International

Global equity markets were range bound on weak economic data and focus on currency movements

weighed on hopes of global economic recovery. M&A activity in 2013 has been on the higher side with

some large deals being announced this week – the latest involving Heinz. The MSCI AC Global Index

closed the week marginally down, led by declines in US and Europe, even as key Asian markets registered

gains. The G20's semiannual meeting in Moscow is expected to throw some light on the consensus view

on currency policies and provided some succor to the JapaneseYen. Earlier, G7 issued a statement that fiscal

and monetary policies should not be used to devalue currencies, which was seen to be aimed at Japan. Bond

yields continued to firm up especially at the medium to long end of the curve. The Reuters CRB index

fell by 0.8% as energy and gold prices declined. In currency markets, the euro remained under pressure.

• Asia-Pacific: Led by sharp gains in Indonesia, Korea and Hong Kong, regional equity markets

outperformed global counterparts. China and Taiwan markets were closed for the Lunar New Year

holidays.As per data, China new yuan loans increased to 1.07 tln yuan ($170.4 bln) in January, up 334 bln

yuan year-on-year. Japan’s economy contracted for the third straight quarter – output declined 0.1% in

Q4 due to weak exports and corporate capex. Central banks in Korea and Indonesia left rates unchanged

and Bank of Japan maintained status quo on its stimulus programme.

• Europe/Africa: Key regional equity indices were little changed from last week amidst mixed

economic and earnings newsflow.While Euro Area industrial production increased in December, Q4

GDP contracted 0.6% as German and France economic output fell more than expected, 0.6% and 0.3%

respectively. Norway recorded 0.4% rise in Q4 GDP (-0.6% previous quarter) as energy sector returned

to growth. In UK, retail sales fell by 0.6% due to adverse weather conditions, while inflation was

unchanged to 2.7%. S&P upgraded the outlook on Ireland to stable following a debt deal with ECB last

week. Russia kept policy rates on hold. The Swedish krona surged as the Riksbank refrained from

monetary easing and held rates steady.

• Americas: US equity indices pared gains towards the close of week. US manufacturing data was mixed

– while New York area reported growth, overall industrial production contracted 0.1%. Consumer

confidence as perThomson Reuters/University of Michigan index rose more than market expectations to

76.3 (from 73.8). On the corporate front, Berkshire Hathaway and Brazil’s 3G agreed to buy Heinz for

$23 bln, and US Airways and American Airlines announced an $11 bln merger to create the world’s largest

airline.Also Comcast is picking up General Electric’s 49% stake in NBC Universal for about $18 bln and

Constellation Brands is acquiring a Mexican Brewery and the US rights to Corona and Modelo brands

from Anheuser-Busch for $2.9 bln.

Market ReviewWEEK ENDED FEBRUARY 15, 2013

Weekly Weeklychange (%) change (%)

MSCI AC World Index -0.15 Xetra DAX -0.77

FTSE Eurotop 100 -0.26 CAC 40 0.30

MSCI AC Asia Pacific -0.16 FTSE 100 1.03

Dow Jones -0.08 Hang Seng 0.99

Nasdaq -0.06 Nikkei 0.19

S&P 500 0.12 KOSPI 1.55

India - Equity

Frontline equity indices closed marginally lower this week and mid/small cap stocks underperformedlarge caps.Trends were divergent amongst sectoral indices - real estate and capital goods indices were thetop losers, while PSU and banking stocks closed the positive zone. FII flows aggregated $431 mln in thefirst four trading days of the week.

• Macro: Latest batch of economic reports was mixed, but wholesale inflationary trends were encouraging.India’s industrial production (IIP index) declined by 0.6% for December (November numbers wererevised downwards to -0.8%). Mining (-4%) and manufacturing (-0.7%) output continued to contract andoffset strong growth in the Electricity sector (5.2%). On a use-based classification basis, both consumerand capital goods reported negative growth. While industrial production trends continue to remainvolatile, on a quarterly cumulative basis, IP has increased by 2.1% as against 0.4% and -0.3% in thesequentially previous two quarters. If investment activity picks up, a stronger recovery in growth rates isexpected.

Trends in IIP

Source: CSO, Morgan Stanley Research

India’s exports growth turned positive in January (first time in nine months), up 0.8%. However largerexpansion in imports resulted in the trade deficit widening to $20 bln. The government’s focus shouldnow shift towards tackling the second of the ‘twin deficits’ which have long been India’s bane, viz., theCurrent Account.Whilst export growth is dependent on the global economy, there are some expectationsof higher import duties, to provide some protection to the domestic industry, add to revenues andstrengthen the currency.

Weekly change (%)

BSE Sensex -0.09

S&P CNX Nifty -0.27

S&P CNX 500 -0.75

CNX Midcap -2.27

BSE Smallcap -3.73

India - Debt

Weak economic data and lower headline inflation added to hopes of monetary easing and helped bond

prices to gain this week. FIIs bought debt securities to the tune of $217 mln in the first four trading days

of the week.

• Yield movements: Yields on the 1-year and 5-year benchmark papers eased 10 bps and 5 bps. At the

same time, the 10 year and 30 year gilt yields decreased by 5 and 4 bps respectively. The yield curve

steepened and spreads between 1/30 year gilts increased to 24 bps from 18 bps last week.

• Liquidity/borrowings: Systemic liquidity tightened this week and the RBI conducted OMO purchase

operations to ease stress. Demand for liquidity under the RBI’s LAF window averaged Rs. 120,000 crores.

Overnight call money rates continued to hover around the 7.7-7.8% mark. Scheduled bond auctions of three

GOI securities for Rs. 12000 crores received bids to the tune of over Rs. 39,000 crore.

• Forex: The Indian rupee closed down for the second straight week on concerns about the macro-

economic situation, even as foreign capital flows remained positive. As of Feb 08, Indian forex reserves

stood at $294.5 bln, $611 mln less than previous week levels.

Source: CLSA Asia-Pacific Markets

• Inflation: Headline inflation eased further in January – inflation rate came in at 6.62%, down from 7.18%

in December.The downtrend was led by fall in Fuel & Power prices. At the same time, the CPI inflation

rate climbed higher from 10.6% to 10.8% - the rise was primarily owing to higher food prices and base

effect.The contrasting trend in the two indices reflects the differential weightage of food articles - 49.7%

in the CPI and 20.1% in the WPI, prices of which remain elevated.

15.02.2013 08.02.2013

Exchange rate (Rs./$) 54.22 53.50

Average repos (Rs. Cr) 120,061 82,633

1-yr gilt yield (%) 7.77 7.87

5-yr gilt yield (%) 7.88 7.93

10-yr gilt yield (%) 7.88 7.93

Source: Reuters, CCIL.

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