1. December 2011, Volume: 33
ISSUE
VOLUME
Investeurs
Chronicles
News …… In Focus
Cover Story
Perfect Storm: Volatility in News on Industry and All routes to India:
Emerging Markets
commodity prices world’s top recipients of
remittances
Open Forum……. Stats Watch ....... Outlook
Is depreciation the new normal? Gross Domestic Rubber
Products –Quartile
Estimate

2. Call Rates as on 3rd December 2011
6.90% - 8.50%
Figure Facts
Forex
Forward Rates against INR as on 3rd December, 2011
Spot Rate 1 mth 3 mth 6 mth
US 51.31 51.62 52.01 52.55 5,050.
Euro 69.18 69.63 70.18 70.95 16,846 15
Sterling 80.48 80.95 81.51 82.28 .83
Yen 65.89 66.37 66.94 67.78 15,946
4,778.
Swiss 55.95 56.35 56.84 57.57 .10
Franc 35
Source: Hindu BusinessLine
Libor Rates
Libor % 1 mth 3 mth 6 mth 12 mth Sensex Nifty
US 0.27 0.52 0.74 1.06
Euro 1.13 1.40 1.64 2.00
Sterling 0.74 1.03 1.33 1.82
Yen 0.14 0.19 0.33 0.55
Swiss Franc 0.03 0.05 0.09 0.32 28,948 55,702
28,688
Forward Cover .00
.00 .00
1 mth 3 mth 6 mth
US 7.35% 5.53% 4.90% 54,415
Euro 7.91% 5.86% 5.19% .00
Sterling 7.11% 5.19% 4.54%
Yen 8.86% 6.46% 5.82%
Swiss Franc 8.70% 6.45% 5.87%
As on 3 rd December, 2011 Source: Hindu BusinessLine
Gold (10 gm) Silver (1 Kg)
Commodities
Aluminum (1000 kg) 102100
109.94
Copper (1000 Kg) 409750
52.16
Zinc (1000 kg) 100350
Steel (1000kg) 31600
107.00
As on 3 rd December2011
51.21
Crude Oil ($/barrel) Dollar
Data from21st November 2011 to 3rd December 2011

3. Stats Watch YEAR Outlook -Rubber
Rubber
The Association of Natural Rubber Producing Countries (ANRPC), whose members account for
92 per cent of global rubber output and exports, pegged output at 10.023 million tons in 2011,
up 6.6 per cent from 9.490 million tons in 2010. According to ANRPC in 2011 world natural
rubber production is estimated to reach between 11.55 million tons and 11.66 million tons
while world demand for natural rubber would be 11.40 million tons.
Compared to the previous year (2010), when world natural rubber production could not meet
market demand so there was a shortage of 400,000 tons, causing the rubber price to rise to
US$4.95 per kg, current scenario is quite optimistic. In the coming year global natural rubber
output could rise 3.6 percent to 10.388 million tons, but growth is expected to be slower than
in 2011 as falling prices affect yield. The current phase of low rubber prices has reduced the
enthusiasm among the dominant smallholders for continuing the good agricultural practices
(stimulated harvesting or rain guarded tapping) which are necessary for optimizing the yield.
The price of Thai RSS3 tyre grade, often considered the benchmark physical price, has halved
since hitting a lifetime high at US$6.40 (RM20.40) a kg in February 2011 on fears Europe’s
debt crisis could hurt demand, and after main consumer China recently sought to
renegotiate prices. Overall, rubber prices had dropped 37% in the current year.
Indeed, the crisis in the US and Europe has affected the price of rubber. There’s a slower
Gloss “Arm’s length Transaction”
demand in the crisis-hit countries. But on the other hand, there’s a jump in demand from
emerging market including India and China, so there’s no way for the rubber price to plunge
freely. Rubber price of $4 per kg is considered quite healthy as the breakeven point for
farmers is at $3.5 per kg. It is expected that rubber price in 2012 to range between $4-4.5 per
A business deal between unrelated persons or organizations in which
kg on continuing strong demand from India and China.
there is no conflict of interest for either party.

