1. Market Review
WEEK ENDED MARCH 22, 2013
International
Global financial markets were volatile this week on uncertainty around Cyprus/Italy and weak Eurozone
data. The decision to impose losses on domestic/offshore deposit holders in Cyprus led to concerns about
similar practices in other troubled economies potentially requiring bailouts. The MSCI AC World index
closed down 1.05% led by declines in Emerging Markets and Europe. Global treasury bond yields
benefitted from the renewed risk aversion amongst investors. Whilst gold prices moved up marginally, oil
prices moved down and the Reuters Jefferies CRB index lost 0.59%. Concerns about the economic
prospects in Europe weighed on the Euro, whilst the sterling was bolstered by encouraging comments from
the Bank of England.
• Asia-Pacific: Regional equity markets continued to underperform global counterparts, even as strong
economic data helped Shanghai equities rally.The gains were more than offset by declines in large markets
such as India, Australia and Indonesia. China’s HSBC flash PMI recovered in March to 51.7, against its
prior reading of 50.4 led by gains in new orders index. OECD said it expects China to grow by 8.5% and
8.9% in 2013 and 2014 respectively, and surpass the US economy in three years’ time. In continuation of
recent trends, Japan reported record trade deficit for February – trade gap rose above $8 bln as imports
growth outpaced exports. The new Bank of Japan governor (Haruhiko Kuroda) reiterated the need to
stave off deflation and reducing focus on fiscal health for the time being.
• Europe, Middle East & Africa: Earlier in the week, the Cypriot Parliament rejected an EU-bailout
package that imposed a charge on local banking deposits.This along with limited progress on talks with
European officials weighed on regional markets.Weak regional economic data in the form of decline in
the Eurozone flash PMI indices and German IFO business climate index exacerbated volatility. Fitch
placed UK’s credit rating on negative watch. The UK budget sought to boost the economy through
reduction in corporate tax rate and support to home buyers. There was some deterioration in
borrowings and GDP growth for 2013 was pegged at 0.6%. South Africa Reserve Bank kept the repo
policy rate unchanged at 5%.
• Americas: US equity indices outperformed global counterparts on the back of sustained positive
economic news flow. US housing starts continued to advance and initial weekly jobless claims declined to
fresh lows. US Markit manufacturing PMI increased to 54.9 from 54.3. The US Federal Reserve
maintained status quo on policy and upgraded its assessment of the US economy. Elsewhere in the region,
Mexican Parliament approved a telecoms bill that paves the way for creation of a tough industry regulator
and enhanced competition in the telecoms and television market. Chile GDP growth picked up in the
final quarter of 2012 on the back of strong domestic demand. Colombia cut rates by 50 bps to 3.25%.
Citigroup agreed to pay $730 mln to settle a class-action lawsuit that claimed investors were misled by the
bank's disclosures when they purchased its debt and preferred stock.

2. Weekly Weekly
change (%) change (%)
MSCI AC World Index -1.05 Xetra DAX -1.63
FTSE Eurotop 100 -1.06 CAC 40 -1.92
MSCI AC Asia Pacific -1.72 FTSE 100 -1.49
Dow Jones -0.01 Hang Seng -1.85
Nasdaq -0.13 Nikkei -1.77
S&P 500 -0.24 KOSPI -1.90
India - Equity
Indian equity markets ended another week in red as developments in Euro-zone and withdrawal of support
by one of the key allies of the government unnerved investors. In addition, markets were impacted by indications
that there was limited room for further monetary easing. Small and midcap stocks continued to underperform
large caps.All sectoral indices closed in the red, except FMCG index which ended largely flat. Real estate stocks
were the top losers with double-digit declines. Foreign portfolio flows slowed and amounted to $172 mln in
the first four trading days of the week.
• Infrastructure/Policy: We continue to believe a revival in investment activity is critical for economic
recovery and further reforms are required to create sustainable growth. At this stage, it appears that the
government could survive the current political turmoil, but any expectations of substantial reforms need to
be tempered. More importantly, in this environment, government efforts to accelerate approvals and remove
bottlenecks for stalled projects become more critical. This week the government gave an in-principle nod
for Mumbai-Bengaluru industrial corridor (a Bengaluru-Chennai corridor is also being considered).These
along with the Delhi-Mumbai Investment corridor can provide fillip to investment activity in the near term.
In addition, efforts to address transport capacity constraints through the establishment of a dedicated freight
corridors and two new ports should help.
Projects under implementation* (%yoy)
Source: CMIE, Morgan Stanley Research
*Includes all government and private projects that were either announced/proposed
or were under various stages of implementation
The government’s recent efforts seem to have helped improve capex environment somewhat – indicators
such as CMIE projects under implementation and engineering & construction companies’ order books have

