The Indian Economy

1. The Indian Economy July 25, 2000

2. Current Situation Overview • Significant all around improvement after turbulent period (1998-99) • 5.7% GDP growth estimated 1999-00 and forecast at 6.3% next year • Inflation, driven by higher fuel prices, up from 4.5% • Expected to stabilize at 6.5% • Industrial environment improves in 1999-00, IIP growth around 8% levels • Stronger consumer demand, tentative industrial demand, rising exports • Cement, automotive, home goods & services are the fast growing segments • Corporate sector reports brisk topline growth of >20% and a slightly slower bottomline growth of 18% • Margins under pressure due to the mild over capacity in most industries • Resurgence in Portfolio Flows (FII) during 2000, FDI flows expected to pick up speed with greater clarity in policy

3. Current Situation Overview • Foreign Debt Under Control at less than 24% of GDP • External debt service ratio at < 2% of GDP • Large part of debt 40% concessional and short term part is only 5% of total debt • Foreign Currency Reserves rise to USD 35 bn (8 months import cover) • Rupee Depreciation only 2.17% in 1999-00, another 2% since April 2000 • Annual rate of depreciation estimated to be around 4.5-5% • Political situation shows greater signs of stability • Wider dispersion amongst partners makes the coalition less vulnerable

4. Current Situation Overview (Concerns) • Fiscal deficit at around 6% continues to be the main concern • Successful completion of at least one privatization program • Approach to cutting back subsidies • Investment demand yet to materialize • The much awaited infrastructure boom • Step-up In new industrial capacities • FDI flows to gather momentum (rise to more than 30% of approvals) • Water scarcity and drought conditions in several states • Is a concern though it is too early to assess impact • Large government attention needed to manage the crisis

5. Near Term Outlook • Base case growth assuming near normal monsoon is around 6% • Fuelled mainly by the growth in consumer demand mainly from rural areas • Benign interest rate regime and a liberal Reserve Bank of India policy of creating adequate liquidity in the market to help investment over the next 12 months • Large scale investments into infrastructure needed to catapult growth to 8% plus trajectory to make a more meaningful trickle down effect to different parts of the economy

6. Current Economic Policies • Centers around strong domestic industry but trade barriers are being dismantled in accordance with commitments • Increased importance on housing and rural industrialization • Product patents in place, import curbs lifted on several commodities • Attempts to create a rural industrial base (around small industry) • Investments guided by competitive advantages/ economic considerations rather than licensing restrictions / allowances • Strong industrial growth averaging 7% in the last five years • Significant progress in opening up telecom and power sectors • Privatization of PSUs (GOI holding upto 26%), closure of sick units, repeal of the Urban Land Ceiling Regulations, etc. • Significant capital flows generated from 1991 to 1998 • FDI - $15 Bn; Portfolio (FII) - $12Bn; • FCY reserves increased from $2Bn in 1991 to over $35Bn as of April’2000

7. Growth Targets & Imperatives • Need to target GDP growth of 8-10% • Liberalize and ease domestic consumption and investment • India ranked 41st in competitiveness • Strengthen the contribution from the export markets • Promote and channel private and foreign investments into infrastructure • Required investment of $120Bn over next five years to sustain planned growth • Current domestic savings of 24% needs to be augmented by foreign investments ~ $10Bn p.a. • Maintain financial and currency stability • Controlled moderate inflation • Cap on fiscal deficit, Bill on fiscal responsibility soon • Clearer focus on planned government capital expenditure

8. Growth Drivers & Bottlenecks • Continued demand for consumer items with rising income levels • More stable agricultural output & rising activity in services • Moderate inflation would enhancing purchasing power • Increased economic activity in infrastructure sector • Telecom, power, roads, new homes • Creation of new logistics infrastructure to drive penetration of consumer goods • Roads, ports and storage facilities • Red-tape procedure and poor infrastructure still deter foreign investors • FDI levels still low as compared to requirements

9. Outlook - 3years - Key Themes • Growth would continue to be led by consumer demand growth • Infrastructure would start contributing towards the end • Rural economy to reduce dependence on agriculture • Stabilize the rural consumption patterns • Provide exponential growth window for consumer goods makers • Government will step in to support investment climate • Fiscal deficit levels would continue to be high • Government expenditure under closer inspection • Industrial investments guided by competitive advantages/ economic considerations rather than licensing restrictions / allowances • High growth will continue in: • Infotech, telecom, transport vehicles (mainly personal transport vehicles), consumer electronics, apparel, convenience foods, pharmaceuticals, financial products (savings products)

10. View From The Rating Agencies

11. Economic Structure • Significant transition in economic structure • Agriculture sector employs 75% of the rural workforce • Industrial sector consolidates through liberalization • Services sector stabilizes the economy • Also includes PS/ GOI spending and defense • Economy largely internal driven and resilient • Imports account for 10% of GDP, while exports account for 8%

12. Economic Indicators - Table

13. Economy and outlook • Macro economic overview 1991 - 2001f A decade full of false starts Forecasts :Citibank estimates

14. Economy and outlook • Other Indicators Consol- -idation amid uncertain policy direction

15. Economy and outlook • Interest rate trends Yields in % Sep98 Jun99 Sep99 Mar00 Apr00 GOI 1 yr 10.42 10.71 10.45 10.11 9.35 GOI 2 yrs 11.04 10.89 10.61 10.05 9.45 GOI 5 yrs 11.84 11.44 11.03 10.33 9.82 GOI 10 yrs 12.18 11.74 11.62 10.81 10.35 AAA I yr 12.20 11.25 11.10 10.96 10.00 AAA 2 yrs 12.85 11.90 11.75 11.00 10.25 AAA 5 yrs 14.05 12.60 12.35 11.38 11.00 AAA 10 yrs 14.55 13.10 12.85 12.12 11.80 Falling yields and credit spreads note : GOI -S/A yld. AAA - Ann. yld.

16. Spot Rupee- Recent history

17. 6 month forward premia (in rupees)

18. Stock Market and the Rupee

19. Nasdaq and BSE

20. FX markets • Access • Through RBI approved authorised dealers • INR trading between 9.00 AM to 4.00 PM • Crosses trading 24 hours • Based on exposures - assets / liabilities in foreign currencies • Limited freedom on the short INR side • FIIs given flexibility and freedom for entry / exit for hedging purposes subject to some guidelines • Instruments • Spot and forward INR - liquid till 12 months • Prices available upto 3/5 years, execution on best efforts basis • FCY / INR Currency swaps for managing exposures • Other derivative instruments - swaps and (non-INR) options

21. Citibank dealing strengths • Global presence • Rated number 1 in FX by Asiamoney and Corporate Finance • Competitive pricing on entire range of currencies • Largest overnight limit amongst foreign banks: domestic limits on par with largest nationalised bank • Ability to handle large volumes • Late night desk for crosses trading • 24 hour order book

22. Research • Fundamental and technical research on all major currency pairs • Focus on Indian Rupee research • Wide range of customer communication / market updates • Daily Treasury Letter • Weekly Treasury Letter • Monthly Indian Rupee Research report • Annual Treasury Letter • G7 Currencies Weekly Reviews • Monthly Global Economic Outlook

23. Customer support • Customer orientation • focus on building long term FX relationships • Technical support • exposure tracking and management systems • Integrated hedging approach • Funds management and exposure management • Focus on overall portfolio vs individual transactions

24. Derivative Strengths • Pricing capability on any kind of exotic derivative products • Ability to quote finest prices on account of large global derivative presence • Expertise in place for launch of new rupee derivatives • Focus on creating customised derivative solutions

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