Forex R isk Management and Outlook

1. ForexRisk Management and Outlook Presented by Demask Investment Services Pvt.Ltd.

2. The backdrop The rupee has depreciated by more than 15 percent since Jan 2013. With the rupee depreciation, profit margins of companies that import commodities or components came under severe pressure. The primary consequences of weak rupee are felt through • Increase in the import bill • Higher inflation • Fiscal slippage

3. Key commodities of concern • Expensive Crude oil imports directly leads to an increase in the operating expense of the companies, thereby hitting their profit margins. • Higher coal import costs are bound to affect the power generation capability of power plants that are heavily dependent upon imported coal for electricity generation. This would mean an increase in the level of energy deficit in the country and higher power costs that have an adverse affect on all the three sectors of the economy namely agriculture, industry and services. • Higher fertilizer costs shall lead to fiscal slippage on account of subsidies • Rising vegetable oil import costs shall adversely affect the FMCG sector in terms of higher costs of production translating into pressure on profit margins. Crude oil and its derivatives Coal and thermal Coke Vegetable oils Fertilizers

4. The vicious circle of currency depreciation

5. Impact on edible oil industry Depreciating Rupee has cost the Indian edible oil industry a squeeze to the tune of 9,000 crores, at constant edible oil price Risk management in edible oils on a standalone basis no longer suffices the industry. An integrated approach with a higher weightage on the FOREX exposure stands as the need of the hour.

6. The way forward Predicting currency movements is perhaps one of the toughest exercises in economics as it has many variables affecting the market movement. However, over a longer term, currency movement is determined by following factors: • Balance of payments • Interest rate differentials • Fiscal deficit • Global economic conditions

7. GDP growth The GDP growth has been on a declining trend. While India boasts of as one of the fastest growing economies in the world, the slow growth in per capita GDP tells the other side of the story. Though we are among the top five economies in the world in terms of size, in terms of per-capita GDP, we are lagging way behind. While every economy goes through this transition, the Indian economy has missed the industrial transition. We are now a services led economy.

8. Current account deficit as % The biggest burden on the Indian government is due to high interest expenses. Though the government has benefited from the low interest regime, in absolute terms, debt burden has continued to increase. While deficits are unavoidable for a developing economy, as the govt. has to spend towards various initiatives from a long-term perspective, the case of India is different. The govt.’s largest expenses are towards non-development aspects, which is concerning.

9. Inflation and money supply Despite the Indian government’s high deficit and consequently, rising borrowings, the liquidity or the supply of money in the Indian economy has been robust. One major reason for this is the consistent inflow of foreign capital. High liquidity is one factor that has supported the softer interest rate regime. Despite rising fiscal deficit and strengthening of oil prices, inflation has remained under check in the last five years. This was due to low capacity utilization and lack of significant credit demand from corporate. Adequate liquidity has prevented any upward pressure on interest rates.

10. Macro health Domestic economic activity weakened in Q1, FY14 • IIP growth remained muted in Apr-May, 2013 at 0.1%; capital goods’ production continues to contract reflecting declining investment sentiment; RBI’s “Order books, Inventories & Capacity Utilization Survey” shows significant deceleration. • PMI for the services sector has been on a declining trend While Headline (WPI) inflation has moderated, retail (CPI) inflation has surged close to 9% level in the past couple of months driven by a sharp increase in food inflation. Non-food credit growth at 14.3% by end of Q1, FY14 was lower than the RBI’s projection of 15.0% with the slowdown spread across all major sectors. During Apr-May, 2013 the Central Government’s key deficit indicators as a % to Budget estimates were higher than a year ago due to higher plan/capital expenditures & lower tax revenues. Trade deficit widened during Q1, FY14 on y-o-y basis mainly due to contracting exports.

11. Summarizing Driven by the sharp currency depreciation, sluggish pace of reforms and the recent liquidity tightening measures by RBI, the growth forecasts for Indian economy for FY14 remains weak. Risks to growth have increased notwithstanding the robust onset and spread of the monsoon. A possibility of any policy rate cuts is ruled out in the current financial year given that India’s CAD is typically financed by portfolio flows, fanning currency volatility and weakness when investor sentiment shifts. So a policy rate cut could discourage foreign investors and likely weaken the rupee further. We anticipate a growth rate for FY14 to 5.2% factoring in the risks of investment slowdown, inflationary potential of currency depreciation and a likely continuation of tightening bias in Monetary Policy.

12. USDINR Mother chart analysis USD INR Spot Chart

13. Elliott wave - USDINR USD INR Spot Chart The recent rise towards 69 has most likely completed the fifth wave and prices are currently in a medium-term corrective tone.  The corrective tone is expected to extend towards 58 and a breach of the same shall take rupee further towards 55.

14. Conclusion Rupee is expected to strengthen towards 58 / 55 over the coming 9-12 months with any weakness expected to be capped in the range of 65-67.

15. Thank You Demask Investment Services Pvt. Ltd.# 8-2-601/P/27,Road No. 10, Banjara Hills, Hyderabad – 500 034E-mail: services@disindia.net demaskindia@gmail.comTel: +91-40-64614092-94www.demaskconsulting.com