HON BRENDON GRYLLS MLA

Minister for Regional Development; LandsMinister Assisting the Minister for State Development

Minister Assisting the Minister for Transport

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INDIA VISIT REPORT

5 TO 11 SEPTEMBER 2009

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'1-

INTRODUCTION

India is Western Australia's fifth largest trading partner with exports in 2008/09totalling $6.4 billion. Western Australia accounts for 58 percent of Australia'stotal exports to India. Exports from WA include gold, copper ores andconcentrates, alumina and wool. In future years LNG exports from WA willfurther increase the level of exports to market.

Western Australia is India's preferred investment destination in Australia withIndian investment to date totalling $680 million. In addition, committed Indianinvestment in Western Australian resources projects to date is $14 billion withthe Petronet LNG purchase from the Gorgon Project and the Perdaman coal-to-urea fertilizer facility development at Collie.

I undertook the visit to India on behalf of the Premier of Western Australia andMinister for State Development in my capacity as Minister Assisting theMinister for State Development.

The purpose of the visit was to:

® Reaffirm India's significance as a trading partner. India is WesternAustralia's fifth largest export market.

O Strengthen government-to-government relations.

O Promote investment opportunities for Indian companies in WesternAustralia's new infrastructure projects, as well as in other industry sectors,through meetings with existing investors as well as with Indiangovernment agencies and industry associations.

Promote Western Australia as a leading destination for investment and areliable, cost effective destination for resources including LNG, gold anddiamonds.

MINISTER HOLDS MEDIA CONFERENCE IN MUMBAI

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NEW DELHI PROGRAM

Meeting with Dr Nik Senapati, CEO Rio Tinto India

Rio Tinto operates several subsidiary companies in India. It has a jointventure with Orissa Mining Corporation, a company wholly owned by theGovernment of Orissa. In addition, Rio Tinto Diamonds has a representativeoffice in Mumbai which provides technical and marketing support to its Indianclients. More than 90 percent of Rio Tinto Diamonds are used in India forjewellery manufacturing.

Rio Tinto Minerals sells borates through an agent in Mumbai and is working inpartnership with Indian agronomy experts to raise awareness of the need formicronutrients in crop management and boron deficiency.

The company also exports coking coal from Australia to India. It is currentlyinvestigating opportunities in thermal coal as India's power sector expands.

Discussion

® Mr Senapati said the current downturn in the global economy hadresulted in reduced capital flows into India and consequently, delayedstart up operations on some projects.

Rio Tinto's mining interests in India relate to exploration for diamondsand iron ore. The company has acquired mining licences forexploration in six states and includes a joint venture (JV) with theOrissa Mining Corporation. In addition, the company operates a pilotplant in Andhra Pradesh.

India is among the top five producers of iron ore in the world. Rio useslocal geologists and scientists as their skill level and experience are ofa high standard.

India's diamond processing industry is in its infancy but going fromstrength to strength. Prior to the global economic downturn, India'sleading export was diamond jewellery.

Western Australia has an MOU with the Gem and Jewellery Council ofIndia. Mr Senapati referred the delegation to Ms Joanne Farrell, HRManager, Perth Office as a contact to explore further discussion todevelop a program that may allow WA jewellery designers to link withtheir Indian counterparts as more than 90 percent of Rio Tintodiamonds are manufactured into jewellery in India.

Rio sells its aluminium technology in India to the state of Orissa.

Energy supplies are very important to India. However, clean coalproduction is very basic. Mr Senapati sees the export of Australiancoking coal to India as a high growth area.

The company operates vocational training programs in India. Thisprovides an opportunity for Western Australia's TAFE to provide in-situtraining programs for mining employees in India.

Rio Tinto out-sources its procurement, financial and accountingservices to Indian company, Infosys.

Petronet's purchase of LNG from Western Australia has resonated inIndia and provides an opportunity for the Western AustralianGovernment to capitalise on investment opportunities in regionalWestern Australia.

