International

Global equity markets remained buoyant supported by economic data out of China and positive earningsnews flow.The MSCI AC World Index moved up by 0.48% led by gains in Asia and the US. Global bondyields closed the week off highs touched earlier as investors reallocated towards risk assets. Crude oil pricesfirmed up as IEA revised upwards demand forecasts for 2013 citing increased demand from EMs.The reportalso said the oil market has tightened with demand picking up and reduced supply from Saudi Arabia.Supply concerns pushed up prices of precious metals, Palladium and Platinum, and helped the ReutersJefferies CRB Index closed the week up 1.53%. In currency markets, the US dollar index advanced 0.6%while the Swiss franc and Japanese yen weakened.

• Asia-Pacific: Emerging Asian equities recorded strong gains on the back of positive data out of China.Chinese GDP growth in Q4 2012 came in at 7.9% (7.4% in Q3 2012) and full year growth was 7.8%.Other monthly data was also largely positive - industrial production was up 10.3%yoy in December andretail sales increased 15.2%, however FDI slowed by 4.5%.Australia’s unemployment rate climbed up from5.3% to 5.4% primarily due to slowdown in mining sector. Indonesia’s equity markets clocked strong gainseven as Jakarta was hit by floods. Japanese equity markets continued to gain on yen weakness, led byexpectations that Bank of Japan is likely to announce a 2% inflation target and announce furtherquantitative easing measures.

• Europe: Concerns about the health of the German economy and wider region overshadowed positivecorporate/global news flow. Eurozone industrial output fell for the third consecutive month (down0.3%) led by sharp declines in Italy and Spain. German economic growth slowed to 0.7% in 2012 (3%previous year) and 2013 growth forecasts were reduced to 0.4% from 1%. UK retail sales slid, whileinflation remained at 2.7% in December. Russia kept policy rates unchanged. On the corporate front,Rio Tinto CEO stepped down after a $14 bln write-down on aluminum assets and a mining project inMozambique. Eon & GDF Suez are selling 49% stake in Slovensky Plynárensky Priemysel toEnergeticky for $3.5 bln.Also Saint Gobain is selling its US glass jar manufacturing unit to Ardagh for$1.7 bln.

• Americas: Strong corporate earnings/economic reports helped US equity markets clock furthergains this week. US industrial production increased by 0.3% in December and housing data was alsopositive. Retail sales expanded by 0.5%, but US consumer sentiment was setback by concerns abouttax increases and spending cuts. As per the Federal Reserve Beige Book the economy was relativelyresilient amidst uncertainty about fiscal cliff and continued to grow at a modest pace. Central banksin Chile, Mexico and Brazil left policy rates unchanged. Mexico added that it could cut rates ifgrowth slows. Brazil economic activity index rose 0.4% in November, more than marketexpectations. On M&A Front, Swatch Group is set to buy Harry Winston Diamond jewellery &watch brand for around $1 bln.

Market ReviewWEEK ENDED JANUARY 18, 2013

Weekly Weeklychange (%) change (%)

MSCI AC World Index 0.48 Xetra DAX -0.17

FTSE Eurotop 100 -0.21 CAC 40 0.96

MSCI AC Asia Pacific 0.68 FTSE 100 0.54

Dow Jones 1.20 Hang Seng 1.45

Nasdaq 0.29 Nikkei 1.03

S&P 500 0.95 KOSPI -0.44

India - Equity

Frontline equity indices were boosted by positive policy developments. Small cap stocks however closedin the negative territory. Trends were mixed amongst sectoral indices – oil & gas and real estate stockssignificantly outperformed broad markets. The former gained as government reformed pricing of fuelproducts. FII interest remained high – flows aggregated $697 mln in the first four trading days of theweek.As a major relief to foreign investors, the government accepted most of the recommendations madeby Dr. Shome panel on GAAR (General Anti-Avoidance Rules) – most important ones being deferral toApril 2016, grandfathering for transactions prior to August 2010 and any applicable tax treaties wouldsupersede GAAR.

• Deficits: The government has announced partial de-regulation of diesel prices and has allowed OilMarketing Companies to raise prices in a calibrated manner (~Rs. 0.4-0.5/per litre per month) till theyare aligned with market rates (about Rs. 60/litre). However, given the political sensitivities, it will needto be seen if this can be implemented in entirety.

Source: Budget Documents, Deutsche Bank

Fuel subsidies account for close to 33% of the total subsidy bill. Given that diesel accounts for bulk ofIndia’s energy consumption and major portion of under-recoveries, the measure should have a positiveimpact on the subsidy burden and help fiscal consolidation from FY14 onwards. Initial research estimatesindicate the subsidy bill could come down by about 0.5% of GDP to 2%. A part of this impact mayhowever be offset by the increase in cap on subsidized LPG cylinders to 9 from 6 per annum. Also theFood Security Bill, if implemented, will push up the subsidy burden. Overall, the picture is mixed, and itwill need to be seen how the arithmetic changes, ahead of an election year.While the implementation ofthe proposed hike would add to inflationary pressures, these should be seen favourably by RBI due totheir positive impact on the macro situation over the long-term.

Weekly change (%)

BSE Sensex 1.91

S&P CNX Nifty 1.90

S&P CNX 500 1.38

CNX Midcap 0.55

BSE Smallcap -1.13

India - Debt

Indian Treasury bond yields eased this week but closed off lows as hawkish comments by RBI weighed on

sentiment and led traders to book profits.

• Yield Movements: Yields dipped across the yield curve – yields on the 1-year and 10-year

benchmark papers eased 3 bps and 5 bps respectively.Yields on the 30-year gilts also fell 3 bps.

• Liquidity/borrowings: Systemic liquidity conditions remained stable this week – overnight call money

rates continued to hover around the 8% and demand for liquidity under the RBI’s LAF window averaged

Rs. 87,800 crore vis-à-vis Rs. 85,634 crore in the previous week. Scheduled GOI bond auctions were

oversubscribed by a large margin.

• Forex: A combination of factors - dollar sale by foreign banks/corporates, strong FII flows and

government reform measures – helped the rupee strengthen by about 1.9% against the US dollar.As of Jan

11, India’s forex reserves stood at $296.25 bln.

India CPI and WPI inflation

Source: CLSA Asia-Pacific Markets, CEIC

• Inflation: Headline inflation (WPI) was positive for yet another month – inflation rate eased to 7.18%

from 7.24% last month.The decline was led by fall in primary articles. In contrast, consumer price inflation

rate (CPI) moved back into double digits - up 10.56% from revised 9.9% last month.The primary reason

for the spike was rise in food prices which have a sizeable weight in the Index. It will need to be seen

what the RBI makes of this contrasting trend at its policy meet later this month.

19.01.2013 11.01.2013

Exchange rate (Rs./$) 53.71 54.76

Average repos (Rs. Cr) 87,791 85,634

1-yr gilt yield (%) 7.84 7.87

5-yr gilt yield (%) 7.90 7.90

10-yr gilt yield (%) 7.90 7.95

Source: Reuters, CCIL.

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