1. International
Global liquidity concerns continued to weigh on financial markets, especially in US, as fresh economic
data heightened expectations of ‘Fed Tapering’. Bond yields rose in key markets and the MSCI AC World
Index fell by 0.98%, led by declines in the US (European and EM markets gained). Yields rose in US,
Europe and Japan, as economic data out of Developed Markets pointed towards increased growth
momentum and the long end of the curve witnessed relatively sharper increase in yields.
Notwithstanding the increased risk aversion, the Reuters CRB index gained 2.5%, helped by sharp gains
in gold and precious metals.The UK sterling registered gains against major currencies and the US dollar
managed to close higher against the Euro and the Yen.
• Asia-Pacific: Markets in Hong Kong, South Korea and Australia did well, while those in India and
Singapore declined. Japan’s GDP grew by 2.6% in Q2, a fall from the healthy growth in the previous
quarter due to lower private investment.The JapaneseYen lost ground against major currencies. On the
other hand, despite the fall in June, the core machinery orders (indicator of capex) closed Q2 on a
strong note. There was also speculation about a potential reduction in corporate sales tax, to counter
the expected rise in consumption tax next year. China’s Everbright Securities indicated that it is
probing trading errors that led to sharp volatility in the Chinese markets on Friday.While the central
bank of Indonesia kept its policy rate unchanged at 6.5%, it announced measures to tighten liquidity
and support the Rupiah. L’Oreal is planning to acquire China’s Magic Holdings International for
around $843 million.
• Europe & Africa: European equity markets got a boost from signs of further economic expansion
and bond yields moved up. With the exception of UK, all major equity markets notched up gains.
Latest data pointed towards the Euro area economy returning to growth in the second quarter -
GDP increased by 1.1% bouncing back from the declines in the previous quarters (Germany and
France leading the region). In addition, the region’s industrial production increased 0.7% in June and
July inflation data was benign. The economic numbers out of UK were also positive with July
inflation declining marginally (2.8%) and retail sales increasing (1.1% m-o-m). Poland’s A- rating
with a stable outlook was affirmed by S&P due to the fiscal consolidation focus. Egyptian markets
came under pressure due to the on-going domestic tensions.
• Americas: Regional equity markets witnessed mixed trends, with those in Brazil and Canada
outperforming. US equity markets came under pressure as latest data increased expectations that
the Federal Reserve will start reducing its bond purchases, effectively initiating a reversal of its
quantitative easing programme (Treasury yields also moved up sharply). On the economic front,
US retail sales rose marginally in July and core consumer price growth was in line with
expectations. However, manufacturing data was on the weaker side.The central bank of Chile kept
its policy rate unchanged at 5%. The Mexican government unveiled an energy reform plan that
proposes a profit-sharing scheme (resources remain state property) and allows private sector
participation in in downstream activities. BlackBerry is considering a sale of the company as part
of various strategic alternatives.
Market Review
WEEK ENDED AUGUST 16, 2013

2. Weekly Weekly
change (%) change (%)
MSCI AC World Index -0.98 Xetra DAX 0.64
FTSE Eurotop 100 0.26 CAC 40 1.16
MSCI AC Asia Pacific 0.34 FTSE 100 -1.27
Dow Jones -2.23 Hang Seng 3.26
Nasdaq -1.57 Nikkei 0.26
S&P 500 -2.10 KOSPI 2.09
India - Equity
A sharp fall on Friday meant that Indian equity markets closed the week in the negative underperforming other
EM indices. Mid and small cap stocks managed to post gains, as the selling was concentrated in the large cap
space. Consumer durables, capital goods and banking stocks underperformed, while Auto and metal stocks
managed to post gains. FII flows for the first three trading days were around $129 mln.
• Economy: Industrial production fell in June as well - 2.2% (May reading was revised downwards to - 2.8%).
The decline was led by deceleration in mining and manufacturing sectors (growth in the electricity sector
was flat).In terms of use-based classification,capital goods and consumer durables posted decline with upside
seen in the consumer non-durables. For FY 13, IIP has declined by 0.3%, compared to the 7% rise in FY
12.The fall in activity in both capital goods as well as consumer sectors is disconcerting and there is a clear
need to boost economic confidence through tangible policy measures.
Source: Citigroup, CSO Source:CEIC, Ministry of Commerce, Morgan Stanley Research
On the other hand, helped by improved global demand, the trade deficit remained largely unchanged in July
at $12.3 bln.There was sharp rise in exports (11.6%) and this combined with a fall in imports (6.2%), helped
the overall deficit trends. Gold imports saw a marginal increase in July. If the trends in exports/imports
continue, the Balance of Payments situation should be under control.
• Markets: There have been renewed concerns about global liquidity, as the FedTapering concerns resurfaced
this week. The relatively positive economic news flow in the developed world has led to increased
expectations of stimulus withdrawal by leading central banks.Whilst the Federal Reserve is unlikely to make
any significant changes, given the impact on global financial markets, it could initiate symbolic moves in the
form of marginal reduction in bond purchases. However, we might see increased risk aversion weighing on
foreign flows into India (especially short term investors changing allocation). Given the attractive market
-10.0
-5.0
0.0
5.0
10.0
15.0
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
%YoY, 3mma
Factory output contracts, trends
continue to disappoint
-16%
-14%
-12%
-10%
-8%
-6%
-4%
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Trade Deficit (3-months Trailing, as % of GDP annualized)
Trade Deficit (Monthly, as % of GDP annualized)

