The document provides a weekly market review for the week ended July 27, 2012. - Signs of stronger policy responses from the ECB calmed investor concerns about Europe, though economic data pointed to ongoing weak growth. The MSCI AC World Index gained 1.4% on the week. - In Asia, markets benefited from increased risk appetite following ECB comments, though China saw declining industrial profits. Europe saw ECB pledges to support the economy lift stocks, while economic data remained weak. US stocks gained as Eurozone concerns eased. - Domestic Indian markets pared losses as global risk improved, though weak monsoon and policy paralysis had weighed on sentiment earlier in the week. Bank

1. Market Review
WEEK ENDED JULY 27, 2012
International
Signs of stronger policy responses calmed investor concerns about Europe even as economic data continued to
point towards muddling growth. A spike in Spanish yields had increased demand for safer assets, before the ECB
(Nowotny and Draghi) made various statements indicating that policymakers are willing to announce stronger
measures to support the regions beleaguered sovereigns.The MSCI AC World Index closed the week with a 1.4%
gain, mainly due to the strength in US and European Markets (Asian markets largely registered declines).The rally
in bond markets along with pressure on the Spanish and Italian yield reversed after comments by the ECB
officials. Commodity prices came under pressure and the Reuters CRB index fell 1.6%, amidst increased concerns
about rising agricultural commodity prices.The US dollar lost ground against the Euro on weak data and other
developments. All eyes will be on the various central bank meetings for next week on both sides of the Atlantic.
• Asia-Pacific: Regional markets benefited from increase in risk appetite following ECB comments.
Chinese equities however continued to trade in the negative territory as a report by National Bureau of
Statistics indicated profits of industrial companies had declined for the third straight month. China’s HSBC
flash PMI index improved to 49.5 from 48.2. The Bank of Thailand left policy rates unchanged while
Philippines unexpectedly cut overnight interest rate by 25 bps to 3.75% to slow currency gains and support
the economy through a global slowdown. Japan reported record trade deficit of $37.3 bln for H1-2012 as
exports demand slowed and higher fuel import costs due to domestic nuclear power plant shutdowns.Weak
external and domestic consumer demand led South Korea's economic growth to slow to 2.4% (annualized)
in the June quarter.
• Europe: ECB pledge to support the European economy lifted market sentiment on Thursday and
helped German/ French equities close week in the positive territory, and the FTSE 100 cut losses. ECB
officials said the bank had sufficient ammunition to protect the euro and would do everything possible
within its mandate – strategy to be focused on boosting inter-bank market and bringing down sovereign
risk premia. Spain and Italy bond yields eased sharply in response. Markets shrugged off Moody’s move
to lower outlook on German sovereign rating to negative. S&P affirmed the UK’s AAA sovereign rating.
On the economic front, Germany’s IFO measure of business confidence declined for the third
consecutive month. The eurozone composite PMI remained stable at 46.4 in July – while the German
composite PMI index edged lower, French economy showed some improvement. UK’s economy
contracted 0.7% in the second quarter, more than the 0.3% declined witnessed in Q1, partly owing to
an extra holiday. Bank of Russia widened the ruble trading band versus a basket of dollars and euros to
seven rubles from six earlier.
• Americas: US equity indices recorded strong gains as concerns about Eurozone eased following ECB
comments and GDP growth came in line with expectations. The US economy expanded by 1.5%
(annualized) in the second quarter. Orders for durable goods rose by 1.6% in June led by strength in
demand for civilian and defense aircraft. Elsewhere in the region, Colombia reduced overnight lending
rates by 25 bps to 5% and cut economic growth expectations for 2012 from 5% to 3%. In Canada, May
retail sales increase of 0.3% was short of market expectations. On the corporate front, Facebook shares

