International

Global equity markets rebounded this week amidst speculation that central banks and governments would soonannounce new measures to stimulate growth as well as deal with the escalating Europe crisis.The MSCIACWorldIndex closed up 2.88% led by gains in developed markets and select emerging markets. Even as hopes of monetaryeasing grew, benchmark treasury bond prices fell and yields rose due to investor shift in favour of risk assets.Europe remained under relative pressure as investors await the outcome of Greece’s upcoming elections anduncertainty over Spain’s efforts to boost its banking sector.Trends amongst commodities were mixed – gold wasimpacted by the US Fed’s decision to maintain status quo and copper & oil prices fell on concerns aboutslowdown in demand from major nations like China. However, gains in some of the other metal/agri-commodities helped the Reuters Jefferies CRB Index finish 1.70% higher than last week levels. Following theUS Federal Reserve decision to hold rates, the US dollar index bounced back and recouped most of the lossesclocked earlier this week.

• Asia-Pacific: Weakness in Greater China equities led regional markets to underperform globalcounterparts. Stocks in Shanghai fell even as the People’s Bank of China cut the one-year lending rate anddeposit rates by 25 bps to 6.31% and xx% respectively. While the Bank of Korea kept borrowing costsunchanged,Australia reduced benchmark policy rates by 25 bps to 3.5%. GDP report from the nation washowever much stronger than expected – economy expanded by 1.3%qoq helped by increase in householdspending and continued investment in mining sector. Japan’s Q1 GDP growth numbers were revisedupwards to 1.2% from 1% reflecting higher capital spending and private consumption than previouslyreported. The current account surplus for April was however smaller than expected as various factorsincluding yen appreciation weighed on trade.

• Europe: Major European equity indices closed positive on expectations of monetary policy action.Good response to Spanish bond auctions also aided sentiment. Gains in Xetra Dax were however curbedby the fall in German exports and weak industrial orders. Both ECB and BoE maintained status quo onpolicy. Fitch downgraded Spain from A to BBB and kept a negative outlook. At the close of week,Moody’s said it will likely review current ratings of various euro-zone nations to build in impact fromlatest developments in Spain and Greece. Earlier it had cut ratings of various German/Austrian bankinggroups citing increased risk from further deterioration in Eurozone situation. IMF urged Spain to actswiftly and shore up its banking system. Russia’s government unveiled a new privatization plan thatenvisages selling about $9.31 bln of state assets, including stakes in Sberbank and Alrosa, this year.

• Americas: US equity indices registered strong gains and the tech-dominated Nasdaq indexoutperformed peers. On the economic front, US factory orders fell 0.6% in April, after a downwardrevised 2.1% fall for March.The ISM non-manufacturing index rose slightly and trade deficit narrowedas drop in imports outpaced exports. As per the Fed’s Beige Book, the economy continues to grow at amoderate pace. This likely influenced the US Fed’s decision to hold rates steady and keep the assetpurchase programme unchanged. Bank of Canada also maintained benchmark policy rates at 1%.Minutesof Brazil’s central bank policy meet indicated bias towards further rate cuts as a weak global environmentweighs on growth. On the corporate front, Domus Holdings filed for a $1 bln IPO.

Market ReviewWEEK ENDED JUNE 08, 2012

Weekly Weeklychange (%) change (%)

MSCI AC World Index 2.88 Xetra DAX 1.33

FTSE Eurotop 100 2.87 CAC 40 3.43

MSCI AC Asia Pacific 0.11 FTSE 100 3.32

Dow Jones 3.59 Hang Seng -0.30

Nasdaq 4.04 Nikkei 0.23

S&P 500 3.73 KOSPI 0.06

India - Equity

Hopes of monetary easing, positive global sentiment and initial signs of policy action helped Indian equities

post a sharp rally this week and outperform global/Asian peers. Large-caps fared better than mid and small cap

stocks. Amongst sectors, capital goods index was the top gainer while consumer durables index closed in the

red. FII flows aggregated -$51.93 mln for the first four trading days of the week.

The sharp bounce back in Indian equities was not surprising, given that the markets had been impacted by a

slew of developments both in India and overseas and most of the negative news seem to have been priced in.

Some of the encouraging signs for the future are –

• Economy: While the latest GDP report pointed towards a further slowdown, recent leading indicators data

such as the PMIs indicate India's manufacturing sector has kept up its modest pace of expansion and activity in

services sector is accelerating.While India and the global economy may continue to face various challenges over

the near term, we believe that we are close to the bottom of this economic cycle in India and we should

probably see some improvement going ahead.The recent softening in crude oil prices along with easing core

inflation has also strengthened the case for further monetary easing.

