International

Global investor sentiment was impacted by the news flow on earnings and economic fronts. The MSCI ACWorld Index closed down 1.65%, as most major equity markets finished in the negative territory. Reneweddemand for safe haven helped global treasury bond yields ease. US treasury yields were however only marginallychanged as encouraging economic data and poor demand at one of the auctions exerted upward pressure onyields. Crude oil prices slumped on reports of increasing US oil inventory and concerns of diminished demandamidst slowdown in global economic growth. This along with weakness in other key commodities led theReuters Jefferies CRB index to close down 3.01%. In currency markets, the Japanese yen rebounded on Fridaybut still closed down as traders speculated the Bank of Japan will announce additional stimulus at its meet nextweek.The US dollar index moved up amidst reduced investor risk appetite.

• Asia-Pacific: Regional equity markets fared relatively better than Western counterparts, led mainly bygains in Singapore and Indonesia markets. Japanese government announced a $5.3 bln stimulus package torevive economic growth. As per data, Japanese exports contracted further last month due to sluggishdemand from Europe and geo-political tensions with China.The HSBC China flash manufacturing PMIrose to 49.1 from 47.9 last month, suggesting some improvement in the sector. South Korea GDP growthslowed to 1.6% (from 2.3%) in Q3 due to sluggish demand for exports and moderate domesticconsumption. Philippines cut its key policy rate by 25 bps to 3.5% on concerns about slowdown in capitalflows and exports. Hong Kong central bank intervened in currency markets to rein in the HK$ - largecapital inflows in recent weeks have pushed the HK$ to trade at the upper end of its trading band. It alsointroduced a 15% tax on property purchases made by foreigners.

• Europe: Mood in regional markets was subdued as earnings fell short of market expectations andeconomic data was lacklustre. Eurozone composite PMI edged lower from 46.1 to 45.8 mainly due todecline in manufacturing sector activity. Data out of Germany was weak - the German IFO businessconfidence index slid and German manufacturing & services sector PMIs also edged lower. Helped byOlympic sales, UK economy returned to positive growth last quarter - GDP expanded by 1% on asequential basis. Spain’s regional elections delivered a mixed verdict for the incumbent government – itwon in Galicia, but lost hold in Basque. Swedish Riksbank left benchmark rates unchanged at 1.25%.French government stepped in to rescue PSA Peugeot by providing bond guarantees to the tune of ~$9bln. BP said it is in advanced talks to sell its 50% stake in TNK-BP to Rosneft for $27 bln.

• Americas: US equity indices slid as weak earnings reports overshadowed the positive economicnewsflow. The FOMC maintained status quo on monetary policy this week. Strength in consumerspending and housing sector helped the US economy expand by 2% (annualized) in Q3. New homesales continued to rise in September.While the headline durable goods orders index moved up sharply,the sub-segment of non-defense capital goods was little changed from last month. Elsewhere in theregion, Bank of Canada and Colombia left policy rates unchanged. On the corporate front,Department of Justice is suing Bank of America allegedly for selling bad mortgage loans to Fannie Maeand Freddie Mac.

Market ReviewWEEK ENDED OCTOBER 26, 2012

Weekly Weeklychange (%) change (%)

MSCI AC World Index -1.65 Xetra DAX -2.02

FTSE Eurotop 100 -1.35 CAC 40 -1.98

MSCI AC Asia Pacific -1.63 FTSE 100 -1.52

Dow Jones -1.77 Hang Seng -0.03

Nasdaq -0.59 Nikkei -0.77

S&P 500 -1.48 KOSPI -2.70

India - Equity

Indian equity markets declined this week primarily due to weak global sentiment and mixed domesticearnings newsflow. Mid and small cap stocks underperformed large caps. Amongst sectoral indices, capitalgoods, auto and banking stocks closed in the positive territory. Consumer durables and FMCG indiceswere the top decliners. FII inflows were relatively lower during this holiday shortened week - $141.5 mlnin the first three trading days. On the M&A front, Rain Commodities acquired Belgian chemicals firmRutgers for about Rs. 5000 crores.