2. fell sharply after it reported fifth straight quarter of revenue declines. China’s CNOOC announced a
$15.1 bln deal to purchase Canada’s Nexen.
Weekly Weekly
change (%) change (%)
MSCI AC World Index 1.39 Xetra DAX 0.90
FTSE Eurotop 100 0.65 CAC 40 2.70
MSCI AC Asia Pacific -0.63 FTSE 100 -0.43
Dow Jones 1.97 Hang Seng -1.86
Nasdaq 1.12 Nikkei -1.19
S&P 500 1.71 KOSPI 0.34
India - Equity
Domestic markets pared losses towards the close of week as global risk appetite improved. Earlier in the week,
weak monsoon trends and domestic policy paralysis alongside weak global cues had weighed on sentiment. Mid
and small cap stocks underperformed large caps. Barring the FMCG index, all other sectoral indices closed in the
negative territory. FIIs pulled out $190.5 mln in the first four days of the week.
45
All India - Net irrigated area as % of net sown
area
40
35
30
25
20
F1978
F1979
F1980
F1981
F1982
F1983
F1984
F1985
F1986
F1987
F1988
F1989
F1990
F1991
F1992
F1993
F1994
F1995
F1996
F1997
F1998
F1999
F2000
F2001
F2002
F2003
F2004
F2005
F2006
F2007
F2008
F2009
Source: CMIE, Morgan Stanley Research
• Macro: Despite the recent improvement in rainfall, the South-West monsoon has remained in deficit for
the season as a whole (22% below long period average upto July 25) and there are increased concerns about
impact of a drop in agri-output and rural incomes on economic growth and inflation. The South-West
monsoon assumes significance for the summer crop as a large share of land in India is not irrigated. As per
latest data, area under cultivation was 14% below last year levels – in particular, area under sowing for pulses
was down 31%yoy.
• Banking Sector: An RBI panel reviewing bank loan restructuring norms has proposed various changes
that are aimed at bringing local practices in line with international standards. Key recommendations are an
increase in provisioning from current 2% to 5% on restructured loans and increase in promoter/borrower
participation in case of restructuring from the current 15%. The former guidelines is to be effected by
providing 1.5% additional in each of the next two fiscal years on existing recast loans. Any fresh
restructuring will require banks to provide 5% immediately. The panel has proposed certain concessions
for the infrastructure sector keeping in mind the importance of the sector to overall growth and recent

3. policy issues that have impacted performance. It has also recommended that in case of stable performance
for two years in a row, banks may move the loans out of restructured asset classification.
- Trend in NPA (%)
20
15
10
5
0
Net NPA Gross NPA
Source: RBI, JP Morgan
Overall at this juncture, systemic risks on restructured loans/ NPAs appear to be limited to select segments
of the economy and risks are manageable.The RBI panel’s recommendations are positive, in the sense they
will help instill more discipline amongst banks as well as ensure borrowers have a larger partake in the
overall losses. There is likely to be some pain over the short term though as the increase in provisions is
expected to impact sector earnings – the extent of earnings erosion will be divergent across banks, but
broadly expected to be higher in case of public sector banks than private ones.
Weekly change (%)
BSE Sensex -1.86
S&P CNX Nifty -2.02
S&P CNX 500 -2.58
CNX Midcap -4.45
BSE Smallcap -4.76
India - Debt
Indian bond yields were range-bound and closed mixed ahead of RBI’s monetary policy meet next week.
• Yield Movements: Yields on the 1-year paper eased by 1 bp as systemic liquidity continued to improve and
those on the 10/30 tear gilts were largely unchanged. Yields on the 5-year benchmark paper however
rose 7 bps.
• Liquidity/ Borrowings: Systemic liquidity deficit continued to narrow – overnight call money rates closed
below 8% levels and repos averaged about Rs.34,000 crores vis-à-vis Rs. 55,000 crores last week. Scheduled
bond auctions of four GOI securities of Rs. 15,000 crores received bids worth Rs. 35,500 crores.
• Forex: Improved global risk appetite towards the close of week helped the Indian rupee bounce back and erase
losses. At market close, the Indian currency was largely unchanged over last week levels. As of July 20, forex
reserves stood at $287.3 bln, $589 mln higher than last week levels.

4. • Policy: Monetary policy direction across the globe has become more biased towards easing over the last couple
of months due to demand slowdown and easing inflationary pressures. In India, while economic growth trends
remain subdued, incremental newsflow on the inflation and policy front has been mixed. Inflationary pressures
in primary articles such as food remain elevated while core inflation has edged lower. Recent comments by
RBI officials indicate they would not focus on core inflation alone as a measure of price pressures within the
economy.With below-normal monsoons, there exist further upside risks to inflation. On the policy front, while
the government appears to have stepped up activity, it is yet to announce concrete measures for deficit reduction
and boosting investment. Overall the macro-economic backdrop remains challenging and RBI is unlikely to
reduce rates. Systemic liquidity levels have eased significantly over the last month or so and hence a CRR cut
may not be on the cardsl.
27.07.2012 20.07.2012
Exchange rate (Rs./$) 55.33 55.32
Average repos (Rs. Cr) 33,980 55,164
1-yr gilt yield (%) 7.89 7.90
5-yr gilt yield (%) 8.05 7.98
10-yr gilt yield (%) 8.29 8.29
Source: Reuters, Bloomberg
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