While RBI has begun the rate cut cycle, plenty of headroom for further cuts would be generated going forward as low inflation would be the defining feature of 2015.

1. Dipankar Mitra (Dipankar.Mitra@MotilalOswal.com); +91 22 3982 5405
2015: Era of low inflation and falling rates begin
RBI to get enough headroom to cut rates by 150-250bp
 While RBI has begun the rate cut cycle, plenty of headroom for
further cuts would be generated going forward as low inflation would
be the defining feature of 2015.
 The sharper-than-anticipated fall in inflation seen already is not just a
statistical artifact but for ‘real’. The latest data indicate prevalence of
disinflationary trend is deeply entrenched at both retail and
wholesale level. Continuation of these trends would imply one of the
lowest CPI inflation in three decades and near zero WPI inflation in
FY16. This would lead to RBI’s target being overachieve by nearly
200bp. This would also mark the convergence of global and Indian inflation after a decade.
 A decomposition analysis of inflation revealed relatively lower contribution of base effect (11% for CPI and 20% for WPI)
in the fall in inflation. However, nearly two third of decline in retail inflation is explained by moderation in food prices
while nearly half of decline of wholesale inflation is explained by meltdown in global commodities (including oil).
 The meltdown in global commodities is now deeply entrenched due to the renewed fears of slowdown in advanced
countries and sector specific dynamics. On the other hand the clampdown on food prices by the government also seems
durable given the history of NDAs in tackling food inflation in the past and the medium term measures initiated by the
government to improve agricultural economy.
 We expect 150bp cut to ensure, among other things and crucially, that real interest rates do not rise above GDP growth
rate. On the INR front, while low inflation lends a stability bias, RBI may proactively depreciate the rupee at a steady
pace to ensure export competitiveness and ward off future volatility.
 Corporate sector as a whole would be a beneficiary of near term expansion of margin both on account of lower input
costs and expected pick up in activities that helps improve operating leverage. We model 120bp/190bp expansion in PAT
margins for FY16/FY17 for our universe companies.
20 January 2015
ECOSCOPE
The Economy Observer
2015 low inflation
 Rate cuts has begun but RBI to get more
headroom as CPI set to overachieve RBI
target by 200bp
 Lower food prices and commodity crash
led to the inflation decline
 As these are durable factors, 2015 likely to
be a year of low inflation
 We expect policy rates to be cut by a total
of 150 bp over 2015; INR may find a
support too
 Corporate margins to expand
Investors are advised to refer through disclosures made at the end of the Research Report.

2. 20 January 2015 2
Period of low inflation begins
As global factors and govt. tame inflation, rates and INR seen to benefit
The sharper-than-anticipated fall in inflation is not just a statistical artifact but for ‘real’.
Quite contrary though the strong disinflationary impulse at the wholesale level and
absence of a price rise at the retail level have caused this. Continuation of these trends
would imply near zero WPI inflation for the first time in three decades and one of the
lowest CPI inflation during this period. This would also mark the convergence of global and
Indian inflation after a decade.
1. Inflation was meant to surprise… but the extent surprised us
too
 Inflation, both retail and wholesale, has rapidly winded down in a short period
of time of last six months.
 While we had expected that inflation would surprise on the downside, the
extent of decline was huge.
Exhibit 1: WPI inflation is falling sharply due to strong disinflationary trends and not just the base effect
Source: Government, RBI, MOSL
WPI
inflation
may fall
tonear
zeroif i)
disinflatio
nary
conditions
prevail for
a few
more
months
and ii)
prices rise
at half the
rates of
high
inflation
years
CPI
inflation
would fall
todecadal
low under
similar
conditions
7.5
6.4
5.1
5.0
6.0
5.5
6.2
5.7
5.4
3.9
2.4
1.7
0.0
0.1
0.4
0.1
-0.4
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Wholesale
inflation (WPI
YoY%) crashed
toground zero
0.4
-1.0
-0.3
0.3
0.4
0.3
0.7
0.5
1.1
0.5
-0.5
-0.7
-1.2
-0.9
0.0
-0.1
-0.1
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Strong disinflationary
pressures seen for last four
months (WPI MoM %)
11.2
9.9
8.8
8.0
8.3
8.6
8.3
7.5
8.0
7.7
6.5
5.5
4.4
5.0
5.6
6.0
5.8
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Retail inflation has crashed (CPI YoY%) and
the may rise now only for base effect
1.3
-1.0
-0.4
-0.1
0.6
0.7
0.6
0.9
1.8
0.9
0.0
0.1
0.2
-0.4
0.2
0.3
0.3
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Now disinflation in retail
inflation too (CPI MoM%)
3.4
3.8
4.3
4.0
3.9
3.8
4.4
6.7
6.2
9.1
12.4
10.5
8.4
10.2
9.5
6.6
3.9
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
NREGA
started with
INR 113 b
Post crisis stimulus
i) Debt waiver INR 720 b,
ii) 6thPay Commission INR200 b,
iii) Tax andspend of INR 1 t
NREGAscaled
up to INR 400 b
MSP
hike of
27%
3.3
7.1
3.6
3.4
5.5
6.4
4.5
6.6
4.7
8.1
3.8
9.6
8.9
7.4
6.0
2.6
0.5
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Era of high
commodity
prices
ECONOMICS

3. 20 January 2015 3
 This concludes an era of high global commodity prices that kept the imported
inflation high and got reflected in WPI measures.
 On the other hand, it also reflected the cumulative measures on social welfare
and crisis response undertaken by the previous UPA government, which
percolated down on domestic retail inflation.
 It is notable though that the decline in inflation is not a statistical artifact. Quite
contrary, it comes on the back of rather deep disinflationary impulses that have
engulfed the Indian economy. This is reflected at the retail level now with the
Dec-14 CPI index witnessing MoM disinflation after three months of near no-
growth in the index. At the wholesale level, disinflation is continuing for the
fourth consecutive month now in Dec-14, signifying that the underlying index
(or price) is actually falling.
 Another supportive factor is the broad-based decline in all components of
inflation and various analytical measures of inflation.
 If the disinflationary trend continues for a few more months, or even if the
increase in prices are half the rate of high-inflation years, we would arrive at
near zero WPI inflation for FY16 (0.5%) -- the lowest in three decades. Similarly,
CPI inflation is poised to reach below 4% level -- very near the lowest value in
three decades.
 This would mark the convergence of Indian inflation with global inflation in
FY16. Notably, the two had diverged widely during the previous UPA regimes,
while the NDA has a track record of maintaining low inflation, and we are likely
headed in that direction again.
Exhibit 2: CPI and all of its components have more than halved from peak values (YoY, %)
Source: Government, MOSL
11
15
9
16
13
15
12 12
11
5 5
4
8
3
7
5 5 5
50% 26% 10% 9% 5% 41%
CPI-RU CPI-Food
group
Services Housing Fuel group Clothing
etc.
Rural CPI Urban CPI Core CPI
Recent peak Latest Weight

