Week ended Aug 10, 2012 WEEKLY ROUND UP Global update Representatives of the troika of the European Commission,

, European Central Bank and International Monetary Fund would hold the next talks with Greece in early September, the outcome of which would determine whether Greece continues to receive their funds from the EUR 240 bn rescue package. The German government backed ECB President Mario Draghis proposals on bond buying to help bring down borrowing costs in Spain and Italy. S&P revised its outlook for Greece downward to negative from stable. The rating agency warned that the countrys rating could be cut further if Greece is unable to obtain the next disbursement from the European Union and International Monetary Fund rescue package. Italian PM obtained victory in a vote of confidence on a bill to cut spending over 3 years . Eurogroup President Juncker commented that a Greek exit from the Eurozone would be manageable but not desirable. The European Central Bank might intervene in bond markets in accordance to Europes bailout fund if the nations commit to improve their current economic and fiscal positions. India update Indias newly appointed Finance Minister P. Chidambaram said yesterday that a path for fiscal consolidation is likely to be unveiled shortly and would provide clarity on the tax laws to enhance foreign flows. He also commented that high interest rates are a "burden to consumers" and that the Finance Ministry would work with the RBI to tackle the issue.
IIP for June clocked a dismal 1.8% YoY. Manufacturing erased its earlier gains and notched 3.2% YoY. The contraction in consumer non- durables is worrying as it indicates a slowdown in domestic consumption activity

MARKET UPDATE Global Markets Overview US stocks traded firm at the week's start as the German government backed the ECBs bond-buying plan, thereby somewhat easing Eurozone debt concerns. Better than expected corporate profit earnings from the nation and better than expected initial jobless claims aided the gains. However, gains were capped owing to concerns surrounding Eurozone debt crisis. Dow Jones is trading more than 2% higher for the week (15:00 IST) Asian stocks opened the week firm tracking positive cues from Wall Street. Sentiment remained supported as the Chinese Central Bank said that it would continue with exchange rate reform and ensure strong credit growth and the German government backed ECBs bond buying programme.

Market sentiment remained supported amidst expectation that the Central Banks across the globe might take policy measures to support growth. Asian stocks closed 2-4% positive for the week.

Domestic Equity Market Overview Indian stocks markets opened the week in green tracking firm cues from Wall Street. Market sentiment remained supported amidst expectation that the Central Banks across the globe might take policy measures to support growth. However, worrisome comments from Eurogroup President weighed on the benchmark indices Comments from the Finance Minister P. Chidambaram that a path of fiscal consolidation was likely to be unveiled shortly further aided sentiment. Index major Reliance Industries jumped 5.7% in a day amidst reports that the company has given access of its KGD6 block-related accounts to the Comptroller and Auditor General of India. Data showing that foreign institutional investors remained net buyers of Indian equities added to investors risk appetite. However, the benchmark indices reversed some of the gains in subsequent trade as industrial production dropped by 1.8% YoY in June. Sensex closed the week more than 2% positive. Outlook - FIIs have been net buyers in 2012 however, whether India would continue getting the inflows on sustainable basis, would be the key thing to watch going forward. Markets may find a support at current levels as correction in crude oil prices could act as a trigger for buying at lower levels. Subdued growth in the global economy could put further pressure on the commodities, in particular oil, which would enable India to reduce its trade deficit. Partial profit booking can be done beyond 18,500 levels, which is a stiff resistance area for the near term. On valuation front, Indian equity markets is trading near 13.5x (one year forward PE), which is below the historical average of 16. Sensex could move in the range of 15,000-18,500 in the near term. Fixed Income Gilts traded firm and remained supported on India's finance minister Chidambarams favourable comments on interest rates and fiscal consolidation. Gilts gained post the data release as a weak IIP print aided expectations of policy stimulus by the RBI going ahead. However bonds pared some gains as investors trimmed positions ahead of INR 150 bn auction on Friday but closed the week strong as 10 year G Sec yield receded to 8.16% levels. Outlook Short term rates - The short term rates are expected to trade lower as liquidity is expected to improve till August 2012. While again in the month of September 2012, liquidity deficit may temporarily spike above INR 1 trillion on account of advance tax outflows. 10 year GSec - In the light of liquidity tightness going ahead and absence of OMOs, we expect G Sec yield to remain range bound with upward bias in the near term as this would also coincide with heavy supply of G Sec bond to the tune of INR 1,060 billion (August September 2012). Markets would keep a close watch for the progress of monsoons, global and Indian economic data prints, the RBI policy actions in the coming months and liquidity conditions for direction. USD-INR The Indian Rupee opened firm amidst improvement in global risk appetite at the beginning of the week. Gains in domestic stocks coupled with Dollar sale by exporters provided further support to the Rupee. Finance Ministers intent to consolidate the fiscal situation added to the uptrend in the Rupee. However, the currency reversed its gains in subsequent trade tracking losses in the Euro as Eurogroup President Juncker commented that a Greek exit from the Eurozone would be manageable but not desirable. Indias IIP data for June surprised the currency on the downside. Rupee closed the week stronger by 1% (15:40 IST)

Outlook - Market is expectantly waiting for the Prime Minister to keep his pledge to revive investor confidence. In fact in the last few weeks, this factor has emerged as the most important driver of the currency, lending support even in the face of deteriorating global risk sentiment. Meanwhile, rise in crude prices on the back of tensions in the Middle East, would cap the gains in the Rupee. Oil Brent and WTI prices had surged post positive US non-farm payrolls reading aiding outlook over growth. However, c rude oil prices edged lower on profit booking and remained under pressure amidst some easing in supply concerns as the Tropical storm Ernesto heading westward in the Caribbean slowed and was forecasted to become a hurricane. Crude oil prices fell amidst concerns over slowing oil demand in US with crude consumption dropping by 4% last week. However, crude inventories were also reported to have declined last week with dollar weakness supporting the oil prices. Expectation over further policy measures by China further aided the prices. Brent oil prices rose amidst concerns of falling North Sea oil output ahead of scheduled maintenance of platforms in the region. Consequently, Brent and WTI Oil prices are trading more than 4% higher from the week's opening levels (15:00 IST) Gold Gold prices rose as firm US labour market data provided some respite to the growth concerns, thereby aiding gains in the commodity space. Gold prices gained in tandem with other commodities amidst firm market sentiment and weakness in the dollar, though did edge lower on profit booking. Expectations of further policy stimulus by the Chinese Central Bank following a lower than expected inflation print released aided the gains with Gold trading in positive territory for the week. China, which overtook India as the largest consumer of bullion in Q1 2012.
Indices Gold spot ($/ounce) Brent ($/bbl) WTI ($/bbl) USD / INR DXY Index EUR USD Aug 3, 2012 1597 106.84 88.17 55.83 83.32 1.2239 Aug 10, 2012 1612 112.32 92.45 55.31 82.69 1.2273 Change 0.93% 4.88% 4.63% -0.94% -0.76% 0.28%

What to watch out for

Focus would now be on the Jackson Hole meeting on August 31st, in which the Fed Chairman may outline the likely monetary policy strategy. Indian Government is likely to introduce big-ticket reforms by 15 th August, which will focus on reining in subsidies and possible FDI reforms if the Government is able to build consensus on the issue.

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