<B>Local currency outlook and medium term inflation </B>

As forecasted, led by a favorable base, the headline inflation rate continues to head downwards from its June 2007 peak and the Mauritian Rupee has remained stable in an environment where the interest rate differential and the real interest rate gained remain attractive despite lowering yields at the domestic level.

<U><B>Real interest rates</B></U>

The MUR underwent its largest depreciation vs the USD, EUR and GBP when inflation picked up steam after June 2006 and as local yields did not immediately head upwards. As can be seen from Figure 1, real rates, that is the difference between what a 3 month T-Bill would give you and the annualized 3-month rate of inflation (using generally accepted methodology for calculating the latter. It is this method rather than using the misleading headline inflation figure that should be used) was negative between July of 2006 and February of 2007. The Bank of Mauritius (BoM) eventually raised interest rates in November-December 2006 and ever since, the real interest rate gained has remained highly attractive. The base effect will continue to have a positive impact on inflation going forward and domestic yields have hence been reduced.

We, however, expect the real interest gained to be brought down to a lower level in the coming months and the direction of the Rupee will hence heavily depend on expectations of inflation by investors and FOREX traders.

<U><B>Interest rate differentials</B></U>

Another key variable that can be used to assess the evolution of the local currency is the interest rate differential. Figure 2 (one of the most widely used figures on the local market) showcases the differential between the 3-month local T-Bill and the 3-month US T-Bill in Rupee terms and also the Rs/USD evolution (monthly rate of change) during the same time period. Investors should note the near perfect negative correlation between the two lines (especially during the third and fourth quarter of 2006 as the Rs depreciated vs the USD). Despite lowering yields at the local level, Mauritius has benefited from a favorable interest rate environment at the global level as the US has cut its benchmark rate by 75bps since September. Moreover, the flight to safety that we have seen towards US bonds during the month of September had pushed US yields further downwards.

With a still historically high differential, it would not be surprising to see domestic yields continue to head downwards limited only by the direction of inflation (real interest rates will need to remain positive).

<B>Inflation forecast and medium term MUR outlook </B>

We still maintain that headline inflation will continue to fall despite rising commodity prices mainly because of a favorable base as evidenced by the Consumer price index. Hence for December, we expect headline inflation to stand at around 8.9% and at around 6.7% by June of 2008. The favorable base effect will however fade after June and rising commodity prices could keep inflation around that level (or slightly higher) in 2008 and 2009.

With regard to the Mauritian Rupee, we would expect demand for FOREX to gather pace during the end of November and December months as importers and exporters become increasingly active during the festive season. On the international front, it is possible for the US Feds to reduce their target rate by a further 25bps (not more than that) by the first quarter of 2008. Hence we have revised our medium term MUR forecast to be-tween Rs 31.40 and Rs 31.60 vs the greenback by February of 2008. Despite a still high current account deficit, liquidity in the FOREX market remains stable and we still maintain our stability stance over the next three months.

What should the BoM do? </B>