4. 20 January 2015 4
Exhibit 3: FY16 retail inflation to crash to near three-decade
lows
Source: Bloomberg, MOSL
Exhibit 4: Wholesale inflation is on course to be near zero
Source: Bloomberg, MOSL
Exhibit 5: Indian and global inflation converging again after 10 years
Source: IMF, MOSL
2. Inflation decomposition - base effect, imported items and
food price crash explains nearly all of inflation decline
A decomposition analysis of inflation revealed relatively lower contribution of base effect
(11% for CPI and 20% for WPI) in explaining the decline in inflation. However, nearly two
third of decline in retail inflation is explained by moderation in food prices while nearly
half of decline of wholesale inflation is explained by meltdown in global commodities
(including oil). Imported inflation mattered less for CPI inflation decline (only 13%) as the
proportion of commodities directly affected by CPI is relatively less. For WPI, decline in
food inflation however, did contribute a significant part (30%) of decline in overall inflation
as food comprises a sizable 14% of the overall WPI basket.
 As inflation declines it’s time to decipher what has led to such sharper than
anticipated inflation.
 A decomposition analysis reveals that three factors viz., base effect, decline in
imported inflation and moderation in food inflation is responsible for the
decline in inflation.
 However, the weight of these factors played different roles in CPI and WPI.
While CPI declined mainly due to moderation in food price, meltdown in global
commodities played a far greater role in moderation of WPI.
3.4 3.9 3.9
2
5
8
11
14
FY84
FY86
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16E
CPI Inflation (YoY %)
Third lowest CPI
inflation in 3 decades
3.3 3.4
0.5
0
4
8
12
16
FY84
FY86
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16E
WPI Inflation (YoY %)
Lowest WPI inflation
in 3 decades
-5
-3
0
3
5
8
10
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
CPI (India - World) Period of convergence
Note: India's 2015 inflaton corresponds to FY16
NDA - I NDA-IIUPA-IIUPA-I

5. 20 January 2015 5
Exhibit 6: Nearly two third of decline in CPI inflation is
attributed to moderating food inflation
Source: Government, MOSL
Exhibit 7: Nearly half of WPI crash is due to moderation in
imported items
Source: Government, MOSL
 We have used separate methodology to isolate the impact of the three factors
in moderation of inflation.
 The base effect has been calculated by using a smoothened inflation index,
measuring the contribution of base effect as a residual of actual inflation and
the smoothened series.
 We have categorized the CPI and the WPI basket into commodity baskets that
are influenced by global prices in to an index (with the combined weight of
these components) and derived the imported inflation out of this index.
 The contribution of food inflation was calculated directly by taking the weighted
contribution of the food basket in each inflation indices.
Exhibit 8: Base impact calculated on a smoothened CPI
index, account for only 10% of the decline in inflation
Exhibit 9: The impact of base effect is somewhat higher at
20% for WPI index
11.2
5.0
0.7 (11%)
0.8 (13%)
4.7 (76%)
Nov-13 Base effect Decline in
imported
inflation
Decline in
food
inflaiton
Dec-14
7.5
0.1
1.5 (20%)
3.7 (50%)
2.2 (30%)
Nov-13 Base effect Decline in
imported
inflation
Decline in
food
inflaiton
Dec-14
4
6
8
10
12
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
CPI Inflation CPI inflation (without base effect)
-2
0
2
4
6
8
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15-E
Mar-15E
WPI-Inflation
WPI inflation (without base effect)

6. 20 January 2015 6
Most of the WPI basket is globally dependent while it holds for only a small part of CPI
Inflation indicator Weight Inflation indicator Weight
WPI 100.0 CPI 100.0
Primary articles 20.1 Food, beverages & tobacco 49.7
Food articles 14.3 Cereals and products 14.6
Non-food articles 4.3 Pulses and products 2.7
Minerals 1.5 Oils and fats 3.9
Fuel & power 14.9 Egg, fish and meat 2.9
Coal 2.1 Milk and products 7.7
Mineral oils 9.4 Condiments and spices 1.7
Electricity 3.5 Vegetables 5.4
Manufactured products 65.0 Fruits 1.9
Food products 10.0 Sugar etc. 1.9
Beverages, tobacco & tobacco products 1.8 Non-alcoholic beverages 2.0
Textiles 7.3 Prepared meals etc. 2.8
Wood & wood products 0.6 Pan, tobacco and intoxicants 2.1
Paper & paper products 2.0 Fuel & light 9.5
Leather & leather products 0.8 Clothing, bedding & footwear 4.7
Rubber & plastic products 3.0 Housing 9.8
Chemicals & chemical products 12.0 Miscellaneous 26.3
Non-metallic mineral products 2.6 Medical care 5.7
Basic metals, alloys & metal products 10.8 Education, stationery etc. 3.4
Machinery & machine tools 8.9 Recreation and amusement 1.4
Transport, equipment & parts 5.2 Transport and communication 7.6
of which import dependent transport 3.9
Personal care and effects 2.9
Household requisites 4.3
Others 1.1
Total global factor dependent WPI basket weight 66.2 Total global factor dependent CPI basket weight 13.4
Source: Government, MOSL
Exhibit 10: Nearly two-third of decline in CPI inflation can be
accounted for food alone
Source: Government, MOSL
Exhibit 11: Decline in food inflation contributed in WPI
moderation too; albeit to a lesser degree
Source: Government, MOSL
2
4
6
8
10
12
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
CPI Inflation
Contribution of food in CPI inflation
0
2
4
6
8
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
WPI inflation
Contribution of food in WPI inflation

7. 20 January 2015 7
3. Inflation to stay moderate as its backbone is crushed by
global trends and govt’s firm hand
The meltdown in global commodities is now deeply entrenched due to the renewed fears
of slowdown in advanced countries and sector specific dynamics. On the other hand the
clampdown on food prices by the government also seems durable given the history of
NDAs in tackling food inflation in the past and the medium term measures initiated by the
government to improve agricultural economy.
i) Global commodity crash
 Indicative of the sharpness of disinflationary pressures prevailing in the global
economy, key commodity prices have retreated by three years.
 While INR’s depreciation has partly moderated this gain, commodity prices in
INR terms are still ruling at three years lows.
 In contrast, India’s inflation indices increased over these years at a steady pace.
Only recently, Indian prices have shown signs of a retreat.
 Global food prices (most crucial factor), after ending an era of extreme volatility,
now appear on the steadier course of a downturn.
 These developments have been highly beneficial for India’s imported inflation,
which nearly collapsed recently.
Exhibit 12: Global commodity prices have retreated by three
years in INR terms
Source: Bloomberg, MOSL
Exhibit 13: Crude oil prices fell by nearly 60% in the last six
months to near levels prevailing six years ago
Source: Bloomberg, MOSL
Exhibit 14: Coal prices have rolled back by five years
Source: Bloomberg, MOSL
Exhibit 15: Other key input prices have crashed similarly
Source: Bloomberg, MOSL
250,895
171,112
100,000
140,000
180,000
220,000
260,000
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Rogers International Index (INR)
127
51
40
60
80
100
120
140
Mar-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Crude (USD/bbl)
128
63
50
70
90
110
130
Mar-09
Jun-09
Oct-09
Feb-10
May-10
Sep-10
Jan-11
Apr-11
Aug-11
Nov-11
Mar-12
Jul-12
Oct-12
Feb-13
Jun-13
Sep-13
Jan-14
May-14
Aug-14
Dec-14
Coal - Richard Bay index (USD/MT)
761
479
450
530
610
690
770
850
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
China HR Steel (USD/MT)

