International

Global financial markets closed an eventful week on a mixed note as concerns about the health of the globaleconomy overshadowed policy actions by key central banks.The MSCI AC World Index closed marginally lowerled by decline in equity markets in the West. Latest PMI and employment data from major economies added toglobal growth concerns. IMF officials also indicated that its current estimate of global growth in 2012 willundergo downward revision. Major treasury bond yields eased in response to latest round of monetary stimulusand weak macro-economic data. Crude oil prices moved up this week as tensions with Iran resumed and US oilinventories declined.This alongside strength in select other commodities helped the Reuters Jefferies CRB Indexadd close to 1%. In currency markets, the euro witnessed sharp declines against the US dollar after ECB cutbenchmark rates. Some of the key M&A deals announced this week were – Porsche/VW, Dell/Quest Softwareand Linde/Lincare.The investigation into LIBOR rigging led to the resignation of Barclays CEO and concernsabout the role played by the other large banks.

• Asia-Pacific: Regional equity markets fared better than counterparts led by strong gains in Singapore,Indonesia and Hong Kong. Mainland Chinese equities however registered a marginal fall – stocks declinedon concerns growth was weakening. China’s official manufacturing PMI index edged lower to 50.2 from50.4 earlier while the HSBC PMI survey pointed to mild contraction. People’s Bank of China lowered itsone-year lending rates by 31 bps to 6% and deposit rates by 25 bps to 3%. Bank of Japan’s latest TankanSurvey indicated the sentiment amongst large Japanese manufacturers has improved.

• Europe/MENA: European stock indices closed mixed amidst renewed concerns about growth andrise in Spain/Italy bond yields. Equity indices in Germany and France finished marginally lower whilethe FTSE 100 gained. ECB cut its main refinancing rate by 25 bps to 0.75% and reduced the depositrate to zero. BoE expanded its asset purchase programme by £50 bln. Euro-area manufacturing PMIwas unchanged from last month’s level.While the services PMI moved up slightly, the dip in Germanservices PMI below 50 raised concerns growth is stagnating in the core countries.A similar measure ofUK services sector output also slid. Euro-area unemployment hit new high of 11.1% in June. Italyannounced spending cuts of €26bn up to 2014 so that it could delay increase in sales tax. Saudi Arabia’scabinet approved regulations that pave way for establishing mortgage companies in the country. Nigeriasigned a $4.5 bln deal withVulcan to establish six new refineries in the country.

• Americas: A weak US jobs report led frontline indices to close in the negative territory. The tech-dominated Nasdaq index fared relatively well and closed flat. Non-farm payrolls rose by 80,000 in Juneand the unemployment rate remained unchanged at 8.2%. US ISM manufacturing index recorded alarge drop to 49.7 from 53.5 last month.The ISM non-manufacturing index dipped to 52.1 from 53.7.In Mexico, presidential elections delivered a verdict in favour of Enrique Peña Nieto of the InstitutionalRevolutionary Party. Latest data from Brazil pointed towards a slowdown with industrial productiongrowth for May continuing the negative growth trend and consumer price inflation fell sharply. GSKagreed to pay $3 bln for improper promotion of drugs and failure to disclose safety information.

Market ReviewWEEK ENDED JULY 06, 2012

Weekly Weeklychange (%) change (%)

MSCI AC World Index -0.33 Xetra DAX -0.10

FTSE Eurotop 100 1.48 CAC 40 -0.87

MSCI AC Asia Pacific 1.18 FTSE 100 1.64

Dow Jones -0.84 Hang Seng 1.85

Nasdaq 0.08 Nikkei 0.16

S&P 500 -0.55 KOSPI 0.23

India - Equity

Frontline equity indices were range-bound, but closed in the positive territory for the week. Gains in mid and

small cap stocks outpaced large caps. Real estate stocks got a boost from the government’s decision to extend the

1% interest subvention scheme for housing loans up to Rs. 15 lakhs (with a property value not exceeding Rs. 25

lakhs) by one year. Banking and consumer durable stocks also outperformed broad markets, while FMCG and IT

stocks registered declines. FII flows into equity aggregated $240.3 mln in the first four trading days of the week.

Earnings will be a key driver of sentiment over the near term and the ongoing monetary easing by various central

banks across the globe could bolster global risk appetite and aid capital inflows into emerging markets. However,

this could push up commodity prices as well, leading to additional inflationary pressures in India.

