According to EPFR Global that tracks foreign fund flows across markets , FIIs withdrew over $4 billion from

India in 2011, against an inflow of $1.35

Key Points: Indias Economic Outlook For 2011-2012 Posted on August 5, 2011 by India Briefing

Aug. 5 Indias Economic advisory council has released its outlook for the year 2011-12. Some vital points are given below:

* Economy is expected to develop at 8.2 percent in 2011-12. * Agriculture grew at 6.6 percent in 2010-11. Likely to nurture at 3.0 percent in 2011-12. * Industry grew at 7.9 percent in 2010-11. Likely to nurture at 7.1 percent in 2011-12. * Services grew at 9.4 percent in 2009-10. Likely to nurture at 10.0 percent in 2011-12. * The expected growth rate of 8.2 percent, although inferior than the earlier year, must be treated as high and respectable, given the current world situation. * The global economic and financial situation is not likely to improve according to the outlook. * To keep the economy growing at 9 percent it is significant to boost fixed investment rates. * Investment rates are expected at 36.4 percent in 2010-11 and 36.7 percent in 2011-12. * Domestic savings rates as a ratio of GDP are likely at 33.8 percent in 2010-11 and 34.0 percent in 2011-12. * The 2011 monsoon is anticipated to be in the range of 90 percent to 96 percent of Long Period Average. As a result, farm sector output is expected to grow at 3 percent. * The revised series (2004/05) for Index of Industrial Production shows an output growth pattern that is fairly different from what the old series (1993/94) had indicated. * The output growth was grossly underestimated by the old series in 2007-08 and overestimated in 2008-09 and 2009-10. * The impact of the Global Financial Crisis on industrial output was much stronger than had been indicated by the old series.

* In 2010-11 the output growth was higher at 8.2 percent against 7.8 percent indicated by the old series. * Current Account deficit is US$44.3 billion (2.6 percent of GDP) in 2010-11 and likely at US$54.0 billion (2.7 percent of GDP) in 2011-12. * Merchandise trade deficit is US$130.5 billion or 7.59 percent of GDP in 2010-11 and projected at US$154.0 billion or 7.7 percent of GDP in 2011-12. * Invisibles trade surplus is US$86.2 billion or 5.0 percent of the GDP in 2010-11 and projected at US$100.0 billion or 5.0 percent in 2011-12. * Capital flows registered at US$61.9 billion in 2010-11 and are projected at $72.0 billion in 2011-12. * FDI inflows projected at US$35 billion in 2011-12 against the level of US$23.4 billion in 2010-11. * FII inflows projected to be US$14 billion which is less than half that of the last years US$30.3 billion. * Accumulation to reserves was US$15.2 billion in 2010-11 and is projected at US$18.0 billion in 2011-12. * The headline inflation rate would continue to be at 9 percent in the month of July-October 2011. There will be some relief starting from November and will decline to 6.5 percent in March 2012. * Available food stocks are to be freely released. * Significant role for fiscal policy to contain demand pressure. Need to ensure that fiscal deficit does not surpass the budgeted level. * RBI will have to persist to follow a tight monetary policy till inflation shows definite signs of decline. * Achieving fiscal targets set in 2011/12 budget estimates to present a significant challenge. * Government to redouble efforts to collect larger revenue, resolve cases to reduce tax arrears. * Minimize avoidable expenditures and initiate measures to increase revenues. * Resolve issues with states and introduce Goods and Services Tax. * Reforms in power sector distribution system to limit the liabilities of state governments.

Dec. 5 After depreciating to a record low of 52.73 against the U.S. dollar on November 22, the Indian rupee (INR) rose in value to 51.206 per dollar on Friday to complete the currencys first weekly advance since October.

The Indian rupee is under great stress as overseas investors are paring their exposure to Asias third-largest economy amid international uncertainty and mounting worries over the domestic economy.

On November 21 alone, overseas funds sold more than US$500 million worth of Indian-listed shares over the five trading sessions, reducing net inflows for 2011 to under US$300 million a tiny sum compared with the record investments of more than US$29 billion experienced in 2010. The rupee has lost more than 10 percent of its value this year, making it one of the worst performing currencies in Asia.

The rupees modest 2.1 percent advance against the dollar last week occurred as six monetary authorities, led by the U.S. Federal Reserve, agreed to lower the interest rate on dollar-liquidity swap lines.

The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said. It coordinated the move with the European Central Bank and monetary authorities in Canada, Switzerland, Japan and the U.K.