India's Mining Legislation Reform Bill was discussed. The currentstatus of the Bill is that it has been passed by Cabinet and is awaitingpromulgation through Parliament. Essentially the new legislationprovides (1) greater control over mining tenements by individual Indianstates; and royalty payments to go to the states.

Likely outcomes of the legislation for mining exploration companies are (1)Security of Title and (2) Approval to transfer leases from one company toanother.

Meeting with Ms Santha Sheela Nair, Secretary of Mines, Ministry ofMines

The Indian Union (Federal) Ministry of Mines is responsible for the survey andexploration of all minerals except gas, petroleum and radioactive minerals. Itis also responsible for the mining of non-ferrous metals such as aluminium,copper, zinc, lead, gold and nickel.

The Ministry conducts exploration and survey under the Geological Survey ofIndia and the Mineral Exploration Company Ltd. Mining regulation and depositdevelopment work are undertaken by the Ministry's Indian Bureau of Mines.

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Discussion

® I informed the Secretary of Mines that Western Australia remainedkeen to build on its relationship with India and that the recent signingby Petronet with Exxon Mobil for supply of LNG from Western Australiawas one of many opportunities for Indian investor companies.

® I made the Secretary aware of ongoing exploration to define thepotential of a large thermal coal resource in the Canning Basin southwest of Fitzroy. I conveyed to her that REY Resources Ltd (a listedAustralian public company) was one of the major proponents wantingto bring the field into production.

® The Secretary mentioned that the MOU between the Indian andWestern Australian Governments was due for renewal in 2010. Shesaid that her government was interested in expanding the MOU toinclude:

geological survey collaboration;- an officer exchange program; and

inclusion of private companies into aspects of the MOU.

She suggested that there may be other areas of interest requiringfurther discussion with the Federation of Indian Minerals Industries(FIMI) and the WA Chamber of Minerals.

I suggested that her Department may be interested in our Landgateprogram which maps and superimposes many aspects about landholdings, uses and infrastructure sites on an on-line system. Furtherinformation about Landgate is to be forwarded to Mr Vijay Kumar,Additional Secretary, Department of Mines.

o I reaffirmed the Western Australian Government's interest to developits relationship with India and that we are keen to attract greater Indianinterest and investment to the State. I recognised Western Australia'sneed to provide the Government of India and Indian companies withcurrent information about resources development and opportunities inWestern Australia.

O Mrs Nair mentioned that the Minister for Coal who was currentlytravelling in Australia may be interested in coal explorationopportunities in Western Australia's north. The delegation would bebriefed about the opportunity as part of its Perth program.

® I informed Mrs Nair about the forthcoming visit to Delhi on 12 and 13October 2009, by representatives from the Geological Surveys Divisionof the Department of Mines and Petroleum (DMP), and offered apresentation to her Department on Western Australia's geology andexploration opportunities. She welcomed the offer. DMP officers werescheduled to brief her Department on 13 October 2009.

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I also made her aware that Western Australia is keen to attract foreigninvestment to develop and provide the expertise to expand its richresources base and develop the required infrastructure as the Statedoes not have the capital to undertake enormous projects of the sizerequired.

The Secretary invited the Western Australian Government to commenton the proposed new legislation as she appreciated the advanced stateof Western Australia's mining laws.

The matter of Oropa Ltd (WA diamond mining company with atenement in India) and its long and protracted dispute to resolve theimpasse with its mining tenement in Chhattisgarh was raised. Mrs Nairoffered to look into the matter and asked that documentation beforwarded to Mr Thakeral, the Joint Secretary of the Ministry of Mines.The report is currently being prepared.

I discussed the Premier's proposed Centre of Excellence in Mining inWestern Australia to be established though the University of WesternAustralia (UWA) and Curtin University. The Secretary said that herDepartment was interested in providing postgraduate studyopportunities for Indian geologists and mining engineers. She thoughtthat this could be a further aspect for inclusion for the MOU renewalwhereby Indian postgraduate students are sponsored by theGovernment of India to study in Western Australia. She mentioned thatthe Indian School of Mines should explore a partner relationship withUWA and Curtin universities.