8. 20 January 2015 8
Exhibit 16: In contrast, WPI index rose fairly steadily and has seen only moderate pushback
recently
Source: Government, MOSL
Exhibit 17: World food prices moderate too thus restraining domestic prices
Source: FAO, MOSL
ii) The iron hand of government
 The combination of post crisis stimulus measures, rural oriented schemes,
subsidies and proceeds from land sale had created a inflationary spiral during
the previous UPA regimes.
 Supply bottlenecks hindered a proportionate increase in food availability along
with demand that was bolstered with higher rural income, wages and shifting
terms of trade in favor of agriculture through higher MSPs. The rate of MSP
hikes more than doubled during UPA regimes as compared with the first stint of
NDA.
 All these are being unwounded now. The new government has cracked the whip
on the stubborn food inflation from all fronts, including price control measures,
subsidy, ensuring food availability and ensuring appropriate response from
states.
 The measures had a salutary impact on food inflation that has subsided from as
high as 19% during Aug 2013 to just 0.6% during Nov 2014.
120
140
160
180
200
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
WPI index
124
226 (68%)
143 (-37%)
240 (68%)
189 (-21%)
100
130
160
190
220
250
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
FAO food price index
A period of volatile food prices
A period of steady decline
in world food prices

9. 20 January 2015 9
Exhibit 18: The vicious cycle of inflation during post crisis
period
Source: RBI, MOSL
Exhibit 19: Very low MSP hike by new govt. to contain food
prices
Source: CACP, MOSL
Exhibit 20: Govt. has attacked food inflation from all fronts
Source: Government, MOSL
Rural
Schemes
Higher rural
income
Higher
rural wages
Higher
MSP
Supply
bottleneck
Higher rural
inflation
2
3
4
5
6
1
8
11
2 2 1 1 1 2
7
17
21
6
2
8
16
7
2
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
NDA-I
Avg: 4%
UPA-I
Avg:
10%
UPA-II
Avg: 8%
NDA
-I I
MSP hike (YoY %)

10. 20 January 2015 10
4. Low inflation to ensure 150bp rate cut; INR to gain too
Low inflation would be the defining feature of 2015. While RBI has initiated the rate cut
cycle, we expect ample headroom to be created during 2015 for a cumulative 150bp cut in
2015. Among other things this would ensure crucially, that real interest rates do not rise
above GDP growth rate. On the INR front, while low inflation lends a stability bias, RBI may
proactively depreciate the rupee at a steady pace to ensure export competitiveness and
ward off future volatility.
i) See lower interest rates
 Due to continued tight monetary policy and rapid unwinding of inflation, real
interest rates have turned positive in FY15 itself.
 However, given the inflationary trajectory for FY16, if rates are not cut
proportionately, the real rates of interest would zoom to historically high levels.
 A cut in rates by 150-250bp in FY16 would thus be necessary to bring real rates
closer to RBI’s indicative real rate of 1.5% (for depositors) and the 0.6% long
term real rate that has historically prevailed in India.
 A critical problem associated with prevailing high real rates of interest though is
that real lending rates have already reached unsustainable levels -- higher than
the GDP growth rate. This would be accentuated in FY16, if rates are not cut
proportionately, thus creating a strong deflationary bias.
 Lower inflation and the inflation differential (with US) in the past have been
associated with a narrowing of interest rate gap that presently is ruling at
historically high levels. A rate cut is thus imperative to normalize the yield gap
that may also narrow the arbitrage opportunities existing now.
Exhibit 21: In the past there existed a broad link between
inflation and policy rates
Source: Government, MOSL
Exhibit 22: This is more so for WPI inflation but the link now is
broken
Source: Government, MOSL
Exhibit 23: Real interest rates have turned positive and may
reach near the 16-year high in FY16 without matching cuts
Source: Government, RBI, MOSL
Exhibit 24: Rates would need to be cut at least by 150-250bp
by FY16 to normalize even with RBI's indicative real rates
Source: Government, RBI, MOSL
4
5
6
7
8
9
10
0
2
4
6
8
10
12
14
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
CPI Inflation (YoY %) Repo rate
4
5
6
7
8
9
10
0
2
4
6
8
10
12
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
WPI Inflation (YoY %) Repo rate
4.7
3.4
1.8
1.1
1.7
1.6
1.6
2.6
-1.0
-6.4
-2.2
0.9
-1.5
-0.5
1.9
4.6
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Real deposits rate (SBI 1yr deposits - CPI inflation)
RBI's indicative real
rate of 1.5%
1.5
0.6
3.1
2.1
RBI's Indicative
real rate
Real rate - Long
period avg
Real rate with
150bp cut
Real rate with
250bp cut
Real rate (%)

11. 20 January 2015 11
Exhibit 25: In a very unusual situation, real rates for corporates (WPI benchmark) would
exceed GDP growth rate
Source: Government, Bloomberg, MOSL
Exhibit 26: Real lending rates in FY15 are much above GDP growth with adverse
consequence on business viability
Source: Government, Bloomberg, MOSL
Exhibit 27: As inflation differential declines, historically high yield gap too needs to be
brought down
Source: IMF, Bloomberg, MOSL
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Real AAA Corporate Bond rate (1-yr) GDP growth
1.2 1.5
2.2 1.7
8.0
5.6
5.0 5.3
6.0 5.5
11.8
5.6
Real Repo rate Real 10-yr Gsec Real CP rate 1yr Real term
deposits 1-yr
Real SBI PLR GDP growth
CPI benchmark WPI benchmark RBI 1.5% benchmark for real rates
How much of real
interest rate is
too much ???
7.6
4.8
5.8
2.9 2.3 0.9 2.3 2.7 2.9 3.8 3.0 3.8 4.6 6.7 6.3 5.8 5.8
0
2
4
6
8
10
12
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
10-yr Gsec Yield (India - US) CPI Inflation (India - US)