4. Perfect Storm: Volatility in Cover Story
commodity prices
When commodity prices slumped in the aftermath of the global financial crisis in 2008,
many market observers were quick to call an end to a sustained five-year commodity
price bull market.
But as the post-crisis economic recovery gathers pace, prices have rebounded. Since the
end of last year, agricultural, energy and industrial commodity prices have surged, in
many cases bringing prices back to or above pre-crisis levels.
Talk is back of a super-cycle that will sustain commodity prices at historically high levels
for years to come, thanks to rising demand and limited scope for an increase in supply
for a number of key commodities. Brent crude prices broke through the $100 a barrel
barrier in early February, copper prices hit a record high in mid-February, while the
UN’s food price index rose to an all-time high in February.
Has the global economy entered an era of persistently high, volatile commodity prices?
Atleast, market sentiments of late suggest so. During the past eight years alone, they
have undone the decline of the previous century, rising to levels not seen since the early
1900s. In addition, volatility is now greater than at any time since the oil-shocked 1970s
because commodity prices increasingly move in lockstep.
Going forward, a trend reversal is not expected. Infact, world is bracing itself for higher
demand and volatility in commodities. Demand for energy, food, metals, and water
should rise inexorably as three billion new middle-class consumers emerge in the next
two decades. Led by China and India, consumption is set to rise in multiple segments,
comprising food, infrastructure and luxury goods. To cite an example, in India, calorie
intake per person is expected to rise by 20 percent during the period till 2030, while per
capita meat consumption in China could increase by 60 percent, to 80 kilograms (176
pounds) a year.

5. Repeat of the feat The prominent of these factors being the growth of emerging markets such as Brazil,
Such dramatic growth in demand for commodities actually isn’t unusual. Similar Russia, India and China. As the populations in those countries improve their standard of
factors were at play throughout the 20th century as the planet’s population tripled living, they consume more meat, coffee and other staples of a middle-class diet. This
and demand for various resources jumped anywhere from 600 to 2,000 percent. shift in eating habit is further evident by the increase in consumption of processed and
Yet, burgeoning demand at that time was met through improvements in junk food. Till a decade back, extensive use of agri commodities for end products, like
exploration, extraction, and cultivation techniques which kept supply ahead of chips, pizza base, and burger was unheard of. But with increased globalization, food
ever-increasing global needs. Infact, this ability to access cheaper resources habits of the developing countries have been influenced by that of the developed
provided the groundwork for a 20 fold expansion f the world economy then. countries at a higher level. That increases demand for the commodities required to
produce those goods.
However, current scenario is different. Firstly, world has become progressively
aware and concerned about the potential climatic impact of carbon emissions The other prominent factor, but marked by controversy is speculative trading in the
associated with surging resource use. Secondly, we have almost hit the point commodity futures markets by hedge funds and other investors. Of late, commodities
where supply of commodities has become inelastic. Long-term marginal costs are have become a standard part of the portfolios of many hedge funds, which use them as
increasing for many resources as depletion rates accelerate and new investments a way to protect themselves against inflation. If hedge funds are betting on inflation,
are made in more complex, less productive locations. they'll shift more money into commodities, which move the market higher. If they're
selling, they'll drive prices down.
Third, the linkages among resources are becoming increasingly important.
Consider, for example, the potential ripple effects of water shortfalls at a time Identifying how much of the recent volatility is being caused by speculators is
when roughly 70 percent of all water is consumed by agriculture and 12 percent impossible, but they are widely believed to be at least partially responsible for the
by energy production. In Uganda, water shortages have led to escalating energy recent run-up in commodity prices.
prices, which led to the use of more wood fuels, which led to deforestation and soil
In recent months, for example, as investors' concerns over Europe's debt woes
degradation that threatened the food supply.
mounted, many hedge funds became more worried about deflation. This caused them to
It now seems that the 2008–09 trough was merely a temporary blip in a larger liquidate their commodity positions, which caused grain prices to plummet.
commodities super-cycle which still has plenty left to run with a predicted
Current Scenario and the road ahead
continued strong demand, major uncertainty surrounding supply and future spare
Although, ground seem to be set for a super cycle in commodity market, yet, a
capacity of a number of key commodities, most notably oil, copper and corn.
combination of factors such as eurozone debt worries and the looming likelihood of
Contributing Factors failure from the U.S. Congressional super committee have pulled down the commodity
Surging development in emerging markets, reawakening demand in North prices in the last couple of months.
America, low inventories and production difficulties in some areas have combined
Energy prices in October 2011 edged down 1%. Non-energy prices sharply extended
to create a sudden, dramatic rise in the global cost of key commodities used in the
their decline by 7.6%; food prices fell by 5.4%; beverages down by 7.3%; raw materials
manufacture of a variety of products.
prices dropped by 6.3%; metals plummeted by 11.2%; fertilizers remained unchanged.