I concluded the meeting by reaffirming that Western Australia seesIndia as a partner and not a client, and that we are keen to see therelationship develop and grow. I welcomed forthcoming Ministerialmining and petroleum delegations from India to Western Australia.

Meeting with Mr Rikab Jain, General Manager - International BusinessPearls International

The Pearls Group is a 26-year-old major Indian business house worthapproximately US$6 billion and spread across 13 industry sectors; includinginfrastructure, real-estate, hospitality, food and beverage, tourism, education,healthcare, and financial services.

The Group has been assisted by Austrade to partner with a Queenslandbased company, Resort Corp, and invested A$100 million to form a neworganisation, 'Pearls Australasia', in order to develop/acquire 5 star hospitalityprojects.

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Discussion

I informed the meeting that the Western Australian Governmentwelcomed Indian investment and that a reason for my visit to India wasto promote investment opportunities and robust interaction.

I also mentioned Western Australia's tourism opportunities in regionalWestern Australia and our wine and agri-food industry as opportunities.I offered to showcase to Mr Jain Western Australia's Margaret Riverregion and its investment opportunities.

Mr Jain told me of his company's most recent partnering with Fostersto bring VB beer to India. He stated that Pearls is seeking healthcare,tourism and education investments in Australia.

I underlined the many investment opportunities in regional WesternAustralia for innovative housing as well as boutique hoteldevelopments in mining towns in Western Australia's North which alsohave tourism development potential. I cited the Ningaloo coast as apossible future opportunity for tourism-related investment.

Mr Jain expressed an interest in nurse training and aged care training. I

asked him for further information regarding his proposal. This is to beforwarded to Mr Michael Carter.

Austrade Trade Commissioner. The Western Australian Trade Officein India is to work with Austrade to put a program together for Mr Jainto visit Western Australia in the near future.

Meeting with Mr R K Sharma, Secretary General Federation of IndianMinerals Industries

FIMI was formed in 1966 when the individual mine operators and associationsestablished an all-India federation and a non-profit corporate body. Theorganisation's purpose is to promote the interests of mining, mineralprocessing, metal making and other mineral-based and mineral derivedsectors such as granite, stone, marble and slate industries. These includeprivate, joint and public sector companies.

FIMI represents all of the nation's non fuel, mining and mineral processingactivities. The association attends to the problems companies face in leasegrants, renewals, tenures, production, taxation, trade, exports and labour. Theorganisation began with a small membership of 40 federating associationsand individual units. It is now a 350 member body.

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Discussion

I thanked Mr Sharma for his support for Western Australia and theWestern Australian Trade Office in India over the years. I

communicated the Premier's message that WA welcomes Indianinvestment and wants to build a strong and continuing relationship withthe Indian Government and companies. I stated that Western Australiawants a partnering relationship with India and not simply a "client"relationship.

Mr Sharma acknowledged FIMI's long term relationship with WesternAustralia and looked forward to continuing the support throughextending the MOU of which his organisation is a signatory.

He mentioned that the new mining legislation was based around acentral framework but included greater participation and responsibilityby the states.

He said that the proposed "auctioning" of leases included in the newlegislation is somewhat contentious sites will be auctioned based ongeological estimation value. In his opinion, the proposed process isflawed. He has put the matter to the central government and isconfident that the matter will be addressed soon.

He said there was room for improvement for Australia to better marketits mining events and investment opportunities in India.

He said that he would like to see the mining MOU that exists betweenus expanded to include non ferrous metals as well as lead, zinc andcopper. It should also include coal.

I suggested that all vested interested parties need to come togethersoon to discuss new inclusions for the MOU.

Meeting with Australian High Commissioner, Mr Peter Varghese

Discussion

Mr Varghese outlined the Australian Government's strategy to expandand grow the bilateral relationship between Australia and India. It

included building a strategic relationship based on:

bilateral trade and investment;provision of energy security for India Australian coal and LNGare important to India;broadening out the political strategic dialogue;multilateral cooperation historically we have been on oppositesides; and

Page 8 of 15

developing people to people relationships through educationand migration (India today comprises Australia's second largestsource of migrant intake).

