1. Market Review
WEEK ENDED APRIL 20, 2012
International
Global equity markets closed the week on a positive note helped by earnings news even as select markets lost
ground on regional concerns. The MSCI AC World Index added 0.8%, notwithstanding the weakness in
technology stocks and key Asian markets. Europe continued to be the focus as yields in Spain and Italy remained
elevated and upcoming elections in France and Greece weighed on investor sentiment. The G-20 pledged to
inject an additional $430 bln into IMF, thereby doubling the institution’s current lending capacity and reiterated
concerns about Europe.There was also agreement about implementing the 2010 Governance and Quota Reform
of IMF in the latter part of 2012, which will lead to increased representation of the EM economies. The IMF
revised upwards its growth forecast for global economy, taking into account the recent improvement in underlying
data – it now expects 3.5% global growth (earlier 3.3%) in 2012 and 4.1% (earlier 4%) in 2013. The Reuters
Jefferies CRB lost 0.55% mainly due to fall in energy prices. In currency markets, the euro got a boost from the
expansion of IMF lending capacity and the yen fell on speculation that the central bank might announce further
stimulus to boost the economy.
• Asia-Pacific: Decline in Taiwan, South Korea and Japanese markets more than offset gains in China, Hong
Kong and India, and led regional indices lower this week. Equity markets in export-driven economies fell
on concerns the ongoing signs of slowing recovery in the US will impact trade. Japan’s trade balance slid
into deficit in March as imports growth outpaced exports. Data suggested volumes rose to the US while
demand from China weakened. Philippines central bank left rates unchanged while India reduced its key
policy rate by 50 bps. IMF left EM Asia growth estimates unchanged at 7.3% for 2012 and revised 2013
estimates upwards by 0.1% to 7.9%. On the corporate front, China’s Haitong Securities raised $1.7 bln
through an IPO in Hong Kong.
• Europe/MENA: French equities closed marginally lower ahead of elections over the weekend, while
leading indices Germany and UK finished in the positive territory. On the economic front, the euro-
zone trade gap swung to a surplus in February following fourth consecutive monthly increase in
exports. The German ZEW survey indicated economic expectations increased slightly in April. UK
labour markets also showed improvement – the unemployment rate fell from 8.4% to 8.3% for the three
months to February. IMF said it expects Euro-zone economy to contract by 0.3% in 2012, less than the
-0.5% before and grow by 0.9% in 2013 (0.8% earlier). On the corporate front, Qatar Investment
Authority bought 5% stake in Tiffany, marking its first major investment in a US public company. News
reports indicate Danone and Nestle are contesting for Pfizer’s infant nutrition business.
• Americas: US equities mostly rose this week, barring tech stocks that were impacted by earnings-
related concerns. On the economic front, US retail sales data was stronger than expectations. However,
initial jobless claims data indicated slowdown in the pace of expansion, industrial production was flat
and housing sector numbers were mixed. IMF revised US growth estimates upwards for 2012 and 2013
to 2.1% and 2.4% from 1.8% and 2.2% respectively. Elsewhere in the region, Brazil’s Monetary Policy
Committee cut the Selic rate by 75 bps to 9% and indicated there may be more easing to come - in
line with its recent efforts to boost economic growth. Bank of Canada left rates unchanged at 1% but

2. policy statements indicated it may look to start withdrawing stimulus. This pushed up the Canadian
loonie sharply against the US dollar. On the corporate front, YPF stock slumped as Argentina
government said it will nationalize the company – the move was condemned by EU.
Weekly Weekly
change (%) change (%)
MSCI AC World Index 0.84 Xetra DAX 2.52
FTSE Eurotop 100 2.08 CAC 40 -0.02
MSCI AC Asia Pacific -0.66 FTSE 100 2.13
Dow Jones 1.40 Hang Seng 1.50
Nasdaq -0.36 Nikkei -0.80
S&P 500 0.60 KOSPI -1.71
India - Equity
A higher-than-expected policy rate cut lifted market sentiment and helped Indian equity markets close the
week on a positive note even as FII flows were weak. However, gains were pared on Friday due to profit-
booking. Expectations that the fall in interest rates will boost demand for automotives helped auto stocks
emerge as top gainers. In contrast, oil & gas, power and capital goods stocks finished lower this week. On the
M&A front, Piramal Healthcare acquired the molecule imaging portfolio of Bayer AG, which includes a
potential Alzheimer’s tracer drug with possible revenues of $1.5 bln.
Exports Growth (%yoy, 3 months moving average)
65%
YoY% YoY%, 3MMA
45%
25%
5%
-15%
-35%
Jun-91
Jun-92
Jun-93
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Source: Ministry of Commerce, Morgan Stanley Research
• Macro/Policy: As per provisional trade data, India’s exports (in US dollar terms) fell by 7.1%yoy in March,
the first monthly decline in over 2 years, compared with growth of 4.2%yoy in February 2012. In contrast,
imports growth remained steady at 24.2% yoy in March and the trade deficit stood at $13.9 bln, less than

