2. Macro Roundup : India
The political uncertaintyβ¦.
ο§ Change of guard expected in the upcoming Centre elections
ο§ Modi-led government, if elected, should offer a more business-friendly
environment β Moodyβs
ο§ Fear of hung house after considering AAPβs stellar performance in Delhi
The macro scenarioβ¦.
ο§ Growth expected to be in 5% - 5.5% range through 2014, before touching 6% in
2015, which is very sluggish in nature and slowest in past 10 years
ο§ December inflation rates fell significantly as WPI eased to 6.2% from 7.5% in
November; and CPI came in on at 9.87% from 11.16%
ο§ Desperate measures to bring down the CAD to 4.8% and 3% by 16-17
ο§ Historically, the rupee usually depreciates in the pre-election run up
ο§ Depreciated in 6 out of 7 occasions prior to elections since 1989
ο§ In 2009, it fell by 18% in the run-up to the polls
ο§ Except in 2004 when the trend reversed
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3. Recent Policy measures announced
ο§ The Fed reduced asset purchases again at FOMC meeting, by USD 10bn.
ο§ RBI raised the Repo rate by 25bps to 8.0% and reverse repo to 7.0%, with the MSF
rate also up to 9.0% to maintain corridor with the repo rate. CRR steady at 4%.
ο§ India, along with Turkey, Brazil ,South Africa & Indonesia i.e ββFragile 5ββ have seen
an Increase in rates by the central banks, and these economies are seeing high
volatilities in their respective currency & equity markets
ο§ CPI to assume dominant position in policy decisions
ο§ Eased rules for hedging foreign exchange exposures for domestically-held forward
contracts and foreign investors
ο§ OMO worth INR 100bn announced to counter the strain on liquidity
ο§ Controlling the fiscal deficit β
ο§ Higher dividend payouts sought from PSUs, Divestment of stake
ο§ 20% cut in the plan expenditure outlay
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4. What to expect going forwardβ¦β¦
ο§ Key events to look out for β
ο§ Elections
ο§ Corporate Results
ο§ RBI may have succeeded in controlling the Rupeeβs downward spiral for now. But
we are facing greater uncertainty now with the looming general elections and the
impending Fed taper
ο§ No major decisions or projects will be taken up till the elections leading to a
standstill in the economy. The Central Bank will have to work harder to push growth
in such a scenario
ο§ India , along with Turkey, Brazil ,South Africa & Indonesia termed as ββFragile 5ββ by
Morgan Stanley, as these Economies have become too dependent on Skittish foreign
investments to finance their growth ambition, can we reverse the same is a challenge
ο§ Expect βVolatilityβ to be the order of the day as every data point is analysed
threadbare
ο§ Never has managing Forex & Interest Rate exposure acquired greater significance
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6. Buy Vanilla Forward
Suggested user : Importers having imports up to 3 months
Rationale : Crystallize near term FCY payments in INR terms, given high
volatility of Rupee and high forward premiums.
Illustration:
Importer buys 3-month forward USD/INR 1 Mio at 64.10.
Scenario and Action,
ο
If USD/INR Spot at maturity < 64.10, Corporate buys USD against INR at 64.10
(No benefit from INR appreciation after booking the forward)
ο
If USD/INR Spot at maturity >=64.10, Corporate buys USD against INR at
64.10 (Full protection from INR depreciation after booking the forward)
Product to be offered to the customer must adhere to Reserve Bank of India guidelines
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7. Buy Plain Vanilla Put Options
Suggested user : Exporters
Rationale : Fix the minimum value of exports and at the same time keep the
benefit of USD appreciation open
Illustration:
Exporters buys USD Put / INR Call Notionalβ USD 1 Mio; Exp/ Del date : (1 year);
Strike β 65.00
Option premium: 2.50% (approx.)
Scenario and Action,
ο If USD/INR Spot at maturity < 65.00, exporter sells USD/INR at 65.00
(Protected from USD depreciation)
ο
If USD/INR Spot at maturity > 65.00, exporter sells USD/INR at market rate
(Open to benefit from USD appreciation)
Product to be offered to the customer must adhere to Reserve Bank of India guidelines
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8. Buy Call Spread
Suggested user : Importers having imports having imports greater than 3 months
Rationale : Protection from USD/INR volatility within a given range. Cost is lower than buying a plan
vanilla call. Open to benefit from rupee appreciation
Risks: Open to currency risk above the range
Illustration:
Importer buys the following call spread
Notional β USD 1 Mio; Exp/ Del date : 28 Apr/ 30 Apr 2013; Strikes β 62.75 (spot) and 65.75 (spot + 3)
Option Premium : 4% (approx.)
Scenario and Action,
ο
If USD/INR Spot at maturity < 62.75, importer buys USD/INR from the market. (Full benefit from
Rupee appreciation)
ο
If USD/INR Spot at maturity > 62.75 and <65.75, importer buys USD/INR at 62.75.
ο
If USD/INR Spot at maturity >65.75, importer buys USD against INR at market rate. However client
will get a credit of INR 3 per USD under the structure.
Product to be offered to the customer must adhere to Reserve Bank of India guidelines
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9. Buy Swap
Suggested user : FCY Borrower
Product : Interest Rate Swap
Rationale : Swap USD floating rate interest payments into USD fixed rate payments
Product : Interest Rate Swap with Call Spread
Rationale : Swap USD floating rate interest payments into USD fixed rate payments and
protection from USD/INR volatility on principal within a given range
Product : Cross Currency Swap
Rationale : Swap and synthetically convert a USD Floating Rate Borrowing into an INR
fixed rate borrowing
Product to be offered to the customer must adhere to Reserve Bank of India guidelines
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10. Thank You
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