I informed the High Commissioner Designate that Western Australia iskeen to widen its investment streams to include India. We do not wantto be seen to be captive to only one investor country. I stressed thatthe Premier also wanted to see greater participation in WesternAustralia's development by second tier company investors.

I mentioned that Western Australia and India have a common platformupon which to build a long term relationship on the back of Gorgon,Pluto and Browse Basin projects.

Western Australia's plan is to grow Karratha and Port Hedland intomajor northern cities, over time. Issues that needed to be tackledincluded the high cost of living and social infrastructure that needs tobe developed around such centres.

Mr Peter Linford, the Senior Trade Commissioner, Austradeacknowledged the growing relationship between his office and theWestern Australian Trade Office in Mumbai.

I mentioned the potential for Muresk College to play a role in agri-foodsector training of Indian farmers in new farming technology andmethods.

I was advised that the Australian Federal Government was pushing forlupin market access for Australian producers and that Australia wouldlike to have greater access to Indian markets for its wine exports.Fluctuating prices make wheat exports somewhat volatile.

I was informed that India would like to export its mangoes and tablegrapes to Australia.

I outlined the Ord River development project in the East Kimberleyregion and the investment opportunities in that project for Indianproponents.

Meeting with Mr Sanihr Batra, Chairman and Managing Director Mineraland Metal Trading Corporation (MMTC)

MMTC Ltd is a Government of India enterprise under the Ministry ofCommerce and Industry, and India's largest trading company with an annualturnover of approximately US$6 billion.

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The company is a major global player in the mineral trade and is the singlelargest exporter of minerals from India. MMTC is also a leading player infertilisers and fertiliser raw materials. MMTC is the largest importer of goldand silver in the Indian sub-continent, handling about 100 Mt of gold and500 Mt of silver annually.

Discussion

I affirmed Western Australia's commitment to and interest in developingstrong partnership relations with Indian companies and our interest toattract greater Indian investment into Western Australia.

Mr Batra informed me that 15 per cent of India's imports from Australiaare through the MMTC, a Government of India trading entity. The entityimports a range of commodities including wool, rice, pulses, gold andsilver and coal to name a few. Last year it imported 200 tonnes of silverand 90 percent of India's wool requirement.

Mr Batra informed me that in recent years the MMTC had diversifiedand is now building an investment portfolio that potentially included agold and silver refinery. The company has a JV with the Tata Group.

O MMTC has an interest in investing in Western Australia. Its preferenceis to invest with a local partner. They have a particular interest inhematite iron ore. Mr Batra said that an initial investment of up toUS$200 million could be made by the MMTC. Greater amountsrequired Government approval but could also be considered.

I informed Mr Batra that I would arrange for a special briefing for hisagency during the forthcoming visit to India by representatives from theDepartment of Mines and Petroleum's Geological Surveys Division.The meeting was scheduled to take place in Delhi on 13 October 2009.

® I mentioned Western Australia's interest in developing a steel-makingfacility in Western Australia especially in the Mid West region as part ofthe Oakajee development. An Indian investor would be welcomed.

Mr Batra said that the Indian Minister for Steel would like to visitWestern Australia. He asked if a letter of invitation could be arranged.This will be undertaken.

MMTC owns and operates two steel making facilities in Africa; twopalletisation plants and one beneficiation plant.

Mr Batra was interested in the proposed Perdaman coal-to-ureafertiliser facility in Collie and has requested further information aboutthe venture.

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National Mineral Development Corporation (NMDC)

The meeting with Mr Batra was also attended by Mr Rana Som,Chairman/Managing Director of the State-owned NMDC Corporation whoexpressed his corporation's interest in Western Australian resources.

Mr Som has since advised that NMDC is firming up an expression of interestto be published in Australian media for potential joint venture partners in ironore and coal.

HYDERABAD PROGRAM

The Chief Minister of Andrah Pradesh died in a helicopter accident two daysprior to the delegations visit to Hyderabad. The Western Australian TradeOffice advised that it was not safe to travel there as the situation couldbecome unstable. Therefore the one day program was cancelled.