3. the $15.16 bln recorded in February. Cumulative exports for FY12 were 21% higher than last year to
$303.7 bln while imports grew by 32.1% resulting in a trade gap of $184.9 bln, 56% higher than last year.
RBI’s move to cut policy rates by 50 bps took markets by surprise and raised hopes of revival in capex
cycle. However the bank’s tone was not dovish – it remains concerned about inflation and fiscal pressures
and possibility of further rate cuts is limited in the near term. The various measures announced as part of
its efforts to reduce systemic risks are positive, given the sharp rise in gold related lending activities. Other
policy measures such as reducing variance on retail/bulk deposits could lead to higher costs for banks and
increased volatility in the last quarter of every fiscal year.Waiver of pre-payment penalty on housing loans
could also weigh on banking sector margins in the near term.
Weekly change (%)
BSE Sensex 1.63
S&P CNX Nifty 1.60
S&P CNX 500 1.36
CNX Midcap 0.62
BSE Smallcap 1.49
India - Debt
Indian bond markets rallied as RBI delivered a larger-than-expected rate cut, pushing yields lower across maturities
lower. However, markets pared gains last few days on supply worries and limited potential for easing ahead.
• Markets: Yield on 10-year benchmark paper declined by 8 bps to 8.48% while 1-year benchmark yields
decreased by 9 bps to 8.11%. Corporate bond yields on AAA 5-year paper eased 5 bps to close the week at
9.39%. Scheduled government bond auctions for four securities of Rs. 16000 crore proceeded well.The Indian
rupee surrendered gains clocked earlier in the week following RBI rate cut decision.The currency closed the
week down 1.49%.
• Monetary Measures & Key Indicators:
- Repo rate cut by 50 bps to 8%
- Consequently the reverse repo and the MSF rate stand revised to 7% and 9% respectively
- In order to provide additional liquidity cushion to banks, the cap on borrowings under MSF has been raised
to 2% of NDTL from 1% earlier
- Cash Reserve Ratio (CRR) is unchanged at 4.75%
- Bank rate has been adjusted downwards to 9%, in line with MSF rate
- Economy forecasted to expand by 7.3% in FY13 (baseline growth), assuming normal monsoons
- Expects inflation to be range-bound during the year on account of impact from possible pass-through of
global commodity price rise being offset by fall in core inflation - pegs WPI at 6.5% for March 2013.
- M3 growth is pegged at 15%, with a view that deposit base will expand by 16% and non-food credit will
grow by 17%

4. • Views on Annual Policy and Outlook: The quantum of rate cuts took the market by surprise given the
cloudy outlook on inflation and recent RBI views that growth moderation has been modest.The recent weak
economic data along with soft headline inflation numbers (especially manufacturing goods inflation) may have
prompted RBI to cut rates in order to prevent any sharp slowdown in growth. Instead of any further CRR
cuts, the central bank opted for an increase in the borrowings cap under the Marginal Standing Facility (MSF).
At the same time, the central bank maintained a very cautious stance about future rate actions and highlighted
concerns on various fronts – inflation and twin deficits. RBI expects inflation to remain at current levels as the
recent high global commodity and energy prices impact input costs and domestic fuel prices, offsetting any
benefits from moderation in demand side pressures.
RBI has ensured that it does not release any animal spirits by the aggressive rate cut through its qualifying
comments and cautious tone regarding the future. It has clearly indicated that the probability of further rate
cuts over the near term is low, until unless the economic data flows provide comfort. Now the focus shifts to
trends in inflation as well as the twin deficits. Given the moderation in economic growth, there remain concerns
about government’s borrowings and the fiscal deficit that can contribute to inflation. On the other hand, a
transparent and conducive policy environment can help in attracting further capital flows, and reducing the
pressure on current account.We expect short term rates to move down in line with the repo rate, but continue
to be cautious about the long end of the curve due to the various reasons mentioned above.
20.04.2012 13.04.2012
Exchange rate (Rs./$) 52.07 51.31
Average repos (Rs. Cr) 94,629 88,552
1-yr gilt yield (%) 8.11 8.20
5-yr gilt yield (%) 8.43 8.54
10-yr gilt yield (%) 8.48 8.56
Source: Reuters, Bloomberg
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is neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproduction
without prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to them
and do not constitute investment advice.
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