• Policy: This week, the PM unveiled plans to provide fillip to investment activity and pushed for faster

progress on awarding infrastructure projects. The plan envisages awarding contracts for two ports, three

airports and certain segment of the dedicated freight corridor, as well as addition of ~18,000MW power-

generation capacity in FY13. The government will also finalize plans to expand/modernize existing

airports, ports and rail network.The coal supply target for power sector was also raised to 11% from the

prevailing 8.8%.The above measures if executed as per plan should spur economic activity. Similar policy

initiatives and accelerated reforms are essential to boost the economy and change the perception about

policy making.

• Rupee/Foreign flows: As we have mentioned in the past, the rupee's sharp decline is not isolated, many

EM currencies (ex. Poland,Turkey, etc) have witnessed relatively higher falls in 2012 YTD due to global

risk aversion.The steep fall in global crude oil prices as well as the drop in gold imports offers glimmer

for hope on the current account balance front. In addition, RBI and the government have announced

various measures to attract flows from NRIs and overseas investors.

Also it is important to note that despite various taxation policy concerns, FII portfolio flows into equity

have not been substantially negative in April/May ($628 mln). FII flows for 2012YTD (as of end May)

were +$8.49 bln. In addition, there have been inflows to the tune of $4.3 bln in debt markets.

• Earnings: The recent corporate results indicate companies with sustainable business models remain on a

firm footing and are coping well with macro-economic challenges, and the earnings downgrade cycle

seems to have stabilized. It may be recalled that Corporate India maintained its RoE edge over Asian and

global counterparts even through the 2008 crisis.

• Global scenario: The situation in Europe could lead to substantial policy response by policy makers that

might boost sentiment.This along with the fall in global commodity prices should help countries like India

dependent on energy imports. However, if the situation deteriorates, the increased risk averseness can

weigh on portfolio inflows into emerging markets like India.

Weekly change (%)

BSE Sensex 4.72

S&P CNX Nifty 4.68

S&P CNX 500 4.13

CNX Midcap 3.66

BSE Smallcap 2.13

India - Debt

Indian benchmark treasury yields eased on hopes the central bank will cut rates at its mid-quarter policy review

scheduled next week.

• Yield Movements: Bond yields at the short-end (1-year) and extreme long end of the curve (30-year paper)

eased by 20 bps each.The downshift was slightly less in the 5-year and 10-year bonds.Yields on 5-year corporate

bonds dipped only slightly and as a result spread over gilts of similar tenor expanded to 117 bps from 112 bps.

CD/CP rates of various tenors also eased.

-1223

882 2337 2698 1079

101318394

4322

107998064

17783

-12179

17639

29321

-512

8490

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

2005 2006 2007 2008 2009 2010 2011 YTD 2012

Debt Equity

Source: SEBI.As of May 31, 2012

FII Flows ($ mln)

• Liquidity/Borrowings: Overnight call money rates closed slightly above the 8% mark and demand for

liquidity under the RBI’s LAF window was slightly higher – repos averaged Rs. 89,716 crore as against Rs.

79,019 crore last week. Scheduled auctions of four GOI securities – 8.24% GOI 2018, 8.97% GOI 2030, 8.33%

GOI 2036 and a new 10-year bond - were well over-subscribed and bids fully accepted.

• Forex: The Indian rupee snapped the recent declining trend and closed the week slightly stronger against the

US dollar helped by increased global risk appetite.As of Jun 01, forex reserves stood at $285.85 bln, about $2.4

bln lower than last week levels.

• Outlook: Signs of a slowing global economy along with intensification of the Euro area issues are likely to

result in a concerted policy action by central banks across the world. Over the last month, safe haven demand

has led yields on major treasury bonds to ease to near record lows and the fall in commodity prices is seen

easing inflationary pressures. However, there are still concerns over the ongoing de-leveraging and the

governments’ ability to cut burgeoning deficits.

The environment in Indian bond markets is quite contrasting – while yields have edged lower in recent days,

they still remain elevated. It is a challenging period for RBI as growth has moderated, but inflation levels remain

elevated and sticky. Domestic factors apart, the ongoing weakness in the rupee is also seen partially offsetting

gains that can possibly accrue from the continued decline in global oil/commodity prices. Nonetheless, given

the sharp decline in global energy prices in recent weeks (Brent below $100/bbl), subdued core inflation and

the government talking about some expenditure cuts, there could be more room for the central bank to resort

to further monetary easing.

08.06.2012 01.06.2012

Exchange rate (Rs./$) 55.42 55.54

Average repos (Rs. Cr) 89,716 79,019

1-yr gilt yield (%) 7.94 8.14

5-yr gilt yield (%) 8.21 8.28

10-yr gilt yield (%) 8.38 8.47

Source: Reuters, Bloomberg

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