12. 20 January 2015 12
ii) Expect INR stability but RBI intervention to ensure competitiveness
 Low inflation is expected to bring stability to INR. Notably, the period of NDA-I
that was marked by Indian inflation rate lower than global inflation, was also a
period of static INR. However, inflation accelerated in the subsequent UPA
regimes and INR too depreciated by a huge margin.
 While low inflation would bring INR stability, we expect RBI to proactively lend a
bias for steady INR depreciation to ensure competitiveness and ward off future
volatility.
Exhibit 28: Higher inflation differential led to INR
depreciation
Source: IMF, MOSL
Exhibit 29: RBI may still intervene to ensure competitiveness
Source: RBI, MOSL
iii) Government finance
 Inflation impacts government finance both from revenue and expenditure side.
 On the revenue side, corporate tax collections may be adversely impacted due
to lower inflation as also major indirect taxes that are collected on ad valorem
basis.
 However, on the expenditure side, government saves on the interest outgo and
non-plan capital expenditure.
 The net impact on government finance, especially headline deficit measures, are
usually neutral.
 However, if prices of particular commodities fall sharper than others where the
government’s subsidy programme too is concentrated, it might mean more than
the usual savings for the government.
 Thus, the combined impact of oil prices fall, decline in food and fertilizer prices,
better targeting of beneficiaries through the Direct Benefit Transfer (DBT) and
reduction in scope of certain subsidies -- LPG and Kerosene -- is likely to aid the
government stay on the fiscal corrective path along with improved fiscal
accounting and practices.
 However, there is a fairy strong and adverse impact of low inflation in public
finance. The reduction in debt to GDP ratio may be slowed down as interest
rates takes a longer time to adjust.
-0.7
2.5
5.6
2.3
7.1
36.1
1999-2004 2005-2009 2010-2014
CPI (India - World) (Yearly Avg)
INR (% change over period)
-50
0
50
100
90
100
110
120
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
REER (WPI Based) (LHS)
RBI Intervention (USD b) (RHS)

13. 20 January 2015 13
Exhibit 30: On revenue side, inflation has the strongest
impact on corporate tax collections…
Source: Government, MOSL
Exhibit 31: …this is followed by customs collection
Source: Government, MOSL
Exhibit 32: Excise too seems positively impacted by inflation
Source: Government, MOSL
Exhibit 33: On the expenditure side, interest burden has a
strong relationship with inflation
Source: Government, MOSL
Exhibit 34: Non-plan capital expenditure too is adversely
impacted by high inflation
Source: Government, MOSL
Exhibit 35: Fiscal deficit though is more stance driven and
has nearly no correlation with interest rates
Source: Government, MOSL
0
10
20
30
40
50
0
3
6
9
12
15
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15BE
WPI Inflation (YoY %) (LHS)
Corporate tax receipt (YoY %, RHS)
-40
0
40
80
0
5
10
15
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15BE
WPI Inflation (YoY %) (LHS)
Custom duties collection (YoY %, RHS)
-20
0
20
40
0
5
10
15
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15BE
WPI Inflation (YoY %) (LHS)
Excise duties collection (YoY %, RHS)
0
5
10
15
20
25
0
3
6
9
12
15
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15BE
WPI Inflation (YoY %) (LHS)
Interest payments (YoY %, RHS)
-20
0
20
40
0
5
10
15
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15BE
WPI Inflation (YoY %) (LHS)
Excise duties collection (YoY %, RHS)
0
5
10
15
20
25
0
3
6
9
12
15
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15BE
WPI Inflation (YoY %) (LHS)
Interest payments (YoY %, RHS)

14. 20 January 2015 14
Exhibit 36: Low inflation however, would adversely impact the continued decline in debt
burden by the government
Source: IMF, Bloomberg, MOSL
5. What not to expect from a low inflation
In popular perception, low inflation is expected to help GDP growth, saving (at least
financial saving) or at the least inflation expectations itself. However, data suggests that
these are fairly unlinked and inflation expectations, at the best would catch up with falling
inflation with a lag.
i) GDP growth don’t go up in a hurry because of low inflation
 Economists have explored this ad infinitum, but the data at least in Indian
context, do not suggest any obvious conclusion of a link between inflation and
GDP growth.
 Indeed, we do not find any evidence of RBI’s assertion that beyond a threshold
level, inflation is inimical to growth.
 While long drawn statistical manipulations may find a result to the contrary, we
simply note that there are just too many exceptions to this rule with many years
6%+ growth coexisting with even 8%+ growth.
 While the conclusion may surprise many, but the fact is that growth requires
many other favorable factors to come together beyond just low inflation.
Exhibit 37: Low inflation however, would adversely impact the continued decline in debt
burden by the government
Source: Government, MOSL
40
46
52
58
64
0
4
8
12
16
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
CPI Inflation (YoY %) Central govt. debt (% of GDP)
-6
-3
0
3
6
9
12
-5 0 5 10 15 20 25
GDPgrowth
CPI inflation

15. 20 January 2015 15
ii) Saving, even private financial savings are not related to inflation
 Similarly, saving ratio is not influenced by inflation and the later is even
inconsequential for allocation of saving in financial instruments.
 This is because while GDP growth rate largely determine saving rate, financial
savings are indeed decided by many other structural factors such as banking and
financial sector penetration; people’s habit, convenience and confidence;
knowledge, etc.
Exhibit 38: There is nearly no link found between inflation
and saving rate
Source: RBI, Government, MOSL
Exhibit 39: Inflation is also not found to influence the share
of private financial savings
Source: RBI, Government, MOSL
iii) Decline in Inflation expectations is not proportionate and may lag
 Finally while inflation expectations, as per RBI’s survey has come down to single
digit levels, there has not been a proportionate reduction in inflation
expectations with falling inflation.
 This is because the immediate past largely influence the survey response of the
households and therefore may take time before moderation.
 Besides, as the theory suggests, there may be an asymmetry of response
between adjusting inflation in a falling inflation scenario vis-à-vis a rising
inflationary situation. Typically the lag is longer in the former case.
Exhibit 40: Inflation expectations has come down but yet to
adjust to realistic levels
Source: RBI, Government, MOSL
Exhibit 41: The gap between expectations and current
inflation is correcting after a lag
Source: RBI, Government, MOSL
0
10
20
30
40
-5
5
15
25
35
FY62
FY65
FY68
FY71
FY74
FY77
FY80
FY83
FY86
FY89
FY92
FY95
FY98
FY01
FY04
FY07
FY10
FY13
CPI Inflation (YoY %) Saving ratio
0
20
40
60
80
-5
5
15
25
35
FY62
FY65
FY68
FY71
FY74
FY77
FY80
FY83
FY86
FY89
FY92
FY95
FY98
FY01
FY04
FY07
FY10
FY13
CPI Inflation (YoY %) Share of financial savings
4
8
12
16
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Inflation expectations (3-month ahead)
Actual CPI Inflation (YoY %)
0.6%
3.3%
4
8
12
16
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Inflation expectations (12-month ahead)
Actual CPI Inflation (YoY %)
2.3%
3.9%

