delays in the payouts and
decision over Greeces funding requirements. However, what is
noteworthy is that despite the trending depreciation of the Rupee since
October, net FII inflows have totalled around USD 5.2 billion. Infact
comparing with its other Asian counterparts, India still continues to be a
net recipient of foreign equity flows. Going forward, various events are
likely to shape the risk sentiments and trajectory of INR, both on the
global and domestic front.

Global factors
1. On the global front, developments over the ongoing discussions on fiscal
cliff in the US will be key. While a solution is likely to pass through
successfully by the end of December, the political haggling prior to the
final acceptance will set the tone keeping the uncertainity alive.

2. While the global growth concerns remain, recent dataprints in the US and
China do suggest some stability. Additionally, the sandy storm-linked
rebuilding in parts of the US is likely to support the economic activity
going forward, giving scope for postive data surprises.
Fi g 1 I NR t ak es a U-t ur n agai n shi f t f r om best t o
w or st per f or mer

Fi g 2 despi t e I ndi a r ec ei vi ng mor e f or ei gn equi t y
i nf l ow s c ompar ed t o i t s Asi an peer s
-6 -4 -2 0 2 4
INR
BRL
IDR
MYR
THB
SGD
TWD
CNY
PHP
KRW
Oct-till date
J ul-Sept2012

-6
-3
0
3
6
9
India Philippines Indonesia Thailand Korea
J un-12 Sep-12 Oct-till date
Source: Bloomberg, ING Research

Source: Bloomberg, ING Research

India Monthly
4 December 2012

FINANCIAL MARKETS RESEARCH

Upasna Bhardwaj
Economist
Mumbai +91 22 33095718
upasna.bhardwaj@ingvysyabank.com
INR loses it sheen over
the last two months
4 December 2012

2

3. Another important event which could shape the risk sentiments going
forward is the decision on Operation Twist (worth USD 45 billion of
monthly purchase of longer dated gsec) which is pending given the end
of the programme by December. However, with the recent improvement
in dataprints, we expect the Fed to possibly wait in the forthcoming
December meeting before announcing additional purchases next year.

Domestic factors

1. Besides the global factors, worsening trade balance continues to remain
a big cause for worry. The trade deficit has been gradually widening with
exports continuing to slowdown without a similar momentum in imports
despite the moderating domestic demand. Cummulatively, exports for the
Apr-Oct2012 period have contracted by 7.3% YoY but imports have
declined by mere 3% YoY.

2. The breakup of imports clearly highlights the perrenial risk to the external
balance in India. While a slowing economy has led to non-oil imports
registering a decline by 7.6% YoY, oil imports have instead risen by 7.5%
YoY. On a sequential basis as well trade deficit has again started to pick
up pace since J uly, hitting an all-time high of USD 21 billion in October.

3. Meanwhile, the ruling government seems to be losing its credibility in
terms of implementaion of the much talked about reforms over the past
two months.

4. Fiscal concerns have again resurfaced with the government expected to
miss its upward revised fiscal deficit target of 5.3% of GDP (as against
the budgeted target of 5.1% and ING estimate of 5.7% of GDP). Such an
outcome has again increased the probability of a rating downgrade very
soon. Although we believe that currently the possibility of a downgrade is
less than 50%, but going into February and March as fiscal calculations
become clearer with next years budget as the key focus, the rating
agencies may want to review their stance.

5. The progress on the winter session of the Parliament and the passage of
some key bills will be critical in restoring investor confidence.

6. While the above factors do suggest risks abound, we expect INR to
remain supportive in the Jan-Mar quarter on following account.

Most of the disinvestment program of the government is expected
to take-off in the J an-Mar quarter, which in turn could provide
some support to the INR provided we witness enough foreign
investor interest.

The government is considering expanding the ambit of external
commercial borrowings for sectors which have recently been
included in the definition of infrastructure sectors - education,
agriculture & health;
Trade deficit in October
reached an all-time high
Oil and gold imports
remain persistently high
Government faces a
credibility issue
While near-term risks
suggest high volatility we
expect INR to remain
slightly supportive in the
next quarter
4 December 2012

3


In an attempt to narrow India's current account deficit, the
Finance Ministry last week increased FII limits in government
securities and corporate bonds by USD 5 billion each, taking the
total investment limit in domestic debt to USD 75 billion.

FDI in aviation and single brand retail seems to be progressing
with some inflows expected in the last quarter of the financial
year.

Also, if the government was able to successfully introduce more
big ticket reforms like GST & DTC we may expect additional
boost to the currency.


While mounting current account deficit is expected to continue to remain
a cause for worry, we believe that capital flows will be sufficient to record
a positive balance of payments. Amidst the high uncertainty levels in the
near-term, the trajectory of INR will continue to remain fairly volatile, with
a range of 54.50-56 expected in December. We continue to hold to our
view that INR is expected to trade in the 52.00-54.00 range in the Mar-
quarter.

