- Global equity markets rose in response to the Fed's dovish tapering announcement and positive economic data, while bond yields increased. Commodity prices also climbed. - Regional markets were mixed, with European stocks gaining on positive economic news but Asian markets underperforming. Chinese equities declined due to cash crunch concerns. - In India, equity markets ended higher helped by strong foreign flows and the RBI's decision to keep rates on hold. Bond yields rose more at the longer end of the curve which flattened. The RBI expressed inflation concerns but expects price pressures to ease in coming months.

1. Market Review
WEEK ENDING DECEMBER 20, 2013
International
Global equity markets responded positively to US Federal Reserve’s dovish tapering announcement and
positive economic data. The MSCI AC World Index moved up 2.16% with equities in Europe, Japan and
the US performing well, while most EM/Asia markets underperformed. In contrast, global bond yields
closed higher as Fed’s decision and positive economic data led investors to reallocate in favour of risk assets.
Signs of improved global growth trends pushed up commodity prices and helped the Reuters Jefferies CRB
index clock gains of 1.2%. Gold prices however declined amidst strength in the US dollar. In currency
markets, the yen slid further against the US dollar, reflecting the divergence in policy stance between their
central banks.
• Asia-Pacific: Regional markets traded mixed – Chinese equities were impacted by a sharp spike in interbank rates on renewed cash crunch. Liquidity injection by the People’s Bank of China failed to alleviate
market stress.Volatility was further exacerbated by moderation in Chinese December manufacturing PMI
(flash) to 50.5 from 50.8. Bank of Japan reiterated its commitment to easy monetary policy. The Tankan
survey, a measure of business sentiment in Japan, showed increase in business confidence amongst large
and small businesses. Indonesia asked banks to shore up core capital base by 1% to 6% of risk weighted
assets so as to build resilience against shocks. On the M&A front, PCCW is buying back its Hong Kong
telecom business from rival Telstra for $2.4 bln.
• Europe, Middle East & Africa: Regional stocks recorded sharp gains on the back of positive
economic data and as a calibrated US QE exit along with low rates seemed to comfort investors. EU
leaders finalized banking union agreement and on the economic front, Euro area flash manufacturing
PMI (up 1.1 to 52.7) and Germany’s IFO index (up 0.2 to 109.5) pointed towards improvement in the
manufacturing sector. UK inflation eased to 2.1%, moving in closer to the central bank’s target inflation
rate. S&P downgraded Euro area credit rating to AA- from AAA. Political turmoil in Ukraine increased
after the government received a $15 bln bailout package from Russia. Turkish equity markets and
currency slumped as corruption investigations raised political risks. S&P affirmed South Africa credit
rating at BBB, but retained negative outlook. On the corporate front, Alitalia is in talks with Etihad
Airways for stake sale and Astrazeneca is purchasing Bristol-Myers Squibb stake in their diabetes drug
JV for $4.1 bln.
• Americas: US equity indices climbed to record highs and Canadian equities also performed well as
investors cheered latest economic data and policy moves.The US Federal Reserve decided to reduce
monthly asset purchases by $10 bln (split between treasuries and agency mortgages) to $75 bln and
indicated that the low interest rates will be maintained until the unemployment rate is well below
6.5%. US November industrial production increased by 1.1% on the back of stronger utilities and
mining output. US Q3 GDP growth estimates were revised up to 4.1% (annualized) from 3.6%
earlier, largely due to accelerated consumer spending. Elsewhere in the region, Canada inflation rate
moved up slightly but held below the central bank’s target levels. Mexico central bank left policy