16. 20 January 2015 16
Corporate India
Interplay of dual factors turning favourable
Corporate earnings were impacted by dual force of ‘high inflation’ and ‘negative operating
leverage’. With sharp correction in major commodity prices and expected rebound in GDP
growth (and hence supportive operating leverage), both factors are turning favourable, in
our view.
 The combined forces of higher commodity prices and negative operating
leverage (owing to sales de-growth) had led to a sharp correction in the
reported EBIDTA margins since FY07. The margins fell 600bps/280bps from
FY07/FY11 to a decade low of 19.0% in FY14.
 Interest cost as percent of sales has increased significantly (to 2.1%) from the
lows of FY07. As a result, PAT margins also witnessed contraction of
570bps/250bps from FY07/FY11 to decadal low levels of 9.8% in FY14.
 Several sectors intrinsically linked to the domestic environment like Capital
Goods, Cement and Real Estate reported a sharp decline in sales growth in this
period; and severe margin erosion owing to negative operating leverage.
 However, with sharp decline in inflation and expected rebound in growth
(resulting from rate cuts and potential orderly depreciation of INR), margin
expansion going forward will be the key drivers of earnings growth. We model
120bps/190bps expansion in PAT margins for FY16/FY17 for our universe
companies.
Exhibit 42: Revenue growth impacted by constrained consumption demand and
investment climate
Source: MOSL
Exhibit 43: RM cost-to-sales ratio increased due to increased
commodity prices, poor demand environment
Source: MOSL, Company
Exhibit 44: EBIDTA margins at decadal lows (%), led by
higher commodity prices and negative operating leverage
Source: MOSL, Company
8.1 7.0 9.5 9.6 9.3 6.7 8.6 8.9 6.7 4.5 4.7
5.6
6.5
18.8
29.6
21.1
29.1
38.5
19.3
7.5
22.1
26.0
10.6 10.6
5.0
9.4
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
GDP growth (%) Sales Growth (MOSL Ex Financials & RMs) (%)
5.5 6.4 4.5 6.6 4.7 8.1 3.8 9.6 8.9 7.4 6.0
43.2
45.3 45.3
44.5 44.6
46.3
45.3
47.4
49.6 48.5
47.1
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
WPI (%) RM/Sales (MOSL Ex Financials & RMs) (%)
21.3
23.8 23.8 25.0 23.3
20.2 21.9 21.8 20.0 19.1 19.0 19.6 20.9
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
EBIDTA Margin (MOSL Ex Financials & RMs) (%)
INFLATION IMPACT

17. 20 January 2015 17
Exhibit 45: Interest cost as % of revenues has increased
significantly from lows in FY07…
Source: MOSL, Company
Exhibit 46: … driving PAT margins to their decadal lows (%)
Source: MOSL, Company
Sharp decline in inflation a positive for corporate margins
 Commodity prices, including both energy commodities (crude oil / coal, etc) and
industrial commodities (metals, rubber, chemicals, etc) had witnessed a sharp
increase during FY04-09, and also during FY11/12 and FY13/FY14. WPI also
increased from 5.5% in FY04 to 8.1% in FY09 and further to 9.6%/8.9% in
FY11/FY12. The increase in commodity prices, especially during FY13/FY14,
came on the back of a poor demand environment, impacting the ability of
several corporates to fully pass on the pricing pressures.
 In past, margins have reacted sharply to a sudden change in inflation as is
evident during FY08-FY10. EBITDA margins shrank from 23.3% in FY08 to 20.2%
in FY09 on the back of a sudden increase in inflation (WPI increased to 8.1%
from 4.7%). Similarly, EBITDA margins expanded to 21.9% in FY10 from 20.2% in
FY09 as inflation declined to 3.8% from 8.1%.
 The sharp correction in key commodities (crude oil, coal, iron ore, China HR,
palm oil) in 2HFY14 and resultant decline in inflation (WPI at zero in Nov-14, and
expected to remain near-zero during rest of FY15 and FY16) bodes well for the
companies that use commodities as input and would positively impact margins.
 Margin expansion would start reflecting from FY16 onwards and would be
ahead of the revenue growth, in our view.
Exhibit 47: In past margins have reacted sharply to sudden changes in inflation
Source: MOSL
3.0
1.9
1.5 1.3
1.6
1.9 1.7 1.6
1.9 1.9
2.1 2.1 2.1
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
Interest / Sales (MOSL Ex Financials & RMs) (%)
13.3
14.6 14.5 15.5
14.1
12.1 12.2 12.3
10.9 10.1 9.8 10.1 11.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
PAT Margin (MOSL Ex Financials & RMs) (%)
5.5 6.4
4.5
6.6
4.7
8.1
3.8
9.6 8.9
7.4 6.0
3.0
0.5
21.3
23.8 23.8 25.0
23.3
20.2 21.9 21.8
20.0 19.1 19.0 19.6 20.9
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
WPI (%) EBIDTA Margin (MOSL Ex Financials & RMs) (%)

18. 20 January 2015 18
Operating leverage also turning favourable
 Indian Inc has gone through a prolonged period of slowdown during last five
years. GDP rate dipped from ~9% in 2010 to 4.5% in 2013. The steep decline had
led to a near stagnation in manufacturing IIP over the last 3 years, leading to a
collapse in the investment cycle.
 During this period, the sales growth for our universe companies (excluding
Financials & RMs) declined to just 10.6% in FY13/FY14 vs 38.5%/19.3% in
FY08/FY09. EBIDTA margins have also shrunk significantly from peak levels of
25.0% in FY07 to 19.0% in FY14, and ROE has declined from 23.6% in FY07 to
14.7% in FY14.
 Several sectors intrinsically linked to the domestic environment like Capital
Goods, Cement, Real Estate, etc reported a sharp deceleration in revenue
growth in this period. Sectors which witnessed acceleration in growth rates
included IT and Pharma led by rising share in global markets coupled with INR
depreciation; Consumer (stables / Discretion) managed to curtail the decline in
revenue growth given the boost from increased rural spending.
 We expect the growth cycle to rebound with expected cut in interest rates (on
the back of low inflation) and potential orderly depreciation of INR (to ensure
export competitiveness). GDP growth would bounce back to 6.5% by FY16 and
further 7.2% by FY17 from 4.5% in FY14. Improved consumption activity will
create congenial environment for a pick-up in industrial activity as well;
translating into a period of strong revenue CAGR. We expect the corporate sales
growth to rebound from FY17 onwards.
Exhibit 48: GDP Growth rates have declined significantly…
Source: MOSL, Company
Exhibit 49: … impacting revenue growth (% YoY)
Source: MOSL, Company
Thus, the combined forces of inflation and operating leverage that impacted EBIDTA
margins in FY09-14 have started incrementally becoming supportive. Both these
factors should drive expansion in EBIDTA margins.
0.0
3.0
6.0
9.0
12.0
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
GDP Growth (%)
(15-year
avg: 7%)
5.5 6.4
4.5
6.6 4.7
8.1 3.8
9.6 8.9
7.4 6.0
3.0 0.5
18.8
29.6
21.1
29.1
38.5
19.3
7.5
22.1
26.0
10.6 10.6
5.0
9.4
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
WPI (%) Sales Growth (MOSL Ex Financials & RMs) (%)