6. Further, the International Monetary Fund has downgraded its outlook for commodity prices, citing slower global economic growth. In its biannual World Economic Outlook
report, the IMF has forecasted global economic growth for 2011 and 2012 to 4.0 per cent, down 0.3 and 0.5 percentage points respectively, from its June projection. The lower-
than-expected economic growth is in part the result of high oil and commodities prices earlier this year. But the institution has warned of potential spikes for oil and food
commodities prices due to geopolitical factors and adverse weather. The benchmark Reuters-Jefferies CRB index, a basket of raw materials including copper, oil and wheat, hit
a 1½-year high in May on the back of rising energy prices, but since then has fallen nearly 13 per cent as the global economy cools.
Investors are betting on further falls.
According to a latest report by Morgan Stanley, commodities show limited potential for gains in 2012 as the global economy slows and risk aversion boosts the dollar. A
comprehensive solution to Europe's debt crisis remains elusive, while economic indicators signal a slowdown and deleveraging and fiscal austerity should impair growth,
providing a "myriad of headwinds" for expansion. Commodities had their worst quarter since 2008 in the three months to September 30 on concern that Europe's debt crisis
was spreading, while 18 of 24 commodities tracked by the Standard & Poor's GSCI Index dropped in November.
Dollar- denominated commodities tend to move inversely to the currency. The Standard & Poor's GSCI Total Return Index lost 12% in the three months to September 30, the
biggest drop since 2008, as the dollar rallied 5.7% against a six currency basket including the euro.
Upside for commodities as an asset class is likely limited given the fragile state of the OECD while the non-OECD should continue to support global growth albeit at a slower
pace.

7. Finally, order compelling open access in power Finance Ministry supports 26% FDI in aviation
The Union power ministry has told all state governments, Amidst differences within the industry, the Finance
power regulators and distribution utilities to delay no Ministry has lent its support to the Department of
more in implementing the open access provisions of the Industrial Policy and Promotions (DIPP) on allowing
Manufacturing drags GDP growth to 6.9% in Q2 Electricity Act, 2003. Open access, meaning freedom to foreign airlines to pick up up to 26 per cent equity in
A noticeable slowdown in the manufacturing sector, choose the supplier, was being denied for consumers domestic airlines. The 26 per cent limit is considered to
decline in mining output and some delay in decision wanting 1 Mw or above, owing to a perceived ambiguity be a better option for any foreign investor as it allows
making pulled down the Indian economy's growth in the in the relevant provisions. veto rights in board decisions. The 24 per cent limit
second quarter to 6.9 per cent, much lower than the 7.7 makes an investor an ordinary shareholder without
per cent growth recorded in the previous quarter this Ranbaxy launches Lipitor generic veto powers on the board of the airline.
fiscal. This second quarter GDP growth performance, A last-minute marketing approval from the United States
which is the lowest in nine quarters, is also lower than medicine regulator, Food and Drugs Administration
the downward adjusted revised growth of 8.4 per cent (FDA), and a profit-sharing agreement with Israel’s Teva
recorded in the same quarter last fiscal. have helped Ranbaxy launch the generic version of
Pfizer’s biggest revenue-earning drug, Lipitor, without
SAIL-led group gets a big bite of Afghan mining delay. The drug had clocked $7.89 billion in the US
pie through September. While the development has put an
A month after signing a strategic partnership deal with end to the uncertainty surrounding Ranbaxy’s ability to
Afghanistan, a consortium of Indian companies bagged launch the drug on time, it has raised questions over
mining rights for three of the four iron ore blocks in the earnings from the deal, due to the profit-sharing
Hajigak deposit in mountainous Bamiyan province, 130 agreement with Teva.
kilometre west of the capital, Kabul. Led by Steel
Authority of India Ltd (SAIL), the consortium of public S&P assigns stable tag to Indian banks SBI, HDFC,
and private sector companies has gained access to 1.28 ICICI and others
billion tonnes of high grade iron ore, a critical input for International rating agency Standard & Poor's has
steel making. The deal would be among Afghanistan’s assigned a stable outlook to leading Indian banks
largest ever foreign investment agreements, as the indicating that a downgrade is unlikely in the next 18-24
country plans to attract $14.6 billion in foreign months. The agency has also said that four banks-State
investment over the next 30 years. Bank of India, HDFC Bank, ICICI Bank and Indian Bank-
have a better stand-alone credit profile than that of the
Indian government.