AGRA PROGRAM(Road trip Delhi-Agra)

Business leaders' luncheon

Mr Rajiv Narain, President of Tourism Guild of AgraMr Vinay Bansal, Vice-president, National Chamber of Industries andCommerce, U.PDr Pankaj Mahindereru, Managing Director, Apollo Pankaj HospitalsDr V. N. Kaushal, consultant Apollo Pankaj Hospitals, AgraMr Jitendra K. Garg, President Taxation Bar Association, AgraMr Vikas Rambal, Perdaman Group

The Agra visit included a visit to the Taj Mahal as guests of the Agra TourismGuild and a tour of the Apollo group's 450-bed private hospital.

Discussion

Mr Bansal, from the Chamber of Industries and Commerce expressedthe desire to create tourism awareness between the Agra region andWestern Australia. He cited potential for trade and technologyexchange between the agriculture sector in Western Australia and hisregion.

Dr Pankaj Mahindereru (Apollo group) spoke of the growth of medicaltourism in India i.e. elective surgery being undertaken by foreignpatients within the Apollo group of hospitals. He cited the burgeoningmedical tourism in Thailand and saw potential for Australian patients totravel to India for their elective procedures.

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Mr Rambal spoke of his group's interest in a 10,000 hectare Jatrophaoil-seed project north of Agra and the possibility of establishing asimilar pursuit in Western Australia, possibly in the Pilbara, should theban on Jatropha be lifted in Western Australia in the future.

(Jatropha is a declared noxious weed in Western Australia,Queensland and the Northern Territory). The Jatropha plant is suitablefor the manufacture of biodiesel. Mr Rambal made me aware of hisinterest in the Apollo medical group.

MUMBAI PROGRAM

Meeting with Mr D. Battacharya, Managing Director Hindalco Industries(Birla Group)

The Aditya Birla Group is a US$28 billion corporation with a market capital ofUS$31.5 billion. The Group operates in 20 countries. Hindalco IndustriesLimited, a flagship division of the Group, is structured into two strategicbusinesses aluminium and copper. It has a turnover in excess of US$14billion; Hindalco is the world's largest aluminium rolling company and one ofthe largest producers of primary aluminium in Asia. Its copper smelter is theworld's largest custom smelter at a single location.

Hindalco operates the Nifty Copper Operation in Western Australia locatedapproximately 350 kilometres south-east of Port Hedland, and the Mt GordonCopper Mine in Queensland, which are managed and operated under AdityaBirla Minerals Limited.

Discussion

Mr Battacharya stated that of all of Hindalco's overseas operations andinvestment, those in Australia (Western Australia and Queensland)were the most favoured. He thanked the Western AustralianGovernment for its ongoing support. Given a favourable investmentopportunity, his company would invest further in Western Australia. Itwas currently making a further investment in Queensland.

He raised several issues of concern which included:

Congestion at Port Hed land making demurrage costsexpensive;Native Title was becoming an issue for the company innegotiating with the local community;The need to speed up the approvals process, andThe need to reform the labour market as access to labour wasbecoming an issue.

Page 12 o

Mr Battacharya said that Hindalco was no longer looking to the MitchellPlateau's bauxite potential because of excessive silica content.

He advised that there was a projected 14 years of mine life remainingin the Nifty Copper Mine and his company was anxious to pursueexploration in the region to the east of the current resource.

o He was not aware of the exploration mining incentive schemeannounced under the State's Royalties for Regions program andrequested a copy which has since been forwarded to him.

o I agreed to meet his company's Perth representatives upon my returnto Perth.

Meeting with Australian banking and company representatives inMumbai including:

o Mr Andrew Mouat, Executive Director, Macquarie Securities -India

Mr Varun Bajpai- Executive Director, Macquarie Bank India

Mr Peter Forby Australian Consul General and Trade Commissioner

Mr Vikram Merchant, Manager, Rio Tinto Diamonds India

O Mr Cameron Jones, Chairman, ANZBAIo Mr Neeraj Chandra, Executive Manager, Commonwealth Bank India

Representative from Westpaco Representative from National Australia Bank

o Representative from Leighton group

Discussion

I informed the group that WA was seeking Indian investment to helpdiversify its foreign investment profile and that the Western AustralianGovernment did not wish to be viewed as courting only investmentfrom China and Japan. I provided an overview of the ExxonMobil andPetronet and Gorgon project developments.

o Leighton informed me that they are building a number of port facilitiesin India. The company struggles to bring into the country the equipmentit needs. Requires Australian government support with these issues.

