June, 2012

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Macro concerns still linger on

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Where are we now?

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IIP Weak Growth for FY 12

Core sector growth for month of April is 2.20 % as compared to 2.00 in previous month IIP for FY 12 is around 2.80 per cent as compared to 8.25 per cent in FY 11 showing clear signs of a slowdown IIP for Mar came in at -3.50 % as against the market expectations of 1.5 per cent Strong steps are required to revive the industrial growth if GDP growth for FY 13 to be around 7.3 per cent
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Exports & Imports Deficit narrows in April

India's exports grew by 3.2% to USD 24.5 billion in first month of the new fiscal emerging out of the negative zone it slipped into last month Meanwhile growth in imports slowed down to 3.8% to USD 37.9 billion, reducing pressure on the country's balance of payments Trade deficit narrows down to USD 13.4 billion, due to fall in imports of gold and crude

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Investments Literally at a standstill

New project investments have slowed down drastically Investments for Q1 2012 is down by 27% as compared to Q1 of 2011 For 2011, total investments made was INR 11.63 lac crs as compared to INR 18.05 lac crs in 2010

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GDP Q4 Shocker

Q4 GDP of FY 12 has come in at 5.30% as against the market expectations of 6.10%, its the lowest quarterly growth in 9 years GDP for FY12 as a whole is around 6.50%, which is way below the 6.90% projection of RBI and the Government

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Rupee Continues to remain weak

FIIs has invested around USD 12.31 bn YTD till 31st May 2012 Rupee has been weakening since March as higher imports and trade deficit take its toll RBI sold USD 20.2 bn since Sept 2011 to stem the rupee fall and going forward such large scale support seems unlikely due to Balance of Payment going into negative and falling FX reserves and have estimated to have sold around USD 6 bn in April & May RBI may stage limited intervention when required

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GDP downgraded domestically..

For India Goldman Sachs BoFA ML Morgan Stanley CARE Rating 2012-13E Previous 7.2 6.8 7.5 7.3 2012-13E Latest 6.6 6.5 6.8 7.0

OECD*
IMF*

8.2
7.0

7.1
6.9

* For CY 2012

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Global Markets Most markets underperform

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Global Markets
Argentina is the top performer for the month US ,China & India are the top performers YTD US continues to be resilient on the back of strong and positive data France and Spain fell the most during the month due to rising risk aversion

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Spain : Uncomfortably exposed at the centre of renewed Euro Crisis

10 Year Bond Yields Yield % 1M % 3M

Germany
UK France Italy Spain

1.39
1.76 2.55 5.79 6.51

-18.2
-17.1 -15.0 2.6 10.8

-23.6
-11.6 -11.4 11.6 30.6

The spread between Germany and Spanish yield stands at ~500bps, signalling continued pressure on Spanish economy in meeting its debt obligations. S&P cuts ratings on five Spanish banks while Moodys lowered debt rating at 16 banks citing a recession and mounting loan losses. EU summit yielded little new policy announcement but Italy PM said majority of country of the regions leaders support a joint bond to fight the debt crisis in Europe. Germany, UK and France bonds have rallied indicating risk-off

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Changing times.news flow

Domestic Factors
Rupee rebounded from new low (56.38) after RBI intervention and few policy noises from GoI

Global Factors
June 17 re-elections to decide Greece fate in Euro Zone Euro Zone PMI for April 2012 at 45.9 against 47.2 in Mar 2012, which is one of the sharpest decline in recent times. Spanish yield remain under pressure Moodys downgrade 16 Spanish banks. Spain would require recapitalization of lot of banks sooner than later FOMC Minutes more easing could be needed if economy slows China cuts reserve ratio requirement by 50bps

Petrol price hike - steepest ever. Markets awaiting nod on the Diesel front as this alone accounts for ~50% of the under-recovery
WPI Inflation rose to 7.23% on higher food prices and higher manufacturing inflation Monsoon to set over Kerala coast on June 1: IMD. It has arrived at Andamans slightly behind sched Monthly Trade deficit for Apr at $13.4bn

GAAR application deferred by an year

IIP turned negative in March, -3.5% YoY v/s 4.1% in Feb12

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FII.India and other Regional markets

FII flows across regional markets 12,000 8586.5 8,000 4,000 622.8 0 (4,000) (8,000) India Indonesia Philippines May Net (Mn US$) S. Korea YTD Net (Mn US$) Taiwan Thailand (177) (630) (3,511) (3,435) 161 767.1 496.8 (473) 6138.5 2259.6

India has not seen a meaningful sell-off when compared with countries like South Korea, Taiwan, Indonesia and Thailand.