Source: Morgan Stanley Research

• Market Outlook: Indian equity markets have had a relatively strong run over the past couple of months,helped by strong FII inflows and government policy offensive. Notwithstanding any major negativesurprises on the domestic and global front, we think markets could maintain a positive trajectory over thenear term. On the domestic front, most of the growth issues are well-recognized and priced in.The keyis for the government to gain traction on the execution of these measures as well as speed up investmentproject clearances.These steps could further help boost confidence in the India growth story.

Easy liquidity conditions in domestic markets have helped borrowing costs edge lower in recent times(CP/CD rates have eased and banks have announced cut in base rate).The RBI policy review next weekwill throw light on whether the central bank has grown more comfortable with the macro-economicsituation post recent changes.

From the global viewpoint, it will need to be seen how upcoming changes in political leadership in theUS and China pan out and their impact on global risk appetite. Also Europe continues to dominateinvestor minds and developments there would have a bearing on markets sentiment. Having said that,global investors with long term investment approach should continue to find value in India - in a worldof easy liquidity, long-term investors continue to focus on fundamental investment opportunities that can

play out in the next decade or so, and India certainly qualifies for the same.The key differentiating factoris obviously the large share of domestic demand in overall GDP (gross domestic product), that can helpthe economy remain relatively resilient in the wake of a sharp slowdown in global economy ordeterioration in the Euro zone crisis. Any efforts by the government to tackle the fiscal deficit andinflation problems can further add to India’s attractiveness as a destination for foreign investment.

Weekly change (%)

BSE Sensex -0.30

S&P CNX Nifty -0.35

S&P CNX 500 -0.65

CNX Midcap -1.43

BSE Smallcap -1.16

India - Debt

Indian bond markets traded in a narrow range this holiday truncated week as investors were cautious of buildinglarge positions ahead of RBI’s monetary policy next week.

• Yield movements: Yields on the 1-year paper rose 1 bp while those on longer dated benchmarkpapers (5/10/30 years) were unchanged from last week levels. The g-sec yield curve remained flatwith spreads between 1/30 year gilts at 21 bps. Corporate bond yields continued to edge lower.

Source: Morgan Stanley Research

• Liquidity/borrowings: Overnight call money rates moved up from 8% to 8.2% levels this week,however demand for liquidity under RBI’s LAF auctions was relatively lower at about Rs. 82,000crores this week. There were no GOI bond auctions scheduled this week.

• Forex: The Indian rupee strengthened 0.5% against the US dollar, helped by strong FII inflowsinto debt (nearly $408 mln in two trading days this week). As of Oct 19, forex reserves aggregatedover $295.2 bln, about $359 mln more than last week levels.

• Policy: All eyes are set on the RBI monetary policy review next week.The central bank continuesto face a tough policy environment – incremental economic data continues to point towardselevated inflationary pressures, even as economic growth remains modest. Over the last fewquarters, RBI has emphasized on the need to take concrete steps to address structural issuesweighing on growth and pushing inflation higher.To that extent, while the recent announcementsby the government are positive, the exact impact will become clear only in the coming

months/quarters. There also remains an urgent need to take up structural reforms to address thecore inflation drivers (read supply-demand imbalances). The recent appreciation in Indian rupeeand the fall in global energy prices (owing to weak economic newsflow from key nations) ishowever positive. Overall, while the overall macro-economic situation seems to have improvedsomewhat, it will need to be seen if the central bank believes there is enough headroom to deliverrate cuts immediately.

25.10.2012 19.10.2012

Exchange rate (Rs./$) 53.56 53.84

Average repos (Rs. Cr) 81,997 87,169

1-yr gilt yield (%) 8.15 8.14

5-yr gilt yield (%) 8.13 8.13

10-yr gilt yield (%) 8.17 8.17

Source: Reuters, CCIL.

The information contained in this commentary is not a complete presentation of every material fact regarding any industry, security or the fund andis neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproductionwithout prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to themand do not constitute investment advice.

Risk Factors: All investments in mutual funds and securities are subject to market risks and the NAVs of the schemes may go up or down dependingupon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Groupand its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Documentcarefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton InternationalInc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the IndianTrust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager.

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