Macquarie Bank India is essentially a domestic demand story. Therecent Union Government elections returned the Congress Party with abigger majority than that previously.

o Energy supply is the Government's immediate concern. There is nowmore investment into rural areas, therefore lessening the reliance onagricultural farming for the less educated.

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® In the current global downturn India's jewellery and auto componentparts industries have suffered. However, expenditure on infrastructureis increasing.

India's tax reform has helped the country increase the rate of industrialrecovery.

The Government of India owns 80 percent of its coal resources. It hasestablished a taskforce to examine its investment portfolio.

I was advised that the Western Australia Government should identifyinvestments that it wants Indian investors to take up. It needsMinisterial delegations to articulate the opportunities that are available.

Energy security is a major issue for India and in this Western Australiais well placed to attract Indian investment.

The group suggested that Western Australia should use theCommonwealth Games to promote investment opportunities inWestern Australia.

Meeting with Mr Brijesh Gupta, Vice President Business Development,ESSAR Ltd

Founded in 1969, the Essar Group is an Indian based, diversified businessgroup with business interests in steel, oil and gas, power, telecom and IT,shipping and logistics and construction. The Group, through its six sectoralholding companies, has a value of over US$50 billion and employs over30,000 people worldwide.

Discussion

o Essar is in the process of building its seventh vertical investmentventure from mining through to processing and manufacturing. Lastyear the company produced 4.6 million tonnes of steel. This willincrease to 10 million tonnes in the next financial year.

O The company is also building power plants gas and coal fired. It hasa requirement for 20 million tonnes of thermal coal. Currently looking atcoal investments on the east coast of Australia.

Essar prefers to own and operate outright its investments.

I mentioned the Oakajee port and rail development and the Petronetacquisition of LNG supplies recently completed. I advised that theWestern Australian resources sector was continuously seeking capitalinvestment to bring resources online.

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o I informed Mr Gupta of the Western Australian government'sexploration incentive package. A copy has since been forwarded tohim.

o Essar informed me of the small village/townships that it has built inIndonesia and Gujarat to service its mining interests and retain andreward loyal workforce in those locations. Housing up to severalthousand employees, the company sees the towns as an investment inworkers and their families.

o I invited Essar executives to come to Western Australia to exploreinvestment opportunities. Mr Gupta said that the company may beinterested in acquiring or farming in to an LNG exploration permit inWestern Australia.

o The company has also been looking at the Pilbara region for aninvestment opportunity.

Essar recently acquired an iron ore mine in Minnesota in the UnitedStates and is now building a pellet plant nearby.

o I also offered that representatives from the Department of Mines andPetroleum's Geological Surveys Division provide a presentation toEssar executives. This offer would help raise awareness of theWestern Australian mining tenement system and provide an overviewof the mineralogy of the State, The offer was welcomed and Essarundertook to send some of its people to Delhi on 13 October 2009 forthe briefing.

o I was advised that Mr Mittal the Managing Director may visit Perth atthe end of the month. I offered my assistance to facilitate the visit.