8. Emerging Markets
Russia, Europe Agree on Overflights Europe's financial crisis deepens, Brazil remains a rare
The European Union and the Russian government bright spot in the battered global economy. However,
SA growth forecast cut on eurozone woes announced the settlement on 1st December, of a long- Brazil isn't immune from the crisis, as an influx of capital
Economists cut their forecasts for South Africa's running dispute about how airlines are charged for flights from investors looking for safe harbor has driven up
economic growth for this year and the next two due over Siberia. prices and cooled industrial production. Experts say that
to the impact of the ongoing eurozone debt crisis, a "From Jan. 1, 2014, any charges EU airlines have to pay Brazil has too much on its plate to be able to contribute to
Reuters poll showed.Seventeen economists surveyed for flying over Russian territory will be cost-related rescuing European economies right now, and some say
for the November Econometer poll showed gross and transparent. They will not discriminate between that offering a bailout would be counterproductive.
domestic product (GDP) growth was expected to airlines," the EU said in an e-mailed statement.
average 3.1% this year, slowing to 3.0% in 2012 and RI books first trade surplus with China
3.7% in 2013, all forecasts lower than those given in Ukraine Gets Third 6-Month Extension on $2Bln Indonesia recorded a trade surplus with China for the
the previous poll just a month ago. VTB Loan first time since the implementation of a free trade
Ukraine's government won a third six-month extension agreement (FTA) despite signs of slowing export growth
South Africa: The price of secrecy of a $2 billion loan from VTB Group, Russia's second- to the country’s major buyers, the Central Statistics
As many African countries push for greater largest bank, to ease its effort to finance the state budget Agency (BPS) says. Despite lowering the trade surplus
transparency, South Africa's controversial state deficit, its Finance Ministry said.The original six-month and slowing export growth in October, Indonesia’s trade
secrets bill has unnerved investors who worry the loan, granted in June 2010, has an interest rate of 6.7 balance booked the first surplus of $106.9 million with
continent's top economy may try to hide widespread percent. The government won its first six-month China, as non-oil and gas exports to the world’s second-
corruption, driving up the cost of business. extension in December 2010 and had an option for more largest economy jumped while imports declined, said BPS
Parliament has passed a bill that allows any time, according to the agreement. The loan comes as director for distribution statistics Satwiko Darmesto.
government agency to apply to have information Ukraine is seeking to reduce the natural gas price it pays
"valuable" to the state protected. The bill also to Russia and hopes to sign a new fuel accord by year-end.
criminalises the possession and distribution of state It wants to cut the price to about $230 per 1,000 cubic
secrets. meters of gas from $400 it pays now.
Battered Europe looks to Brazil, which has its own
problems
The visit by International Monetary Fund head Christine
Lagarde to Brazil this week was the latest sign that while

