LIQUIDITY,VALUATIONS

ANDEVENTS

Apr – Jun2012

MOVEMENTS OF MAJORINDICES

Index 1-Apr-11 2-Jan-12 30-Mar-123-month Returns

1-Year Returns

BSE SENSEX 19420 15518 17404 12% -10%S&P CNX

Nifty 5826 4637 5296 14% -9%Dow Jones 12377 12397 13212 7% 7%Dow Jones Composite

Index 4261 4261 4461 5% 5%S&P 500 1332 1277 1408 10% 6%

Nikkei 225 9708 8560 10084 18% 4%Shanghai

Composite 2967 2169 2263 4% -24%Bovespa 69268 57829 64511 12% -7%

MOVEMENT OF SECTORAL INDICESSectoral indexes 1-Apr-11 1-Jan-12 30-Mar-12

3-Month Returns

1-Year Returns

BSE AUTO 8046 9356 10135 26% 8%BSE BANKEX 9178 13190 11751 28% -11%BSE Capital Goods 8102 13345 10028 24% -25%BSE Consumer Durables 5356 6281 6402 20% 2%BSE FMCG 3983 3613 4493 13% 24%BSE Health Care 5861 6058 6626 13% 9%BSE IT 5822 6517 6082 4% -7%BSE METAL 9352 16347 11346 21% -31%BSE OIL & GAS 7628 10180 8088 6% -21%BSE Power 1788 2737 2091 17% -24%BSE PSU 6376 8981 7311 15% -19%BSE Realty 1370 2398 1777 30% -26%BSE TECk 3417 3844 3562 4% -7%

CHANGE IN COMMODITY PRICES

2/4/2011 3/1/2012 30/03/2012 3-Month Returns

1-Year Returns

Aluminium ($/tonne) 2590 2006 2099 5% -19%Copper($/tonne) 9336 7661 8480 11% -9%Zinc ($/tonne) 2341 1827 2003 10% -14%Gold ($/OZ) 1418 1598 1663 4% 17%Crude - Brent (US$/barrel) 119 112 123 10% 3%

Recap of Jan – Mar 2012 Flows• FII Flows into equities (in Rs. Million)

• FII flows into debt (in Rs. Million)

Month Jan Feb March

Gross Purchase 504674 798986 637951

Gross Sales 401099 546866 554138Net investment

103577 252121 83811

Month Jan Feb March

Gross Purchase 260808 237353 125025Gross Sales 101098 137196 190909

Net investment 159712 100158 -65886Total net purchase/sale

during Q12012 633493

Flows from Domestic Institutional Investors

(In Rs. Million)Month January February March

Purchase 203291 268376 216004Sale 270650 386924 250960

Net purchase/sale -67359 -118548 -34956

Total net purchase/sale during Q12012 -220863

Recap of Jan – Mar 2012 Major Events that drove the market

• Monetary easing – fuelled liquidity– Prime driver of the rally in asset prices – both stocks and commodities –

during Q1 was the ECB’s twin LTRO programs (December 21 and February 29) worth 1.02 trillion Euros.

• Rising Global uncertainty– Rising Spain bond yields – Greece came on the borderline of default

• US recovery• Surprised currency market worldwide

• Domestic– Cut in cash reserve ratio (CRR)– Outcome of election in 5 states, particularly UP and its impact on policy

paralysis– Union Budget

Notes on Events

LTRO-2

• Feb. 29, 2012: The ECB held a second 36-month auction, known as LTRO2, that provided 800 euro zone banks with 529.5 billion Euros in low-interest loans. This flood of liquidity boosted asset prices across the world during Q1.

SPAIN BOND YIELDS

• Rising yields of Spanish bonds signalled that problems in the euro zone flaring up again.

• During March yield on 10-year bond rose 93 basis points to 5.8 per cent.

• A Spanish bond auction on April 4 barely managed to raise the minimum amount sought.

• Will Spain follow Greece, Ireland and Portugal in seeking a bailout?

• Unemployment level in Spain at a very high 23%.

US RECOVERY

• News flow from US has improved. • GDP grew at an annual pace of 3 per cent in Q4

2011. • Unemployment rate down to 8.2%. • But recovery in jobs stalled in March. Only

120,000 jobs added compared to 240,000 in Feb. • Strong growth in the US could lead to slowdown

in fund flows to EMs owing to home-country bias of institutional investors.

RATE CUTS

• Inflation has abated but is not yet in RBI’s comfort zone.

• High oil prices due to Israel-Iran stand-off pose a risk.

• Reining in of government expenditure, as announced in the budget, was inadequate.

• Government will have to rein in fiscal deficit (read, raise fuel prices) to create comfort zone for RBI to proceed with further rate cuts.

• CRR was cut by 50 bp

IMPACT OF UNION BUDGET -1• Budget contained no major reforms and evoked mixed reactions from

the market. • Rajiv Gandhi Equity Saving Scheme introduced which will give tax

incentive for investing in equity markets. First-time investors with annual income less than Rs 10 lakh may invest up to Rs 50,000 in equities and get a tax deduction of 50%. Scheme carries lock-in of 3 years.

• Security Transaction Tax (STT) reduced by 20 per cent on delivery-based trades from 0.125% to 0.1%.

• GAAR, which will tax FIIs that don’t have a substantial presence but merely route investments through tax havens, has created uncertainty.