2. rates unchanged and S&P upgraded the country’s sovereign ratings one notch to BBB+ amidst
optimism about energy reform. On the corporate front, 3M increased its share buyback estimates to
$17-22 bln until 2017 and Oracle is buying Responsys for $1.5 bln.
Weekly
change (%)
Weekly
change (%)
MSCI AC World Index
2.16
Xetra DAX
4.37
FTSE Eurotop 100
3.69
CAC 40
3.30
MSCI AC Asia Pacific
0.52
FTSE 100
2.59
Dow Jones
2.96
Hang Seng
-1.87
Nasdaq
2.59
Nikkei
3.03
S&P 500
2.42
KOSPI
1.04
India - Equity
Helped by strong FII flows ($873 mln), Indian equity markets managed to close an eventful week in the
positive territory. RBI’s decision to maintain status quo boosted market sentiment, and after an initial
negative reaction to the US stimulus tapering news, markets moved up tracking global counterparts. Mid
and small cap indices performer better than large caps. SEBI’s revamped rules on trading of thinly-traded
stocks were welcomed by the markets. Technology and real estate sector indices were the top gainers,
while banking index closed marginally lower.
Trends in Bank Stressed Assets
12
10
8
6
4
2
Gross NPLs
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-
Restructured Assets
Source: RBI, Citi Research
• Policy: RBI’s discussion paper on non-performing assets (NPA) management puts forth a range of
measures for early recognition of problem assets and to tighten asset recovery process. Some of the key
aspects of the proposed NPA resolution programme are creation of a special mention account category
for accounts with over 30-day and 60-day payment delays and certain other qualitative factors such as
delays in stock statements, etc. For larger loans, the central bank has suggested setting up a joint lenders
forum to start negotiating with the borrower on early signs of slippage. Banks can also categorize certain
borrowers as non-co-operative and this can trigger a system wide increase in provisioning. Lastly, the
paper also has some suggestions for the government and judiciary system so as to improvise the asset
recovery process.

3. Overall the paper, as it stands, is a step in the right direction and can help banks deal with NPAs in a
structured manner. At this point, problem assets are not at alarming levels and mostly concentrated in the
books of public sector banks. Such a mechanism will help expedite resolution and improvise the
bargaining position of banks.
Weekly change (%)
S&P BSE Sensex
1.76
CNX Nifty
1.72
CNX 500
2.22
CNX Midcap
3.08
S&P BSE Smallcap
2.62
India - Debt
Indian bond markets got off to a weak start on high WPI readings, but yields edged lower in the week as
RBI surprised markets by staying on hold. FII inflows continued, aggregating $248 mln for the first four
trading days.
• Markets: Rise in yields was sharper at the longer end of the curve and the curve flattened – yields on
10-year gilts increased 15 bps, while those on the 5-year gilts increased 12 bps. Yields on the 1-year
papers firmed up 5 bps while that on the 30 year papers increased 30 bps.
Systemic liquidity tightened somewhat and overnight call money rates moved up slightly to 8.75%. The
INR rebounded towards the close of week on sustained FII inflows and was relatively resilient against the
US dollar even as the Federal Reserve announced tapering.
• Policy: At the mid-quarter policy review this week, RBI expressed concerns about persistent rise in
inflation at both, wholesale and retail levels, but noted that the recent rise was mainly driven by temporary
factors like food inflation. The central bank expects recovery in the rupee, ongoing economic slowdown
and expenditure cuts to meet the fiscal targets to ease upward price pressures in coming months. However,
it remains on the vigil and said it will act if inflation levels do not ease as expected. Rate actions may be
announced outside of the scheduled policy meeting days. Positive trends in trade deficit and rise in foreign
exchange have made the central bank relatively comfortable with the external situation at this point.
Repo rate and market rates (%)
9.5
9.0
8.5
8.0
7.5
7.0
6.5
5y IRS
Policy rate
6.0
Dec-10
10y Gov
5y Gov
Dec-11
Dec-12
Source: Bloomberg, Credit Suisse
Dec-13

4. Looking ahead, the outlook for policy remains uncertain, given the conflicting inflation and growth
trajectories, and tough external environment. Over the near term, bond yields will be driven by global
news flow and local economic data. Investors also await clarity on the new monetary policy framework
to be unveiled by end-December. Liquidity conditions are expected to remain comfortable over the
near term. Fiscal deficit data will be closely monitored in coming months and any negative surprise is
expected to weigh on long-bond yields.
Against the current macro-economic backdrop, we continue to see merit in investing in funds focused
on the shorter end of the curve and/or accruals. Investors with a medium to long term horizon and
high risk appetite can consider funds with exposure to long dated bonds/gilts
20.12.2013
13.12.2013
Exchange rate (Rs./$)
62.04
62.12
Average repos (Rs. Cr)
39,124
19,795
1-yr gilt yield (%)
8.74
8.79
5-yr gilt yield (%)
8.86
8.98
10-yr gilt yield (%)
9.01
9.16
Source: Reuters, CCIL.
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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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