Yields and currencies tend to move together. In general, favorable yield differentials between our bonds and US bonds have brought stability to our currency while unfavorable differentials have caused roller coaster rides for the rupee. In September of 2006 however, the weighted average yield on a one-year Treasury bill stood at 9.58% but still proved insufficient in stemming the subsequent depreciation of our local currency as demand for foreign exchange (FOREX) increased. In order to limit the depreciating trend of the Rupee, in an environment of increasing inflation, the Bank of Mauritius eventually raised its benchmark rate and yields increased (and so did the interest rate differential). By March 2007, the weighted average yield on the one-year T-bill had gone beyond 13% and since the beginning of the year our local currency has gained 5.63% vs the US dollar.

<B>Local currency again under pressure? </B>

Faced with a challenging macroeconomic environment on the domestic front and despite having the choice of investing in foreign assets, institutions and investors at large decided to invest locally this year mainly because domestic yields have so far remained attractive. In fact, comments of ?lack of FOREX in the domestic market? had gradually turned to ?excess FOREX? in recent months. With the current weighted average yield on the one-year T-bill having gone down to 9.78%, will our local currency again come under pressure in the coming months?

In the wake of the US subprime crisis, investors around the world have switched to safer assets and hence yields on US treasuries have come down quite a bit during the month of August. The weighted yield on the one-year US T-bill, for example, has come down from 4.85% in July to the current 4.16%. Hence, despite lower yields locally, the interest rate differential between our rates and US rates remains relatively attractive.

While certain FOREX traders have recently claimed that current yields have become unattractive due to the fact that the unofficial inflation rate for August stood at 10.30%, one must understand that investors do not look at the past but rather they build expectations on the future. For example if one were to invest in the one year T-bill today, the expected inflation rate over the next 12 months (in our case the September 2008 headline inflation figure) is what would really matter!

Due to a favorable base, we still expect inflation to continue to edge lower. Using the old basket, we forecast inflation to stand at around 8.90% by December 07 and between 6.7% and 7.2% by June 08. Hence real rates (nominal interest rate ? inflation) remain attractive! Institutions and other investors that face Rupee-denominated liabilities still need to continue to invest in local bonds.

<B>No other roller coaster ride for the Mauritian Rupee </B>

Our outlook on the Mauritian rupee has not changed and the local currency is likely to remain relatively stable vs the US dollar this year. In the coming months, importers are likely to ramp up their demand for FOREX as the festive season approaches and the rupee is likely to undergo a slight depreciation vs the US dollar to around the low Rs 32 level.

Assuming normal conditions, tourist arrivals and foreign currency inflows into the economy are expected to remain strong and we do not foresee major liquidity issues in the domestic FOREX market for the remainder of the year. In sum, the Mauritian rupee is not likely to undergo another roller coaster ride in 2007 and that is cause enough for relief!

<B>Contributed by INVESTMENT PROFESSIONALS LTD (Feedback: [email protected]) </B>