1. The World This Week
May 16 – May 21, 2011

2. Equity:
Last week S&P threatened to downgrade the credit rating for Italy from stable to negative because of its failure to balance
its budget. Fitch ratings announced a further reduction in the credit rating of Greece by three notches and it is now
expected that Greece will require significant debt restructuring which would amount to default on its borrowings. With
concerns rising in peripheral Europe, we expect further pressure on the equity markets around the world. Euro has
continuously weakened against the dollar in the last two weeks and any further rise in the dollar could lead to correction in
the commodity prices specially oil and other precious and industrial metals.
SBI came out with results last week which was below the consensus estimates. Aasset quality at SBI has been deteriorating
and we would expect further NPA to come out in the next 2 quarters . We continue to maintain bias towards private sector
banks as we expect the coming two quarters to be tough for the public sector banks.
The Oil Ministry announced a change in the ratio of the subsidy burden borne by the upstream Oil and Gas Companies. The
ratio was increased from 33.5 to 38.5 which would lead to additional subsidy burden on companies like ONGC, Gail and Oil
India. The ratio was fixed at 33.5 for the last three years and a sudden change will have a negative impact on most of the Oil
& Gas companies especially the ONGC FPO. With brent crude at $110 per barrel the subsidy burden is expected to cross
Rs.150000 Crs for this fiscal. We maintain avoid on upstream and downstream PSU oil and Gas companies.
The IIP data came in for the month of March at 7.3%. We believe that the IIP data would have bottomed out in February
and expect the number for FY12 to be between 7%-8%.

3. NEWS:
DOMESTIC MACRO:
 The food price index rose to 7.47 percent and the fuel price index climbed to 12.11 percent in the year to May 7. In
the previous week, annual food and fuel inflation stood at 7.70 percent and 12.25 percent respectively. This is the
slowest rise in food prices since end-March 2009.
 Inflation could ease to under 8 percent in August or September if the country receives good monsoon rains.
Headline inflation dipped to 8.66 percent in April but hefty revisions to recent past data and prospects of higher
energy prices will keep the pressure on the RBI to stick to its hawkish monetary policy and lift rates in June.
 India's foreign exchange reserves fell to 307.493 billion from $309.535 billion in the previous week.
 India is expected to grow around 8.2 percent in the eleventh five-year plan, Montek Singh Ahluwalia, the deputy
chairman of the Planning Commission.
GLOBAL MACRO
U.S.:
 The cost to hedge against a U.S. government debt default rose on Friday to its highest level since January ahead of
the government's sales of $99 billion in securities this week.
 Worries persist over Washington's struggle to reach a deficit-cutting deal and to raise its $14.3 trillion legal
borrowing limit, which was hit on Monday.
 New U.S. claims for unemployment benefits fell more than expected last week, but a rise in the four-week moving
average to a six-month high indicated the labor market recovery will remain painfully slow.
 Manufacturing output fell 0.4 percent, breaking nine straight months of gains, as supply disruptions from Japan's
earthquake hit auto production. Overall industrial production was flat. Excluding cars and parts, manufacturing
output rose a sluggish 0.2 percent.
Japan:
 Gross domestic product fell 0.9 percent in January-March, nearly double the 0.5 percent forecast by analysts,
translating into an annualized 3.7 percent decline compared with a 2.0 percent forecast, government data showed
on Thursday. The economy shrank a revised 0.8 percent in the fourth quarter of last year, so a second consecutive
quarter of contraction puts Japan in recession
Eurozone:
 Fitch cut Greece's credit rating by three notches on Friday, pushing the country deeper into junk territory, and
warned that any kind of debt restructuring would amount to default. The three-notch cut to 'B+' with a negative
outlook takes Fitch's rating into "highly speculative" territory
 Standard & Poor's cut its rating outlook for Italy to negative from stable, citing weak growth prospects and
increased risks it would fail to slash its debt mountain. Standard & Poor's affirmed its 'A+' long-term and 'A-1+'
short-term sovereign credit ratings on Italy.
 The International Monetary Fund approved a 26 billion euro loan for Portugal to help the country recover from a
debilitating sovereign debt crisis, saying it would immediately disburse 6.1 billion euros to ease investor concerns
over the euro zone member's debts. The funding is part of a joint IMF/EU 78 billion euro ($110 billion) bailout
package.
 Norway has suspended the payment of a 42 million dollar grant to Greece as it did not fulfill its commitments and
may have broken some rules.

4. Swapnil Pawar Varun Goel Jharna Agarwal
Palak Nanjani Kanika Khorana
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