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The Indian Economy

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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

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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

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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

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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

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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

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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

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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

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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)

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View From The Rating AgenciesCountry Moody'sThailand Ba1*

Korea Baa2

Poland Baa1

India Ba2

Argentina B1

Brazil B2

Turkey B1

Russia B3

S&PBBB- (Stable)

BBB (Positive)

BBB (Positive)

* Under review for possible upgrade

Moody's as on April 26, 2000

All ratings for Long term foreign currency borrowings.

BB (Positive)

BB (Stable)

S&P ratings as on April 28, 2000

B+ (Positive)

B+ (Positive)

SD

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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%

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Economic Indicators - Table

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Economy and outlook

A decade

full of

false

starts

Forecasts :Citibank estimates

Macro economic overview 1991 - 2001f

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Economy and outlook

Consol-

-idation

amid

uncertain

policy

direction

Other Indicators

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Economy and outlook

Falling

yields

and credit

spreads

note :

GOI -S/A yld.

AAA - Ann. yld.

Interest rate trends

Yields in % Sep98 Jun99 Sep99 Mar00 Apr00Yields 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

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Spot Rupee- Recent history

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6 month forward premia (in rupees)

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Stock Market and the Rupee

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Nasdaq and BSE

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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

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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

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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

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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

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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