The RBI held interest rates steady against expectations due to concerns over seasonal food price inflation. The governor said rates may rise in 6 months if food inflation does not cool. US Federal Reserve began tapering bond purchases as expected due to strong economic growth. Indian IT and export sectors are expected to benefit from the recovery in the US economy. Bank earnings this quarter are forecast to improve over the last two quarters.

1. The World This Week
Dec 16 – Dec 21, 2013

2. Equity View:
RBI Policy announcement came on the 18th where against all expectations, RBI decided to hold on the
interest rates for long. The decision was taken essentially because the Governor believes that the food
and vegetable price inflation is seasonal and should go down in the next few months. The Governor also
made the point that if the food and vegetable price inflation did not cool down materially over the course
of 6 months, he might look for a rate hike.
Our own sense is that considering that two rate hikes have already been done in the last couple of
months, another hike will only happen if there is a sustainable rise in core (CPI) Consumer Price Inflation.
As we have mentioned earlier that RBI has now moved its inflation metric from (WPI) Wholesale Price
Index to (CPI) Consumer Price Index and more specifically Core (CPI) Consumer Price Index. The Core CPI
for last month was around 8% which is the same level what it was in the previous month hence we
believe that it is the key metric to watch out for. The headline CPI number is expected to stay at elevated
levels in the next few months. We believe that 10% - 11% is kind of a new normal and we don’t expect
CPI number to fall below 10% in the near future. The Core CPI might see some kind of cool off going
forward and we expect a number between 7% and 8%. We are not currently expecting a rate hike till
January policy.
In terms of global events we had a big U.S Federal reserve announcement of taper light as in a small
tapering of $10bn a month and this was largely expected because of the very strong macro economic
growth that the US economy has been seeing. We don’t believe that there is going to be any material
decrease in U.S quantitative easing till the time U.S fiscal issues has been addressed in the early part of
March. U.S GDP growth last quarter has been revised to 4.1% which is far higher than what was
estimated earlier and US economy seems to be doing extremely well and if we look at it in that light, now
U.S and India seem to be growing at a similar rate, our growth rate last quarter was 4.7% - 4.8%.
Considering the fact that U.S economy growth has bounced back very strongly and also because of the
unemployment numbers have been coming off, U.S Federal Reserve decided to start the tapering
process. Also this was the last policy announcement by Mr. Ben Bernanke who retired as a Fed Chief in
the 1st week of January and he probably wanted to start the tapering process before he retires.
On the whole, we believe that a strong U.S economy is positive for global growth. U.S continues to be a
engine or a driver of global growth and specially as far as India is concerned, the revival and growth that
we’ve been seeing in the last few months is specially driven by exports considering the fact that Indian
rupee has depreciated significantly in the last 1 year.
A significant revival in U.S economy will be beneficial to sectors like IT and textiles and we continue to
believe that this export led recovery in Indian growth will continue in the next few months. Basically
there is no reason for panic or worries about US tapering and we believe that US fiscal issues will need to
be addressed before we see any material change in the US monetary policy.
As far as emerging market equities are concerned, we continue to see a positive traction even despite U.S
tapering being announced on Thursday. Global equity markets and currency markets have reacted in a
positive way. We believe that the world is a lot more prepared to accept tapering today than what it was
when the tapering was first hinted at in the months of July and August.

3. In terms of India specific event which are going to impact the equity market, we are going to see the
beginning of Quarter 3 earnings season beginning on 9th January 2014 with the Infosys result. We expect
Indian IT companies to deliver a very set of strong numbers in the coming quarter. We believe that IT
sector is really going to be leading the earnings growth with around 15% - 20% Y-o-Y earnings growth. We
expect US revenue growth to be extremely strong around 5% - 6% on a Q-o-Q basis. That should give a
very healthy indicator in terms of revival of US economy and also in terms of fresh order inflows.
We continue to maintain a positive bias for banking space, both public and private sector banks will
deliver much more healthier results this quarter as compared to what they have been doing in last two
quarters.
News:
DOMESTIC MACRO:

India’s forex reserves rose by $4.4 bn to $295.7 bn the highest level since April as a steady stream
of foreign institutional inflows into the equity markets added to the buffer built by the Reserve
Bank of India (RBI) via the special swap facilities offered to banks between September 5 and
November 30.