19. 20 January 2015 19
Sectors at their multi-year low/high margin
Possible margin expansion across sectors, aided by lower commodity prices
There are a number of sectors (Auto, Capital Goods, Cement, Metals, PSU banks)
which are at their multi-year low margin levels. Sectors such as Healthcare and
Private Banks are at their multi-year high, while Consumer and Technology have
current margins at average levels. We discuss below margin expansion possibilities
across these sectors, given the dual force of ‘inflation/commodity prices’ and
‘operating leverage’.
Exhibit 50: Sectors at their multi-year high / low margins
EBITDA margin for all sector, except Banks where net margins are used
Size of bubble represent 2014 margin
Source: MOSL
Auto
Capital Goods
Cement
Consumer
Healthcare
Metals
Oil & Gas
Technology
Telecom
Utilities
Pvt Banks
PSU Banks
-9.0
-6.5
-4.0
-1.5
1.0
3.5
6.0
8.5
-30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0
2014less10-yearavgmargin(%)
Prem/disc to 10-year avg PE (x)

20. 20 January 2015 20
Exhibit 51: Sectoral margin trend, key margin levers and best picks
Sectors Margin trend Key margin expansion levers Best picks on margin theme
Auto Gross margins (-180bp) and EBITDA margins (-
470bp) were under pressure during FY10-14, led by
higher competitive pressures (reflected in
increasing discounts) and negative operating
leverage (~11% revenue CAGR)
Discounts moderation
Favorable commodity prices
Operating leverage
Maruti Suzuki
TVS Motor
Ashok Leyland
Capital Goods EBIDTA margins declined to decadal low levels of
10% in FY14, being impacted by muted revenue
CAGR of 4% during FY11-14
Improved operating leverage
Lower commodity prices
BHEL
Thermax
ABB
Cement EBITDA margins, which witnessed 25-31% range in
FY07-10, plunged to ~20% in FY11-13 and further
down to decades’ low of 16.2% in FY14
Volume and operating
leverage
Price (due to strong volume)
Variable cost reduction
Ultratech
Dalmia Bharat
JK Cement
Consumer Gross margins and EBITDA margins of our FMCG
universe has remained in a band of 50-54% and 15-
16% during FY11-14
Demand uptick
Input cost correction
Asian Paints
Pidilite
HUL
Emami
Financials While return on asset (RoA) of PSU Banks are at
decadal low (0.6% in 2014) primarily due to
concerns on asset quality, RoA of Private Banks
witnessed sustained improvement during FY09-14
Decline in short term interest
rates
Deleveraging of corporate
balance sheet
Comfortable liquidity
conditions
SBI
Axis Bank
Yes
PNB
LICHF
Healthcare Combined forces of improved product mix in US,
cost rationalization in domestic business and
operating leverage in emerging economies had led
to improvement in sector’s aggregate EBITDA
margins from 21.4% in FY04 to 24.0% in FY14
Improved product mix
Cost rationalization
Operating leverage
Sun Pharma
Lupin
Divis Lab
Metals Metals witnessed decline in margins following sharp
correction in commodities with the 2008 crisis. With
gradual recovery following the crash, margins
started to recover over FY10/11. Margins started
declining again from FY12 due to China demand
slowed down and over-capacity in major
commodities
Price increase
Demand recovery
Cost optimization
Hindalco
Nalco
JSW Steel
Oil & gas Margins were impacted on two counts (a) lower net
realization for PSU upstream companies led by
higher under recoveries and (b) higher energy costs
for all the refiners
Lower crude cost
Lower energy cost
Improved demand
OMC’s (HPCL, BPCL and IOCL)
Castrol
Technology Growth in constant currency revenues has been the
single largest determinant of operating profit
margins for the industry
Currency
Revenue growth
Business mix
Infosys
Media There is clear trend of increase in ad spend to
revenue ratio whenever there is a steep decline in
RM/sales for FMCG sector. This was witnessed in
FY05, FY10 and FY13. Similarly, sharp increase in RM
cost in FY09, FY11 and FY12 led to lower ad spends.
Favorable demand
environment led by increase
in ad spend
Zee Entertainment
Telecom On average, telecom operators spend 7-9% of
wireless revenue on energy. Increase in diesel prices
in last few years have negatively impacted
Telecom’s EBITDA margin
Network cost
Source: MOSL