3. valuations, we believe any sharp corrections should be viewed as long term buying opportunities. The
government needs to focus on enhancing investor confidence about the policy environment.
Weekly change (%)
S&P BSE Sensex -1.02
CNX Nifty -1.04
CNX 500 -0.61
CNX Midcap 0.37
S&P BSE Smallcap 0.67
India - Debt
Domestic debt markets came under pressure on the weakening rupee and latest inflation data.There are increased
concerns that the temporary measures to support the rupee might be in place for an extended period of time and
weigh on economic growth. RBI set cut off yields at higher levels in the scheduled auctions and FII flows into
the debt markets were around $103 mln.
• Yield Movements: The 10-Yr benchmark yield rose by 46 bps.The 5-yr Gilt yield rose 45 bps while the 5
– yr AAA corporate bond yields rose by 65 bps and the spread expanded to 116 bps.Yields for 1 yr gilts rose
by 54 bps, while 30 yr Gilts rose 42 bps and the yield curve remained negative.
• Liquidity/Borrowings: Liquidity remained tight with repos averaging around Rs. 38,000 crore and the
overnight rates remained around 10.2% levels.The central bank had to set higher cut-off yields and some of
the auctions partially devolved on the primary dealers. Four securities were auctioned, but competitive bids
were received for only Rs. 14,500 crs against the Rs.16,000 crs.
• Forex: The rupee fell to a record low before recovering on Friday to close at 61.65 against the US dollar.
Forex reserves as of August 9th were lower at around $279 bln.
• Macro: Inflation data for the month of July showed mixed trends.The headline wholesale inflation (WPI)
rose to 5.79% in July (4.86% in June), consumer price inflation levels eased to 9.64% in July (9.87% in
June). The rise in WPI was primarily due to higher food prices. The combination of a higher WPI and
weak rupee would make RBI’s policy making relatively more difficult, as the latter could lead to higher
imported inflation as well
Source: CEIC, CLSA
4
5
6
7
8
9
10
11
12
Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13
(% YoY)
CPI-new WPI

4. • Policy : The government announced its roadmap for the Balance of Payments and indicated that it would
contain current account deficit at $70 bln (around 3.7% of GDP) for FY 14. It also unveiled several measures
address the CAD issue and improve its funding -
• Increasing the import and excise duties on precious metals, especially gold.
• Liberalizing ECB norms and NRI account deposit schemes – PSU financial institutions and oil
companies have been given additional flexibility to raise overseas funds.
In addition to the government’s measures, RBI imposed restrictions on capital outflows -
• Corporate FDI reduced to 100% of the net worth under the automatic route with exemptions to PSUs
• Reduced the individual overseas remittances from $200,000 per financial year to $75,000 and also
prohibited realty transactions under this scheme.
• Markets : The central bank and the government have made their intentions clear about tackling rupee
pressures. However, this has led to increased concerns about the impact of the various measures on the
already weak economic environment. At this stage, investors are concerned that the various liquidity
tightening measures could remain in place for an extended period of time and hence, yields have moved up
across the curve.
The short term outlook remains uncertain as a lot depends on the global environment and foreign flows.
However, we are very clear that given macroeconomic environment, lower interest rates are a must. In that
sense, investors with a relatively longer investment horizon can take exposure to long dated portfolios, whilst
those with an intermediate horizon can benefit from corporate bond focused funds.
16.08.2013 08.08.2013
Exchange rate (Rs./$) 61.65 60.88
Average repos (Rs. Cr) 38,671 37,518
1-yr gilt yield (%) 10.43 9.89
5-yr gilt yield (%) 9.13 8.68
10-yr gilt yield (%) 8.96 8.50
Source: Reuters, CCIL.
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and do not constitute investment advice.
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