India is likely to import a record 4 million tonnes of refined palm oil in 2013/14 as Indonesian
suppliers are offering discount over the crude variety due to favourable export duty structure

The Reserve Bank of India (RBI) has kept key policy rate and cash reserve ratio unchanged in the
December 2013 Mid-Quarter Monetary Policy Review.
GLOBAL MACRO
EURO

Austria's 2013 budget envisioned a nominal 2.3 percent deficit, but officials have said final results
will be better thanks to higher-than-expected tax revenue and one-off income from a mobile
frequency auction.

Irish government bonds are close to marking their second year as the euro zone's top-performing
debt, rewarding investors who trusted Dublin to successfully exit its bailout deal. Irish bonds have
returned 11.7 percent year-to-date according to data compiled based on Markit's iBoxx.
United States

The Commerce Department said housing starts jumped 22.7 percent, the biggest increase since
January 1990, to a seasonally adjusted annual rate of 1.09 million units. That was the highest
level since February 2008.

The U.S. central bank announced that it would reduce its monthly $85 billion bond buying
program by $10 billion starting in January.

4. 
December's service sector PMI rose to 56.0 from 55.9 as new orders increased, prompting
businesses to take on more staff. The employment index, after hitting an eight-month low of 52.4
last month, jumped to 55.7 in December, the fastest rate of growth since Markit's data collection
began in late 2009.
China

China's cash market squeeze showed little sign of easing, reinforcing the view the central bank
has shifted to tighter monetary policy.
Indices:
Date
Sensex Midcap Auto Bankex
CD
CG
FMCG
HC
IT
Metals
O&G
Power Realty
Teck
16/12/2013 20,660 6,321 11,950 12,963 5,689
9,896
6,370
9,487
8,690
9,641
8,426
1,633
1,342
4,851
17/12/2013 20,612 6,319 11,944 12,797 5,749
9,926
6,418
9,630
8,710
9,643
8,381
1,621
1,333
4,877
18/12/2013 20,860 6,404 12,150 12,976 5,826 10,186 6,444
9,742
8,753
9,706
8,561
1,655
1,380
4,899
19/12/2013 20,709 6,392 12,112 12,661 5,770
6,437
9,848
8,905
9,728
8,456
1,638
1,369
4,961
20/12/2013 21,080 6,502 12,357 12,891 5,686 10,047 6,490
9,905
9,052
9,779
8,780
1,664
1,406
5,035
9,991
2.03% 2.87% 3.41% -0.56% -0.05% 1.53% 1.89% 4.41% 4.16% 1.44% 4.20% 1.87% 4.82% 3.79%
Commodities and Currency:
Date
USD
GBP
EURO
YEN
16/12/2013
17/12/2013
18/12/2013
19/12/2013
20/12/2013
62.10
61.96
61.92
62.38
62.24
-0.22%
Rupee
Depreciated
101.27
101.14
100.83
102.15
101.81
-0.53%
Rupee
Depreciated
85.43
85.33
85.27
85.29
84.88
0.65%
Rupee
Appreciated
60.40
60.17
60.16
59.98
59.59
1.36%
Rupee
Appreciated
Debt:
Tenor
1-Year
2-Year
5-Year
10-Year
Gilt Yield in % (Friday)
Change in bps (Week)
8.90
8.47
8.88
8.80
-13
-3
-11
-11
Crude
(Rs. per BBL)
Gold
(Rs. Per 10gms)
6761
6795
6719
6788
6880
29818
29863
29798
29436
29526
-1.76%
0.98%

5. Satadru Mitra
Varun Goel
Nupur Gupta
Jharna Agarwal
Kinjal Doshi
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