Tabl e 1: BoP ex pec t ed t o t ur n sur pl us f or t he year on suf f i c i ent c api t al f l ow s
USD bn FY08 FY09 FY10 FY11 FY12
FY13 (ING
estimates)
Current Account -15.7 -27.9 -38.4 -46.0 -78.2 -75.9
Trade balance -91.5 -119.5 -118.4 -130.4 -189.7 -197.6
Exports 166.2 189.0 182.2 250.6 309.8 308.9
Imports 257.6 308.5 300.6 381.1 499.5 503.3
Invisibles 75.7 91.6 80.0 84.5 111.5 121.7
Software 36.9 43.5 48.2 53.3 61.0 65.8
Private transfers 41.7 44.6 52.1 51.5 61.5 69.8
Other income -2.9 3.6 -20.3 -20.3 -10.9 -13.9
Capital Account 106.6 7.4 51.6 62.0 67.8 85.7
Net FDI 15.9 22.4 18.0 9.4 22.1 23.1
To India 34.7 41.7 33.1 25.9 33.0 34.1
From India -18.8 -19.4 -15.1 -16.5 -10.9 -11.0
Portfolio investment 27.3 -14.0 32.4 30.3 17.2 17.6
ECB 22.6 7.9 2.0 12.5 10.3 12.5
Short-term credit 15.9 -2.0 7.6 11.0 6.7 9.2
Banking capital 11.8 -3.2 2.1 5.0 16.2 16.6
NRI deposits 0.2 4.3 2.9 3.2 11.9 12.9
Other capital 13.1 -3.6 -10.3 -6.1 -4.7 -4.7
Errors and ommissions 1.3 0.4 0.0 -3.0 -2.4 -3
BoP 92.2 -20.1 13.4 13.1 -12.8 6.5
CAD % of GDP -1.3 -2.3 -2.7 -2.7 -4.2 -3.8
Source: CEIC, ING Research

We expect INR to trade in
the 52-54 range over next
quarter
BoP to remain in surplus
despite uncomfortably
high CAD as global
liquidity and domestic
factors to support capital
flows
4 December 2012

4

Fi g 3 I NR t ak es a beat i ng despi t e r obust FI I f l ows

Fi g 4 Tr ade def i c i t w i dens t o r ec or d hi gh l evel s
-2
0
2
4
6
8
N
o
v
-
1
1
D
e
c
-
1
1
J
a
n
-
1
2
F
e
b
-
1
2
M
a
r
-
1
2
A
p
r
-
1
2
M
a
y
-
1
2
J
u
n
-
1
2
J
u
l
-
1
2
A
u
g
-
1
2
S
e
p
-
1
2
O
c
t
-
1
2
N
o
v
-
1
2
40
42
44
46
48
50
52
54
56
58
FII flows USDINR-rhs

15
20
25
30
35
40
45
A
u
g
-
1
0
O
c
t
-
1
0
D
e
c
-
1
0
F
e
b
-
1
1
A
p
r
-
1
1
J
u
n
-
1
1
A
u
g
-
1
1
O
c
t
-
1
1
D
e
c
-
1
1
F
e
b
-
1
2
A
p
r
-
1
2
J
u
n
-
1
2
A
u
g
-
1
2
O
c
t
-
1
2
-20
-18
-16
-14
-12
-10
-8
Trade balance (inverted, rhs) Imports Exports
Seasonal ly adjusted 3-month moving average (USD bn)
Source: Bloomberg, ING Research

Source: Bloomberg, ING Research
Fi g 5 Oi l i mpor t s pi c k up si gni f i c ant l y

Fi g 6 Gol d demand agai n pi c k ed up i n Sept quar t er ,
despi t e r ec or d hi gh pr i c es
5
15
25
35
45
O
c
t
-
1
0
D
e
c
-
1
0
F
e
b
-
1
1
A
p
r
-
1
1
J
u
n
-
1
1
A
u
g
-
1
1
O
c
t
-
1
1
D
e
c
-
1
1
F
e
b
-
1
2
A
p
r
-
1
2
J
u
n
-
1
2
A
u
g
-
1
2
O
c
t
-
1
2
Oil imports Non-oil imports
Seasonally adjusted 3-month moving average (USD bn)

0
50
100
150
200
250
300
Q
3
-
2
0
1
0
Q
4
-
2
0
1
0
Q
1
-
2
0
1
1
Q
2
-
2
0
1
1
Q
3
-
2
0
1
1
Q
4
-
2
0
1
1
Q
1
-
2
0
1
2
Q
2
-
2
0
1
2
Q
3
-
2
0
1
2
15000
18000
21000
24000
27000
30000
33000
J ewellery Investment demand Average Gold prices-rhs
Tonnes Rs/10gms
Source: CEIC, ING Research

Source: Bloomberg, ING Research

4 December 2012

5

Disclosures Appendix
This report prepared by ING Vysya Bank Limited (the Bank) is purely indicative and is for the purpose of
information only and is not intended to be relied upon.
This report is not intended to provide any basis for any analysis or any other evaluation and is not to be
considered as a recommendation and readers are required to make their own independent evaluation and
judgement.
All projections and forecast in this report are based on assumptions considered to be reasonable but the actual
outcome may be materially affected by changes in economic and other circumstances, which cannot be
foreseen. No representation or warranty (express or implied) is made that any projection, forecast, assumption or
estimate contained in this report is accurate. Accordingly the Bank, its respective directors, employees, affiliates,
partners, members, stockholders, agents, advisors or representatives accepts no liability whatsoever with respect
to use of this report.

Analyst certification
The analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect
his/her personal views about the subject securities or issuers and no part of his/her compensation was, is, or will
be directly or indirectly related to the inclusion of specific recommendations or views in this report.