COSTS (Mission Hon Brendon Grylls MLA and Mr Douglas CunninghamChief of Staff)

Airfares $9868.44OtherAccommodation, Meals, Transport, Issuing of Passports, Vaccinations

6029.68

Total $15,898.12

ATTACHMENT 1

India: The new economic cycle (Macquarie Economics Research)

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Sou

rce:

CE

IC, M

acqu

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Res

earc

h, S

epte

mbe

r 20

09

Page

4

11I

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Sour

ce: C

EIC

, UN

, Mac

quar

ie R

esea

rch,

Sep

tem

ber

2009

Page

5

4 S

harp

acc

eler

atio

n in

inve

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ent h

as b

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ake

y dr

iver

of h

igh

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ears

4 In

the

five

year

s to

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, gro

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ed 1

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pare

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rage

GD

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row

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rea

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ic p

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asm

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bina

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d hi

gher

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mod

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ibut

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of e

xpor

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ove

rall

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as lo

wer

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that

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nves

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t ow

ing

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of e

xpor

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GD

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Sav

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% c

h, F

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ar

20 15 5 01-I

A0 -5

a G

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GF

CF

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2000

-01

2001

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2003

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2004

-05

2005

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GO

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sav

ings

rat

e

Sou

rce:

CE

IC, M

acqu

arie

Res

earc

h, S

epte

mbe

r 20

09

2008

-39

Pag

e 6

it

Eco

nom

ic g

row

th to

sho

w a

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shi

ft to

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on

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ely

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4 R

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erva

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, but

cyc

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ly c

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Page

7

Dom

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x ha

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Sou

rce:

CE

IC, M

acqu

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Res

earc

h, S

epte

mbe

r 20

09

Page

8

GD

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Sour

ce: C

EIC

, Mac

quar

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esea

rch,

Sep

tem

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2009

Page

9

4 In

dust

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rodu

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Sou

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Res

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Aug

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Dec

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Sou

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CE

IC, M

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Res

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09

Feb

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Page

12

u at

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Inte

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63.

63.

73.

9

Def

ense

1.9

2.0

2.2

2.4

2.4

Dire

ct s

ubsi

dies

1.5

1.3

2.4

1.7

1.9

Rev

enue

exp

endi

ture

12.6

12.4

15.1

14.1

15.3

Cap

ital e

xpen

ditu

re2.

51.

71.

811

2.1

Rev

enue

(op

erat

ing)

bal

ance

-1.1

-1.0

-4.5

-4.0

-4.8

Prim

ary

bala

nce

0.9

1.1

-2.5

-1.8

-3.0

Fis

cal b

alan

ce-2

.7-2

.5-6

.1-5

.5-6

.8

Not

e: T

he o

ffici

al fe

dera

l def

icit

does

not

incl

ude

off-

budg

et s

peci

al b

onds

tota

lling

aro

und

0.6%

of G

DP

in 2

007-

08 a

nd 1

.8%

of G

DP

in 2

008-

09.

Sou

rce:

CE

IC, M

inis

try

of F

inan

ce,

acqu

arie

Res

earc

h, S

epte

mbe

r 20

09

Page

13

77--

--iu

ur

.

'

,

II

--.1 .

U.+

Diff

eren

t ind

icat

ions

from

CP

I and

WA

infla

tion

mea

sure

sco

mpl

icat

e po

licy

setti

ng. F

ood

bask

et h

as a

hig

her

wei

ghtin

gin

the

CP

I bas

ket t

han

in th

e W

PI b

aske

t

WP

I inf

latio

n po

ised

to in

crea

se o

win

g to

dis

sipa

ting

effe

ct o

fla

st y

ear's

bas

e an

d hi

gher

food

infla

tion

from

poo

r m

onso

on

WP

I inf

latio

n w

ill b

reac

h R

BI's

"ar

ound

5.0

% Y

oY"

guid

ance

Nea

r-te

rm, t

he k

ey p

olic

y re

spon

se w

ill b

e hi

gher

food

sub

sidy

and

sect

or-s

peci

fic m

easu

res

Hik

ing

polic

y ra

tes

now

will

not

affe

ct fo

od in

flatio

n bu

t will

crea

te m

ore

dow

nsid

e ris

k to

gro

wth

WPI

infla

tion

RB

I tar

get f

or e

nd-M

ar 2

011

Aro

und

5.0%

YoY

Jan -03

Jan -04

Jan-05

Jan-OS Jan -07

Jan -08

Jan-09

Jan-10

Jan-1

Yaa

%Y

oY

-4

Jan-

Jul-

Jan-

Jul-

Jan-

Jul-

Jan-

Jul-

Jan-

Jut-

0505

0606

0707

0808

0909

Pki

ndus

tria

l4vo

rker

s

%Y

oY

8 4 2W

I -fo

odC

PI-

food

Jan-

Apr

-Ju

l-O

ct-

Jan-

Apr

-Ju

l-O

ct-

Jan-

Apr

-Ju

l-07

0707

0708

0808

0809

0909

Sou

rce:

CE

IC, M

acqu

arie

Res

earc

h, S

epte

mbe

r 20

09

Pag

e 14

Cas

h re

serv

e ra

tio a

nd p

olic

y in

tere

st r

ates

7.4

pa.

of n

et ti

me

and

dem

and

liabi

litie

s17

-%

pa

11 9

7

7

5J 4- 3 Jan-

01 J

an-0

2 Ja

n-03

Jan

-04

Jan-

05 J

an-O

S Ja

n-07

Jan

-03

Jan-

09

rigR

ever

se r

epo

rate

Rep

o ra

teG

RR

Sou

rce:

GE

IC, R

BI,

Mac

quar

ie R

esea

rch,

Sep

tem

ber

2009

10-y

ear

gove

rnm

ent b

ond

yiel

d

A

Jan-

01 J

an-0

2 Ja

n-03

Jan

-04

Jan

-05

Jan-

06 J

an-0

7 Ja

n -O

S Ja

n-09

RB

I tra

nsiti

oned

to a

neu

tral

sta

nce

in J

uly

4 D

eclin

e in

ove

rnig

ht r

ates

has

bee

n an

impr

essi

ve 5

75bp

, muc

h m

ore

than

the

decl

ine

in p

olic

y ra

tes

We

expe

ct th

e fir

st p

olic

y ra

te h

ike

in A

pril

2010

. Hig

h fo

od in

flatio

n co

mpl

icat

esm

onet

ary

polic

y bu

t hik

ing

polic

y ra

tes

imm

edia

tely

is n

ot th

e so

lutio

n

9 R

BI w

ill b

egin

to w

ithdr

aw e

xces

s liq

uidi

ty (

first

via

ope

n m

arke

t ope

ratio

ns)

befo

rehi

king

rat

es

Page

15

T. 4

41

4 S

tren

gthe

ning

US

D, g

loba

l cre

dit

sque

eze

and

Indi

a's

wor

seni

ng b

alan

ce o

f pay

men

ts w

ere

behi

nd IN

R's

dep

reci

atio

n

4 C

A d

efic

it po

ised

to n

arro

w in

200

9-10

, des

pite

low

er r

emitt

ance

s an

d so

ftwar

e ex

port

s

Cap

ital i

nflo

ws

likel

y to

impr

ove;

pol

icy

mov

es to

enco

urag

e m

ore

capi

tal i

nflo

ws

likel

y

4 Im

prov

ing

bala

nce

of p

aym

ents

ow

ing

to n

ewca

paci

ty in

oil

and

gas

will

als

o be

nefit

INR

Pro

duct

ivity

-driv

en fo

unda

tion

of a

str

onge

r IN

Rov

er th

e m

ediu

m-

to lo

nger

-ter

m in

pla

ce

We

expe

ct IN

R/U

SD

to a

ppre

ciat

e to

46

byD

ec09

and

43

by J

un10

4 K

ey r

isks

: Shi

fts in

glo

bal r

isk

aver

sion

and

any

US

D r

ebou

nd

US

$ bi

llion

350

300

250

200 cr 0 0

INR

/US

D, r

ever

se

35 37 39 41 43 45 47 49 51 53

Jan-

99

INR

/US

D

52 -

50 48 4

Jan-

01Ja

n-03

Jan-

05Ja

n-07

Jan-

09

For

eign

cur

renc

y re

serv

esU

SD

/INR

42 4

8 6

Y. V

. Red

dy b

eco

mes

RB

IGov

erno

rD

. Sub

bara

o be

com

esR

BI G

ovem

or

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09

Sour

ce: C

E1C

, Mac

quar

ie R

esea

rch,

Sep

tem

ber

2009

Page

16