3. stabilized at low levels. At the same time, we are seeing that some coal, power and metals projects are also
making progress.A lot of projects are dependent on state governments, and we are witnessing good progress
in some states. At the same time, given that many of these projects are longer term in nature, it would take
time before we see meaningful impact on investment growthglobal crisis, it needs to strengthen the
foundation for sustainable economic growth.
Weekly change (%)
BSE Sensex -3.56
S&P CNX Nifty -3.77
S&P CNX 500 -4.21
CNX Midcap -5.29
BSE Smallcap -6.58
India - Debt
While the RBI delivered a 25 bps cut in the repo rate in line with market expectations, the bank’s cautious
comments on further monetary policy easing weighed on market sentiment and led bond yields to rise this
week. FII inflows into debt remained positive - $254 mln in the first four trading days of the week.
• Bond Markets: Benchmark gilt yields at the long end of the curve rose – yields on the 10 year gilt
closed up 8 bps, while that on the 5-year firmed up 7 bps.Yields on the 30-year paper also increased by
13 bps. At the same time, 1-year gilt yields closed flat, after rebounding from lows touched earlier in the
week.
• Forex: The Indian rupee slid amidst broad-based risk aversion in global financial markets and local events. As
of Mar 15, Indian forex reserves stood at around $292.3 bln, about $2 bln more than previous week levels
primarily due to revaluation of forex assets.
• Forex: The rupee extended gains from last week helped by foreign fund flows, dollar sales by exporters
and relative dollar weakness. As of Mar 08, Indian forex reserves stood at around $290 bln, about $224 mln
less than previous week levels primarily due to revaluation of forex assets.
Source: Morgan Stanley Research
• Monetary Policy: At its mid-quarter review of monetary policy this week, RBI reduced the benchmark
repo rate by 25 bps to 7.75% and left the CRR unchanged at 4%. Key points from the policy statement
were –

4. • Policy decision influenced by broad-based deceleration in domestic growth and the need to support
investments to lift growth
• RBI remains wary on the inflation front – cites upside risks on the food front and pending pass through
of international energy prices
• It reiterated concerns about widening current account deficit (CAD) and over-reliance on short-term flows
• It indicated that it will be on stand-by to support systemic liquidity through Open Market Operations
(OMOs)
• Monetary policy direction in the coming quarters will depend on the emerging growth-inflation trends
In our view, the policy outcome was along expected lines and the bank’s comments about continued
OMOs could aid market sentiment. Liquidity tightness is expected to abate post year-end as government
spending picks up. The central bank has clearly put the onus on the government to boost investment
activity by controlling fiscal deficit, addressing supply side issues and enhancing project implementation.
Given the current macro situation and RBI’s emphasis on ‘limited room for monetary easing’, markets
could be volatile in the short term. At the same time, the central bank is expected to be more
accommodative over the longer term to support economic recovery.
• Government Borrowings The government’s borrowing calendar was also in line with expectations – it
is scheduled to borrow Rs. 349,000 crore of the full year target of Rs. 579,000 crore (excluding bond
buybacks). Typically the government borrows about 60-65% of its requirement in H1. Reportedly, the
government is increasing the FII debt limits further to cushion rising current account deficit and support
bond markets.
22.03.2013 15.03.2013
Exchange rate (Rs./$) 54.33 54.02
Average repos (Rs. Cr) 136,065 106,996
1-yr gilt yield (%) 7.96 7.96
5-yr gilt yield (%) 7.92 7.85
10-yr gilt yield (%) 7.97 7.89
Source: Reuters, CCIL.
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