1. Market Review
WEEK ENDED MAY 12, 2012
International
Global equity markets fell further as a combination of weak economic newsflow and fresh uncertainty in Europe,
weighed on investor sentiment.The MSCI AC World Index fell 2.09% led by sharp declines in Asia. Benchmark
treasury yields edged lower as latest economic data pointed towards slowing growth momentum in key global
economies. Crude oil prices declined on expectations of diminishing demand due to downshift in economic
growth and signs supply had improved. The IEA slightly raised its oil demand forecast for 2012 - it now pegs
global consumption at 790,000 b/d, up from 770,000 b/d.The fall in crude oil prices alongside weakness in gold
and other industrial commodities led the Reuters Jefferies CRB Index to close down 1.80%.Amongst currencies,
the US dollar index gained on the back of continued risk aversion.
• Asia-Pacific: Regional markets underperformed global counterparts on concerns that the slowdown in
mature economies and China will weigh on regional growth. Economic data out of China was mixed –
headline inflation continued to ease, but industrial output and retail sales growth came in below market
expectations. China’s April trade surplus expanded as imports growth slowed more than exports. Exports
data out of Taiwan and Malaysia was also weaker than expected. Hong Kong GDP growth slowed to
0.7%yoy from 1.1%yoy in the sequentially previous quarter. Central banks in Indonesia and Korea left
interest rates unchanged. Indonesia reported 6.3%yoy GDP growth for Q1-2012, slightly slower than the
6.5% growth recorded in the sequentially previous quarter. Moderation in export and investment activity
contributed to the slowdown.
• Europe: Election outcomes in France and Greece indicated growing support for anti-austerity political
groups and concerns about a potential Greece exit from the Euro. Francois Hollande won the
Presidential elections in France leading to doubts over the fiscal path and expectations of a more
growth-oriented approach.The inconclusive elections results in Greece have led to political uncertainty.
This alongside developments in Spain led regional equities lower, as the Spanish government took a 45%
stake in Bankia to shore up the bank’s finances and also announced new norms for the banking sector,
which would require additional capital raising. Germany’s Xetra Dax index however closed in the
positive zone helped by strong domestic economic data. European Commission revised regional growth
forecasts upwards – it now expects GDP to contract by 0.3%yoy in 2012 and grow by 1% in 2013.The
Bank of England kept policy rates and asset purchases on hold. Poland increased policy rate by 25 bps
to 4.75%. KPN rejected America Movil’s $4.2 bln offer saying it undervalued the company.
• Americas: US equity indices slid even as domestic economic data was relatively upbeat. Banking stocks
were under pressure after JP Morgan reported $2 bln of trading losses. US consumer sentiment index
registered sharp increase and the government reported its largest monthly budget surplus in nearly three
years. US exports recorded robust gains but higher fuel costs added to import bill and led the trade
deficit to widen to $51.8 bln. Canada economy added 58,200 jobs in April but the unemployment rate
increased to 7.3% as more people were added to the workforce. On the corporate front, News Corp
doubled the size of its share buyback programme to $10 bln from $5 bln. Coty raised its offer price for
Avon to $10.7 bln from $10.05 bln.

2. Weekly Weekly
change (%) change (%)
MSCI AC World Index -2.09 Xetra DAX 0.28
FTSE Eurotop 100 -0.47 CAC 40 -1.02
MSCI AC Asia Pacific -4.41 FTSE 100 -1.41
Dow Jones -1.67 Hang Seng -5.32
Nasdaq -0.76 Nikkei -4.55
S&P 500 -1.15 KOSPI -3.62
India - Equity
Indian equity markets declined on continued global risk aversion and weak macro-economic numbers, even as
the government deferred the implementation of the much –debated General Anti-Avoidance Rules (GAAR).
Amongst sectors, power, metal and IT indices underperformed broad markets while consumer durable stocks
managed to hold ground. FII outflows aggregated about $184 mln in the first four trading days of the week.
• Macro: Growth in India’s industrial production, as represented by the IIP index, turned negative in March –
index declined by 3.5% on the back of broad-based contraction in output across mining and manufacturing
sectors. There was also a marked slowdown in electricity generation and capital goods output fell by 21.5%.
Growth in consumer goods output was a bright spot in the report – output increased by about 0.7%. from 20%
to 5%.The continued volatility in the IIP data has been a concern and raises the validity of data. However, the
broad trend points towards slowdown – cumulative growth for FY12 stood at 2.8%yoy as against 8.2%yoy a
year ago.
While the Indian economy continues to be driven by the services sector (accounts for about 60% of GDP), the
slowdown in manufacturing and investment has been weighing on investor sentiment.The sector is seen to be
a critical one for private sector investments and generating large scale employment over the medium to long
term.
• Policy: The government this week announced few changes to the Finance Bill. Key amongst them being
the deferment of GAAR implementation to the next fiscal year so as to complete consultations and put
in place the operational framework. The onus of proving tax avoidance has now been shifted to tax
authorities and it was clarified that GAAR will not supersede DTAA on retrospective basis. The
government however maintained its stance on retrospective taxation of cross-border transactions – this
could be a negative for some of the corporates. Further clarity is expected to emerge once the government
releases guidelines at end of month.
Other key changes to the Finance Bill included –
• Reduction in the withholding tax on external commercial borrowings (ECBs) from 20% to 5% has
been extended to all businesses (from infrastructure sector alone)