9. InFocus Open Forum
All routes to India: world’s top recipients of Is depreciation the new normal?
remittances
The sharp fall in the rupee has given the contrarians their moment in the sun. Forecasts
For the fourth straight year, India has narrowly edged out China to emerge as the
of Rs 57 and Rs 58 to the dollar are being taken seriously by the markets and not being
world’s top recipient of officially recorded remittances. According to the latest issue
consigned to the crank’s corner. The majority view, however, is that after some more
of the World Bank’s Migration and Development Brief released on 30th November,
wobble, the rupee will appreciate again and slip below the 50-mark. In short, there will
containing estimates for 2011 remittances, India is expected to receive $58 billion
be gain after this bout of pain, as a newspaper headline succinctly put it.
this year, followed by $57 billion flowing to China, and $24 billion to Mexico.
Perhaps we should give the contrarians their due this time around. Let’s not forget that
India’s inward remittances have grown from $13 billion in 2000 to $58 billion this
continuous depreciation, not appreciation, was the norm in the nineties and this trend
year, while remittances to China have jumped from $5 billion to $57 billion during
persisted until 2003-04. The rupee shed value, on average, every year despite a
the same period. The share of remittances in China’s GDP is just under one per cent,
continuous improvement in the current account deficit, the latter being driven by
while the inflows made up three per cent of India’s GDP last year.
aggressive exports of the sunrise industries like IT and pharmaceuticals. Of course, rupee
Worldwide remittances, including those to high-income countries, will reach $406 depreciation itself helped the improvement in current account since it helped
billion in 2011, of which $351 billion will flow into developing countries. competitiveness.
According to the brief, high oil prices helped provide a cushion for remittances to The rise of the rupee was actually a relatively short episode that lasted between 2003-04
South Asia from the Gulf Cooperation Council or GCC countries this year. A and 2007-08. Brics-mania was rising, “Chindia” was in fashion and these pulled in
depreciation of currencies in large migrant-exporting countries like India, massive amounts of foreign capital. This left the economy with massive capital surpluses
Bangladesh and Mexico also contributed to the rise in remittances. However, going that appreciated the rupee despite a continuously deteriorating current account deficit.
forward, persistent unemployment in Europe and the United States will affect Brics-mania, incidentally, was not just a lot of hype based on the endless possibilities that
employment prospects of existing migrants and harden political attitudes toward favourable demographics would yield after a couple of decades. It was under-girded by
new immigration in those regions. rapidly improving fundamentals — the fisc was consolidating, growth was high and
inflation benign.
The contrarian case is the following. Brics-mania is ebbing as China and India post limp
macro and corporate data. India clearly seems headed for a bout of hard-landing on the
back of policy waffle and high interest rates. Inflation remains sticky and the room to
reverse the monetary gear is limited. The fiscal deficit, too, seems out of control despite
repeated assurances from the government. Massive expenditure on things like food

10. security is pending and it seems unlikely that the government can piece together a credible strategy for getting the fisc back into the genie’s bottle. The current account deficit
is worsening and dwindling capital inflows mean that there simply aren’t enough dollars going around to service it. To top it all, global uncertainty is running high and the safe-
haven bid for the US dollar remains strong. The result: rising pressure on the rupee to adjust this imbalance by shedding value against the dollar.
The extreme denouement of this drama would be a balance of payments crisis that could ride on two sets of “twin-deficits”. The decade of the eighties culminated in a balance
of payments crisis brought on by the interplay of a rising current account deficit and a rising fiscal deficit. This spilled over to the other twin deficit — a negative current
balance and a negative capital account balance. If this were to happen again, the rupee has a long way to depreciate against the dollar before it finds its feet again.
While this scenario is possible, we are not entirely sold on this forecast. For one thing, the relationship between the fiscal deficit and the current account deficit has been
somewhat weak over the past decade than in the eighties. Why could this be? Macro-economics 101 tells us that the current account deficit is the sum of the private savings
and investment gap and the fiscal deficit. Over the past decade, the private gap has broken the nexus between the external deficit and fiscal deficit. Between 2003-04 and 2007-
08, the fiscal deficit improved continuously and yet the current account deteriorated because high growth implied a rising deficit of private savings over private investments.
Flip this argument around and you should get a sense of why a “doomsday” scenario might not hold. As growth dwindles on the back of limp private investments, the savings-
investment deficit is likely to compress and keep the current account deficit under control. Thus, even with a worsening fisc, we might not get a yawning current account gap.
That could prevent the rupee from falling too sharply. To fall back on the jargon used by economists, the current account could act as an “automatic stabiliser”.
That said, we believe that instead of an appreciation bias, the rupee is likely to have a deprecation bias over the next few months. Thus, levels of 54 or even 55 to the dollar
cannot be ruled out. What can certainly be ruled out is a quick move back to the 47-48 range. Also, even if the rupee were to somehow consolidate at current levels, we might
be stuck in a completely new trading range against the dollar that involves much weaker levels for the rupee than in the past.
In the very near term, there is some scope for consolidation. For one thing, the Reserve Bank of India seems to be getting quite antsy about conditions in the currency market.
If it sees another round of depreciation pressure, it might take more aggressive measures to curb it. One option that it could exercise is to supply the dollar-hungry oil
companies from foreign exchange reserves and take the pressure off the markets. Besides, the rupee seems a trifle oversold and there could just be a technical pull-back that
could lend it temporary stability. However, any significant reversal could come only if capital flows come back. If the situation in Europe worsens as it threatens to, that’s
unlikely to happen in a hurry. However, if there is indeed a comprehensive resolution going forward (we remain eternally hopeful) to Europe’s impasse or if the US Fed does
another round of liquidity easing, we might see a turn in the exchange rate that might just sustain.

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