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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 itsearlier 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.

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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 takepolicy 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 INR150 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)

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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.

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 15th 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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Indices Aug 3, 2012 Aug 10, 2012 Change

Gold spot ($/ounce) 1597 1612 0.93%

Brent ($/bbl) 106.84 112.32 4.88%

WTI ($/bbl) 88.17 92.45 4.63%

USD / INR 55.83 55.31 -0.94%

DXY Index 83.32 82.69 -0.76%

EUR USD 1.2239 1.2273 0.28%