21. 20 January 2015 21
Macro Economic Indicators
Annual FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E
I. National Income (Growth %)
Nominal GDP (USDb) 721 834 948 1,239 1,226 1,366 1,708 1,879 1,858 1,878 2,102
Gross Domestic Product 7.0 9.5 9.6 9.3 6.7 8.6 8.9 6.7 4.5 4.7 5.6
Agriculture 0.2 5.1 4.2 5.8 0.1 0.8 8.6 5.0 1.4 4.7 2.3
Foodgrains (M Ton) 198 209 217 231 234 218 245 259 250 263 265
Rainfall (% of long period average) -9.1 -1.0 -5.2 -0.8 -10.0 -18.6 1.8 -7.2 -9.5 6.4 -13.0
Industry 9.8 9.7 12.2 9.7 4.4 9.2 7.6 7.8 1.0 0.4 3.4
Services 8.1 10.9 10.1 10.3 10.0 10.5 9.7 6.6 7.0 6.8 7.2
II. Inflation (Y-o-Y %)
WPI (Annual Averages)
All commodities 6.5 4.4 6.5 4.8 8.0 3.6 9.6 8.9 7.4 6.0 2.6
Primary articles 3.7 2.9 9.6 8.3 11.1 12.7 17.8 9.9 9.8 9.8 4.2
Fuel & power 10.1 9.5 6.5 0.0 11.6 -2.1 12.3 13.6 10.6 10.1 0.3
Manufactured products 6.3 3.1 5.6 4.9 6.1 1.8 5.7 7.3 5.4 3.0 2.6
CPI-IW/CPI-RU (from FY12) 3.8 4.4 6.7 6.2 9.1 12.4 10.5 10.5 10.2 9.5 6.6
III. Fiscal Situtaion (as % of GDP)
Total receipts 15.6 14.3 13.6 14.3 15.8 15.9 15.6 14.8 13.9 14.0 13.7
Direct tax 4.1 4.5 5.4 6.3 6.0 5.8 5.8 5.6 5.5 5.6 5.9
Indirect tax 5.3 5.4 5.7 5.6 4.9 3.8 4.5 4.5 4.7 4.6 4.8
Net tax 6.9 7.3 8.2 8.8 7.9 7.1 7.4 7.2 7.3 7.4 7.7
Total expenditure 15.4 13.7 13.6 14.3 15.8 15.9 15.6 14.8 13.9 14.0 13.7
Plan 4.1 3.8 4.0 4.1 4.9 4.7 4.9 4.8 4.1 4.2 4.3
Non-plan 11.3 9.9 9.6 10.2 10.9 11.2 10.7 10.0 9.9 9.8 9.4
of which subsidies 1.4 1.3 1.3 1.4 2.3 2.2 2.3 2.4 2.5 2.3 2.0
Fiscal deficit 3.9 4.0 3.3 2.5 6.0 6.5 4.9 5.9 4.9 4.6 4.1
Revenue deficit 2.4 2.5 1.9 1.1 4.5 5.2 3.3 4.4 3.6 3.3 3.0
Combined fiscal deficit (centre + states) 7.2 6.5 5.4 4.1 8.5 9.6 7.4 8.0 7.1 6.7 6.0
Public debt 82 79 75 71.4 72.2 70.8 66.0 65.6 64.0 65.0
IV. Money and Banking (Y-o-Y%)
Reserve money 12.1 17.2 23.7 31.0 6.4 17.0 19.1 9.2 8.4 9.5 10.0
Money Supply (M3) 12.3 21.2 21.3 21.4 19.3 16.9 15.9 13.0 13.6 13.5 12.0
Deposits 10.8 23.4 23.8 22.4 19.9 17.2 15.8 13.4 14.3 14.3 13.0
Bank credit 26.2 38.0 28.1 22.3 17.5 16.9 21.4 17.0 14.1 14.6 15.0
V. External Sector
(in USDb)
Exports 85 105 129 166 189 182 251 310 307 319 326
Imports 119 157 191 258 309 301 381 500 502 466 488
Trade Deficit -34 -52 -62 -91 -120 -118 -130 -190 -196 -148 -162
Invisible Surplus 31 42 52 76 92 80 86 112 107 115 126
Current A/c deficit -2 -10 -10 -16 -28 -38 -44 -78 -88 -32 -36
Net capital flows 28 25 45 107 7 53 57 68 89 49 80
Forex Reserves 142 152 199 310 252 279 305 294 293 304 348
(As % of GDP)
Exports 11.8 12.6 13.6 13.4 15.5 13.2 14.5 16.8 16.5 17.0 15.5
Imports 16.5 18.8 20.1 20.8 25.4 21.8 22.1 27.0 27.0 24.8 23.2
Trade Deficit -4.7 -6.2 -6.5 -7.4 -9.8 -8.6 -7.6 -10.3 -10.5 -7.9 -7.7
Invisible Surplus 4.3 5.0 5.5 6.1 7.5 5.8 5.0 6.0 5.8 6.1 6.0
Current A/c deficit -0.3 -1.2 -1.0 -1.3 -2.3 -2.8 -2.6 -4.2 -4.7 -1.7 -1.7
External debt 18.5 17.3 18.2 18.1 20.5 18.9 17.3 18.7 21.4 23.2 24.2
VI. Financial Markets (Avg %)
Call rate 4.7 5.6 7.2 6.1 7.1 3.2 4.5 8.0 8.0 8.1 8.0
1-yr AAA corporate bond 5.5 6.7 8.5 9.3 9.8 5.9 8.1 9.6 8.2 9.4 9.0
Yield on 10-yr G-sec (%) 6.2 7.1 7.8 7.9 7.6 7.2 7.9 8.4 9.3 8.3 8.0
Exchange Rate (INR/USD) 44.9 44.3 45.3 40.2 45.9 47.4 45.6 47.9 54.4 60.5 61.0
BSE Sensex return 16.1 73.7 15.9 19.7 -37.9 80.5 10.9 -10.5 8.2 18.8
P/E ratio (Tralling) 14.4 21.6 18.2 18.8 11.8 21.0 19.0 15.6 16.0 16.8 18.7
Market capitalisation (as % of GDP) 52.4 81.8 82.5 103.0 54.8 95.2 87.7 69.0 62.9 65.4 77.1
Oil price (Indian Basket, USD/bbl) 39.2 55.7 62.4 79.5 82.7 69.6 85.1 111.9 108.3 105.5 91.0
Figures in red are estimates