• Disinvestment target reduced from Rs 40,000 crore in FY12 to Rs 30,000 crore in FY13 in the light of large slippage last year.

IMPACT OF RECENT STATE ELECTIONS

• The Congress Party performed poorly in the recent state elections, losing in UP, Punjab and Goa.

• Had it done well in UP, it could have offered support to the Samajwadi Party in the state and received reciprocal support at the centre.

• This would have enabled it to pass reform-related bills in Parliament. • Now the party is likely to grow more cautious and not undertake any reforms.

Many allies oppose key reforms, and the UPA does not have a majority in the Rajya Sabha. Only reforms that don’t require Parliamentary approval are likely.

• Later this year elections are scheduled in Gujarat and Karnataka.• More dole-outs prior to them would have adverse implications. • If Congress fares badly in them too, calls for mid-term elections could become

more strident. • Political uncertainty would be negative for the markets.

Liquidity flows

• What factors will impact global portfolio flows?– Impact of GAAR– LTRO– QE3– Slowing Chinese economy

Notes on Liquidity

IMPACT OF GAAR

• General Anti-Avoidance Rules (GAAR) announced in budget spooked many FIIs.

• Entities investing in India via a tax haven such as Mauritius or Singapore must have "substance" in those tax havens.

• Funds being invested in India must have been pooled in that tax haven or at least one senior investment manager must be present there.

GAAR – who will be affected?• P-note issuers able to demonstrate substantial presence in Mauritius

or Singapore won’t be affected.• FIIs whose funds are pooled elsewhere (say, US or UK) and who

route funds via Mauritius will be affected. From April 1 will become liable to pay taxes in India.

• May relocate to Singapore to avail of double taxation avoidance agreement (DTAA ) between Singapore and India.

• But to avail of that benefit, fund has to demonstrate that it has had operations in Singapore and has incurred expenses of around $200,000 per year for last two years.

• GAAR could affect short-run FII inflows. Long-term impact unlikely to be significant, given India’s importance.

• Only when more clarity on GAAR emerges can impact be gauged.

MORE MONETARY EASING: LTRO

• The most prominent sign of problems in the euro zone flaring up again comes from the yields of Spanish sovereign bonds rising once again.

• This could force the ECB to undertake further rounds of monetary easing.

Quantitative Easing 3• Operation Twist scheduled to close at end of June. Once it

ends, Fed Chairman Bernanke could launch another dose of bond purchase program (despite signs of recovery).

• Would get required alibi if euro zone deteriorates. • November presidential election might make it difficult for him

to launch new initiative in second half of 2012. • May do it in Q2-Q3 2012, or in January 2013, when effect of

the recent fiscal tightening shows up. • Both forms of QE (LTRO and QE3) would drive risky assets in

EMs like India up.

SLOWDOWN IN CHINESE ECONOMY

• China’s growth rate expected to slow down from 9-10 per cent in recent past to 7.5-8 per cent in 2012 due to monetary tightening.

• If world’s biggest consumer of commodities slows down, commodity prices could soften.

• Would be a big positive for a commodity importer like India.

OUTLOOK FOR ASSET CLASSESAsset Class Performance in

Q1CY12Range of movement Outlook for

Q2CY12Remarks

Debt 10-Year Gilt: Up 1.67%5-Year Gilt: Up 2.63%AAA 5 Year: Up 1.70%AAA 10 Year: Up 2.04%3-M T Bill: Up 5.87%3-M CD: Up 14.89%1-Year CD: Up 6.26%

8.13 – 8.548.20 – 8.609.24 – 9.649.22 – 9.518.52 – 9.07

Yields to soften across the board. Short terms yields to moderate with better liquidity

Crude prices likely to correct. Commodity prices also to soften. FII flows, if intact, will also keep liquidity position good

Equity Sensex : Up 12.16%

Nifty : Up 14.21%

15358 – 18523

4588 – 5629

Markets likely to stay range-bound. May edge past the Q1 peak towards the end of Q2

Require impetus to move up: QE3, rate cuts, policy action, positive FII flows

OUTLOOK FOR KEY SECTORSSectoral Indices Q1CY12

Returns12 month returns

Outlook for Q2CY12 Remarks

Auto

26% 8%Positive

Reduction in interest rates, affordability, new launches

Banking

28% -11%

Positive Macro environment positivity to reduce NPA threat

Pharma 13% 9% Positive Strong domestic growth

IT

4% -7%

Neutral Mixed bag of results to keep outlook on the sector confused

Capital Goods24% -25%

Positive Resumption of order flows, lower interest rates

FMCG 13% 24% Neutral Strong growth priced in

Metals 21% -31% Negative China slowdown

NIFTY 14% -9%

Annexure-Union Budget

• On subsidies, we got a target – it will be kept under 2 per cent of GDP in FY13 and reduced to 1.75 per cent in 3 yrs.

• FM has projected a fiscal deficit of 5.1%, a more credible target than last year’s 4.6%.

• Both excise duty and service tax rate hiked by 2 percentage points, which could prove inflationary. Move to a negative service tax list to increase its coverage.

• Boost to infrastructure development by increasing the limit of infra tax-free bonds from Rs 30,000 crore to Rs 60,000 crore. ECB allowed for road construction and power.

• Budget doubled custom duty on gold and platinum from 2 to 4 per cent to curb consumption.

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