3. • Tax on long-term capital gains due to sale of unlisted securities (private equity investors) has been
aligned to FII taxation rates - 10% from 20%.
• Rolled back the 1% excise duty on gold jewellery
• Foreign banks are exempted from any capital gains taxes for converting their local branches into
wholly-owned subsidiaries
• Proposal to levy a 1% TDS on real estate transactions was withdrawn
Notwithstanding the prevalent negative sentiment in Indian equities, we believe any positive surprise in
the form of policy responses can trigger a rebound. Also further decline in global crude oil prices can have
a positive impact on India’s deficit situation and boost market sentiment.
Weekly change (%)
BSE Sensex -3.20
S&P CNX Nifty -3.11
S&P CNX 500 -3.03
CNX Midcap -3.18
BSE Smallcap -2.93
India - Debt
Weak IIP numbers raised hopes of further monetary easing and boosted Indian bond markets this week.The RBI.
• Yield Movements: The 10-year benchmark yield eased 6 bps, while 5 year gilt yields dipped 1 bp.The yield
on corporate bonds of a similar tenor increased 1 bp and consequently, spreads over 5-year gilts widened to 98
bps from 96 bps.Yields on the 30 year paper rose by 6 bps, while 1-year gilt yields firmed up by 12 bps. As a
result, spreads between short & long dated gilts (1 and 30 year papers) expanded to 87 bps from 81 bps.
• Liquidity/Borrowings: RBI intervention in forex markets pushed up systemic liquidity deficit and RBI
bought back securities worth Rs. 9,757 crore through OMO auctions to cushion impact. Overnight call money
rates rose to 8.30% compared to 7.50% last week. Scheduled auctions in four dated GOI securities of Rs. 15,000
crore received bids of over Rs.36,500 crore and were fully accepted.
• Forex: Sustained fall in the rupee led RBI to announce fresh set of measures to support the currency and
intervene in forex markets.The central bank asked exporters to convert 50% of their dollar holdings to rupee
and raised the ceiling on interest rates on FCNR (B) accounts. It also imposed limits on banks’ intra-day
positions in the forex market and allowed NRIs to transfer repatriable funds from their NRO account to NRE
account.The currency however closed 0.30% lower than last week levels. As of May 04, forex reserves stood at
$293.2 bln, about $2.19 bln lower than last week levels.
• Securitization Guidelines: RBI issued final guidelines on securitization and direct assignment this week. Key
observations are –

4. • The guidelines prohibit credit enhancement for direct assignment deals, where investors are assigned the
scheduled cash flows arising from a pool of loans together with the underlying security.This move is likely
to have a negative impact on the rating of such instruments and also require greater due diligence on part
of banks, thereby resulting in reduced volumes for such transactions.
As per ICRA, direct assignment transactions accounted for over 75% of the market in FY12. Most NBFCs
used this route instead of SPVs to sell-down pools due to low capital requirements.
• The RBI has defined minimum holding period and minimum risk retention ratios for originators so as to
ensure they continue to participate in the risk and greater alignment of interest between issuers and investors
• The guidelines also define the type of assets that can be securitized. Amongst the securities that cannot be
securitized are - single entity assets (i.e., single entity loan), revolving credit facilities (e.g., credit card
receivables), and re-securitization of assets purchased from other entities.
Overall, the guidelines are positive and encourage shift towards formal securitization structures rather than direct
assignment.
11.05.2012 04.05.2012
Exchange rate (Rs./$) 53.63 53.47
Average repos (Rs. Cr) 118,030 100,366
1-yr gilt yield (%) 8.03 8.15
5-yr gilt yield (%) 8.43 8.44
10-yr gilt yield (%) 8.67 8.73
Source: Reuters, Bloomberg
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