22. 20 January 2015 22
Macro Economic Indicators
Quarterly Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14
I. National Income (Growth %)
Gross Domestic Product 5.1 4.5 4.6 4.4 4.4 4.7 5.2 4.6 4.6 5.7 5.3
Agriculture 2.0 1.8 1.8 0.8 1.6 4.0 5.0 3.7 6.3 3.8 3.2
Industry 2.1 0.3 -0.4 1.7 2.1 -0.4 2.6 -0.4 -0.2 4.2 2.2
Services 7.3 7.2 7.6 6.9 6.3 7.2 6.3 7.2 6.4 6.8 7.1
II. External Sector (USDb)
Exports 80 75 73 74 85 74 81 80 84 82 85
Imports 132 119 120 133 130 124 115 113 114 116 124
Trade Deficit -52 -44 -48 -58 -46 -50 -33 -33 -31 -35 -39
Invisible Surplus 30 27 27 27 28 29 28 29 29 27 28
Current A/c deficit -22 -17 -21 -32 -18 -22 -5 -4 -1 -8 -10
Net capital flow 17 16 18 31 21 21 -5 24 9 20 19
Forex Reserves 294 290 295 297 293 285 276 296 304 316 314
Macro Economic Indicators
Monthly Feb '14 Mar '14 Apr '14 May '14 Jun '14 Jul '14 Aug '14 Sep '14 Oct '14 Nov '14 Dec '14
I. Growth and inflation (Y-o-Y %)
IIP -1.8 -0.5 3.7 5.6 4.3 0.9 0.5 2.8 -4.2 3.8
WPI - All commodities 5.0 6.0 5.5 6.2 5.7 5.4 3.9 2.4 1.7 0.0 0.1
Primary articles 6.3 7.3 7.0 8.6 7.0 6.8 3.7 2.0 0.8 -1.0 2.2
Fuel & power 8.7 11.8 9.3 10.5 9.0 7.4 4.5 1.3 0.5 -4.9 -7.8
Manufactured products 3.4 3.7 3.7 3.9 3.9 4.1 3.7 3.0 2.5 2.0 1.6
CPI-RU 8.0 8.3 8.6 8.3 7.5 8.0 7.7 6.5 5.5 4.4 5.0
II. Fiscal situation (as % of budgeted)
Total receipts 75.1 99.0 0.6 3.2 9.2 14.2 21.7 33.5 38.5 43.4
of which tax revenue 75.0 97.6 0.1 2.9 10.1 15.0 19.0 33.1 37.7 42.3
Total expenditure 88.0 98.3 6.8 15.9 23.0 28.1 37.5 48.0 53.6 59.8
Non-plan 88.9 99.6 8.1 18.3 24.7 30.5 40.6 50.5 57.0 64.0
Plan 86.0 95.3 4.1 10.7 19.4 23.0 30.9 42.8 46.4 51.1
Fiscal deficit 114.3 96.9 21.5 45.6 56.1 61.2 74.9 82.6 89.6 98.9
Revenue deficit 117.3 97.3 26.4 53.6 65.9 70.4 85.8 91.2 98.5 108.6
III. Money and Banking (Y-o-Y%)
Reserve money 9.8 14.4 9.0 11.9 9.6 11.3 11.1 9.5 10.3 8.2 9.4
Money Supply (M3) 14.6 13.2 13.8 13.1 11.7 12.2 12.6 12.8 12.7 11.0 11.1
Bank Credit (Y-o-Y %) 14.3 14.3 14.3 13.6 13.3 13.3 10.9 9.7 11.2 11.3 10.5
Deposits (Y-o-Y %) 15.8 14.6 15.3 14.6 12.4 13.0 13.6 13.4 12.0 11.7 11.5
IV. External Sector
Exports (USD b) 26 30 26 28 26 28 27 29 26 26 25
Exports (Y-o-Y %) -3.7 -3.8 5.3 12.4 10.2 7.3 2.3 2.7 -5.0 7.3 -3.8
Imports (USD b) 34 40 36 39 38 40 38 43 39 43 35
Imports (Y-o-Y %) -17.1 -1.1 -15.0 -11.4 8.3 4.3 2.1 26.0 3.6 26.8 -4.8
Trade Deficit (USD b) -8 -11 -10 -11 -12 -12 -11 14 13 17 -9
Forex Reserves (USD b) 294 304 310 312 316 321 319 314 316 316 320
Real effective exchange rate 95.9 97.9 99.4 104.2 103.8 104.6 105.3 106.4 106.2 107.5 106.6
RBI's net forex intervention -1.9 7.8 5.9 1.8 0.6 5.5 -0.5 1.4 2.7 3.1
V. Financial Markets (Avg %)
Call rate 8.0 8.1 7.9 7.7 7.9 8.0 7.6 7.6 7.6 7.4 7.8
Govt borrowing (% completed) 100.0 100.0 11.2 25.0 32.6 42.1 53.6 60.5 67.9 77.5 84.4
91-day T-bill 9.1 9.1 8.9 8.8 8.6 8.6 8.6 8.6 8.5 8.3 8.3
Yield on 10-yr G-sec (%) 8.8 8.8 8.9 8.7 8.6 8.7 8.8 8.5 8.4 8.2 7.9
SBI Base rate 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
CP - 3 month 10.0 10.0 9.4 9.2 8.9 8.9 9.1 8.9 8.7 8.6 8.7
CD - 1yr 9.7 9.5 9.2 9.1 8.9 9.0 9.1 9.1 8.8 8.7 8.7
AAA corporate - 1yr 9.9 9.8 9.5 9.3 9.0 9.2 9.2 9.1 8.8 8.6 8.6
Exchange Rate (INR/USD) 62.3 61.0 60.4 59.3 59.7 60.1 60.9 60.9 61.3 61.7 62.8
BSE Sensex return 3.0 6.0 0.1 8.0 4.9 1.9 2.9 0.0 4.6 3.0 -4.2
P/E ratio (1 Year Forward) 14.5 15.2 15.0 16.0 16.5 16.5 16.7 16.5 17.0 17.2 16.3
Mkt capitalization (as % of GDP) 62.3 61.0 60.4 66.3 71.2 71.0 72.8 73.8 76.3 78.3 77.1
Oil (Indian basket, USD/bbl) 106.1 105.1 105.7 106.8 109.2 106.1 101.9 97.1 87.0 77.4 61.6

23. 20 January 2015 23
ECOSCOPE Data Monitor
Annual Quarterly/Monthly
GDP growth (%): Moderate recovery in growth suggested GDP growth (%): First signs of pick up in growth
Inflation: Showing signs of sharp moderation Inflation: CPI at 5%; WPI at near zero
Fiscal deficit (% to GDP): Consolidation continues Fiscal trend: Year-end consolidation expected
Credit growth constrained by slowdown and tight money Credit growth has slowed down
9.3
6.7
8.6 8.9
6.7
4.5 4.7
5.6
6.5
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E
4.4 4.7
5.2
4.6 4.6
5.7 5.3
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
8.0
3.6
9.6
8.9
7.4
6.0
3.0
0.5
9.1
12.4
10.5
10.5
10.2
9.5
6.8
3.9
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
WPI CPI-IW / CPI-RU
5.1
5.0
6.0
5.5
6.2
5.7
5.4
3.9
2.4
1.7
0.0
0.1
8.8
8.0
8.3
8.6
8.3
7.5
8.0
7.7
6.5
5.5
4.4
5.0
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
WPI CPI-RU
6.5
4.9
5.7
4.9
4.8
4.1
3.5
9.6
7.4
8.0
7.1
6.9
6.1
5.5
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
Centre Centre + states
0
30
60
90
120
150
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
As%offullyearbudget
Receipts Expenditure Fiscal deficit
16
13
14
14
13
14
16
13
14
14
13
15
21
17
14
15
14
16
FY11
FY12
FY13
FY14
FY15E
FY16E
Money Supply (M3) Deposits Bank credit
9
12
14
17
19
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
M3 Bank Credit Deposits

24. 20 January 2015 24
ECOSCOPE Data Monitor
Annual Quarterly/Monthly
External sector: CAD in control helped by oil price drop External sector: Exports weak, deficit moderately up
Financial markets: Rates stable now while yield curve is flat Financial markets: Interest rates displaying a downward bias
Market ended with good return in FY14 Markets are fairly valued now
INR depreciated; forex reserves static RBI intervened to stabilize INR
-7.6
-10.3
-10.5
-7.9
-7.7
-7.7
-2.6
-4.2
-4.7
-1.7
-1.7
-1.7
FY11 FY12 FY13 FY14 FY15E FY16E
%ofGDP
Trade Deficit Current A/c deficit
-50
-30
-10
10
30
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Exports Imports Trade deficit (USD b)
2
4
6
8
10
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14Call rate Yieldon 10-yr G-sec (%)
8
9
10
11
12
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
CP - 3 month AAA corporate - 1yr
26
26
23
42
52
82
83
103
55
95
89
69
63
66
10
30
50
70
90
110
-80
-40
0
40
80
120
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Market capitalization(as % of GDP) (RHS)
BSE Sensex return (LHS)
66
66
64
62
59
56
61
61
63
62
62
61
60
66
71
71
73
74
76
78
77
0
16
32
48
64
80
96
-8
-4
0
4
8
12
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Market capitalization (as % of GDP) (RHS)
BSE Sensex return (LHS)
0
50
100
150
200
250
300
350
30
35
40
45
50
55
60
65
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Forex reserves (USDb, RHS)
Exchange rate (INR/USD, LHS)
42
48
54
60
66
-6
-1
4
9
14
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
RBI's net forex intervention (USDm) (LHS)
Exchange Rate (INR/USD) (RHS)

25. 20 January 2015 25
N O T E S

26. 20 January 2015 26
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