Sentiment has improved slightly after the central banks actions, Vikas Babu, a Mumbai-based currency trader at state-owned Andhra Bank, told Bloomberg News. This is unlikely to last long as only the symptoms of the crisis are being tackled, and I expect dollar-buying to resume soon.

The exchange rate of the Indian rupee is dependent upon the market conditions. Though, in order to sustain effective exchange rates, the Reserve Bank of India (RBI) actively trades in the US$/INR currency market. The RBI also intervenes in the currency markets to maintain low volatility in exchange rates and remove excess liquidity from the economy. The rupee is pegged by the Bhutanese ngultrum at par and with the Nepali rupee at INR1 to NPR1.6.

India has a managed floating exchange rate system. This means that the Indian government intervenes only if the exchange rate gets out of hand by increasing or reducing the money supply as the circumstances demand.

Impact on economy Rupee appreciation makes imports cheaper and exports more expensive. According to intelligence reports by the Associated Chambers of Commerce and Industry of India, sectors like petroleum and petroleum products, drugs and pharmaceuticals and engineering goods which have import inputs of as much as 77 percent, 19 percent and 21 percent, respectively will gain if the rupee appreciates. They would have to pay less for the imported raw materials which would increase their profit margins.

Likewise, a depreciating rupee makes exports cheaper and imports expensive. So, it is good news for industries such as IT, textiles, hotels and tourism which generate income mainly from exporting their products or services. Rupee depreciation makes Indian goods and services cheaper for overseas buyers, thus leading to increases in demand and higher revenue generation. The foreign tourists would find it cost effective to come to India, therefore increasing the business of hotel, tours and travel companies.

Indias IT sector is dependent on foreign clients, especially the United States, for more than 70 percent of its revenue. When an IT company gets a project from a client, it pre-decides on the length of the contract and the cost of the project. The contracts with U.S. clients are usually quoted in U.S. dollar terms. So, the fluctuation in the exchange rate can bring about a considerable difference in the performance of a company.

Some companies undertake a range of measures like hedging exchange risks using forwards and futures contracts. This helps in mitigating some of the losses due to exchange rate fluctuations, but none-the-less the impact is substantial.

The exchange rate is a significant tool that can be used to examine many key industries; with fluctuations potentially having a serious impact on the economy, industries, companies, and foreign investors. Rupee appreciation is generally helpful for industries which rely closely on imported inputs while depreciation of the rupee is welcome news for industries which are exporting a majority of their products.

Indias RBI Cuts Cash Reserve Requirement Posted on January 30, 2012 by India Briefing

Jan. 30 The Reserve Bank of India cut cash reserve requirements (CRR) for banks by 50 basis points last Tuesday to relieve tight liquidity, indicating a policy shift towards reviving growth after nearly two years of fighting inflation. With core inflation still inflexibly high, the RBI left its policy repo rate unchanged at 8.50 percent for the second consecutive review. The central bank had raised rates 13 times between March 2010 and October 2011, which made it one of the most hawkish central banks over that time period.

Bond and exchange markets at first commended the CRR cut before being disappointed in that there was no perfect guidance on a policy rate cut pushing bond yields and swap rates higher. The BSE Sensex, though, was sharply higher, rising as much as 1.66 percent on the day powered by bank shares.

Expectations had grown in recent days that the RBI would cut the CRR and the cut on Tuesday lowered the CRR to 5.50 percent and released Rs. 320 billion of liquidity into the banking system.

Inflation worries persist The RBI kept to its hawkish position long after most central banks shifted their focus to growth, as inflation in India remained high due to elevated food prices, infrastructure bottlenecks, and an expansionary fiscal policy that pushed up rural spending power and strained government finances.

Yearly inflation, measured by the wholesale price index, slowed to a two-year low of 7.47 percent in December, because of a decline in food inflation. However, manufactured product inflation edged up from the previous month.

The 16 percent drop in the rupee in 2011 has made imports even more expensive.

It has also made some, albeit limited, progress in allowing multi-brand retailing, which has so far been prohibited in India. At present, this is restricted to 49 percent foreign equity participation. As estimated, the RBI lowered its GDP growth forecast for the fiscal year that ends in March to 7 percent from 7.6 percent, and left its wholesale price index inflation target unchanged at 7 percent for the end of the fiscal year in March. Asias third-largest economy grew 8.5 percent in the previous fiscal.

CRR signal Indian banks borrowed Rs. 1.42 trillion from the RBIs repo window, more than double the Rs. 600 billion that would indicate a liquidity deficit of 1 percent. The RBIs guideline is for liquidity deficit or surplus within 1 percent of aggregate deposits.