• Foreign Direct Investment: As per UN’s latest World Investment Report, India continues to be the third

most favoured FDI destination after China and the US. As per the report, FDI flows into India increased

by over 30% in 2011 to $32 bln, notwithstanding the various policy issues. Flows are expected to remain

strong in 2012 as well, though the momentum could be slower than 2011. RBI data indicates that India

received cumulative FDI inflows of $14.2 bln in 2012YTD, compared to $6.5 bln in the corresponding

period last year. The UN report classifies India amongst countries where FDI potential is amongst the

highest but actual flows have been below potential. Policy reforms are a must to attract FDI flows, which

can help reduce dependence on volatile FII flows, for funding the current account deficit.

• Exports: One of the benefits of the sharp fall in the rupee has been increased competitiveness on the

exports front.While India is largely a domestic-demand driven economy, the contribution of exports to

overall economic growth has been increasing.While net exports contribution to GDP has remained small

or negative, gross exports’ share of GDP more than doubled to 25% in FY12 from 12% at end of 2000.

Apart from growth in volumes, there has been a marked shift in the overall composition of exports and

the target markets. Over the recent years, India’s export destinations have been mainly EM countries and

this makes them resilient to any sharp slowdown in developed markets.

30%

40%

50%

60%

70%

% p

01 03 05 07 09 11

Developed markets

Emerging Markets

Trends in destination of India’s exports

Source: JP Morgan

In terms of composition, manufacturing exports now have a higher share of the basket (almost two-thirds)

vis-à-vis software. Also notably the manufacturing product basket has seen a shift away from traditional

goods to mechanized and differentiated ones such as automobiles, auto parts, chemicals and capital good.

Weekly change (%)

BSE Sensex 0.52

S&P CNX Nifty 0.72

S&P CNX 500 1.28

CNX Midcap 2.19

BSE Smallcap 4.26

India - Debt

Improvement in the liquidity situation helped short-dated bond yields to ease, while those on longer-dated

securities held steady.

The over $10 bln FII debt auction for g-secs and corporate debt held this week witnessed lukewarm response and

a third of the auction limits were unsold.The g-secs sold at the auction had a residual maturity of three years or

more, while the long-term corporate bond infrastructure limits auctioned had a one year lock-in period and

residual maturity of 15 months

• Yield Movements: Yield on the 10-year Indian benchmark treasury bond was unchanged from last week’s

level. Better liquidity conditions helped 1/5 year gilt yields and CP/CD rates for various maturities ease.

Consequently the yield curve steepened and spreads between short (1-year) and long dated (30-year) gilt yields

increased to 68 bps from 64 bps.

• Liquidity/ Borrowings: Demand for liquidity reduced - repos averaged around Rs. 43,000 crore as against

Rs. 89494 crore last week. Overnight call money rates however stayed elevated. Scheduled bond auctions for

four GOI securities received good response

• Forex: The Indian rupee pared gains towards the close of week – the currency ended 0.33% up against the

US dollar.As of June 29, forex reserves stood at $290 bln, $1.36 bln higher than last week levels.

• Macro/Policy : Ongoing slowdown in developed economies has led central banks in key nations to provide

additional monetary stimulus. Such liquidity/policy easing measures in the past have pushed up risk assets

including commodities and added to inflationary pressures. In case of India, such measures have dual

implications – while a liquidity-led rally in risk assets could help the rupee strengthen against the US dollar,

renewed rise in global crude oil prices would further exacerbate the domestic inflation situation.

The web-based trading platform introduced by the RBI is a positive move as it expands access to the sovereign

bond market, to a larger set of investors (reduce cost of trading as well). Over time we could see increase in

trading volumes as retail investors (including smaller institutions) will now be able to track and respond to

market developments quickly. However, like in markets across the globe, sovereign bond markets in India are

also dominated by institutions and this is unlikely to change due to the new development.

06.07.2012 29.06.2012

Exchange rate (Rs./$) 55.42 55.605

Average repos (Rs. Cr) 43,117 89,494

1-yr gilt yield (%) 7.97 8.01

5-yr gilt yield (%) 8.07 8.18

10-yr gilt yield (%) 8.37 8.37

Source: Reuters, Bloomberg

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