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Silver linings in the cloud.

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FDI Inflows Strongest Inflows in March

India received USD 8.1 billion in foreign direct investment in March, showing an increase of 800 percent compared to March 2011 (1.07bn USD) April to Mar period has seen cumulative inflows of USD 36.03 bn against a 19.43 bn in the same period in FY 11 FY 12 inflows have been strong and for FY 13, reforms will be the key

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Crude : Any Fall is positive

Crude prices have corrected by more than 15% from its high of USD 129 per barrel in March Price correction was mainly due to slowdown in global economy, fears of Greece exiting EU and China facing a significant slowdown thereby bringing down the demand for the black gold Talks of dialogue with Iran on its nuclear programme bought down the Premium Strengthening of the USD impacted most commodities
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Gold Imports Fatigue sets in

Gold imports constitute a major portion of our trade deficit (around 30%) Q1 of 2012 saw imports falling by 29% compared to last year as higher import tariffs and jewelers strike reduced demand Q2 may see imports falling by 30% as high prices deter consumers and international prices continue to fall Even a fall in imports to 500-600 tonnes for the year will reduce the current account deficit significantly
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Falling commodity...good for India??

Palm Oil $/mt
1250
800 780 HRC Steel $/t

1150

760 740 720

1050

700 680

950 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12

660 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12

Coal Therm al $/t 135 125 115 105 95 85 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12

Crude Oil, Gold, Coal, Fertilser and Palm Oil (these contribute ~53% of Indian imports) are

critical commodities from trade deficit standpoint

whereas Coal and Steel are critical from Infrastructure perspective.

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Product Preferences

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Liquidity tightness eases

Net Liquidity in May averaged around (-)INR 99,000 crs as against (-)INR 100,500 crs in April 1 Year CP touched a high of 11.60% and CD rates at 10.90% in March and has dropped to current 10.42% and 9.85%

RBI may counter any future liquidity tightness by cutting CRR and OMOs going ahead
OMOs of INR 32,000 crs in May to infuse liquidity and keep the yields in check
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Credit to Deposit Ratio: All time highs

High credit to deposit ratio in recent months have contributed to liquidity tightness
Current ratio is at 76.7, which is close to its all time highs Deposits growth has to be above 17% to bring liquidity under control Rates may move down if it comes below 71.5

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10 Year Yields Upward Pressure remains

10 Yr yield have broken the 8.45 pivot levels to current 8.51 per cent Higher government borrowing in FY 13 have caused the yields to spike up Yields can move till 8.7 to 8.90 per cent due to higher borrowing in the H1 of FY13 Future OMOs along with CRR cut is necessary to plug the liquidity deficit and keep the yields in check

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Rate Cut- Transmission at the short end

Impact of RBI repo cut of 50 bps was seen in the short end rather than the long end Current 1 year CP & CD rates are at 10.50 % & 10 %

Short term funds have performed well and is still recommended

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Inflation moderates but risks remain

WPI for the month of April was 7.23% as compared to 6.89% in March and CPI for April was at 10.36% as against 9.47% in Feb Core inflation continues to remain flat, thereby giving comfort to RBI RBI has targeted 7% inflation for FY 13 Upwards risks to inflation remain with rising crude prices, weak or bad monsoon and core inflation rising
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What do we suggest for June 2012?

With liquidity tightness and CP & CD rates being very high, short term funds are an attractive proposition now for 6 months to 1 yr horizon Conservative investors looking to lock in funds should look at Fixed Maturity Plans and Fixed Deposits as the short term rates are still at elevated levels Investment into duration products is recommended for aggressive investors. However, the investment should be staggered over the next two to three months as there is regular Gilts supply and the liquidity conditions is expected to remain tight Tax Free Bonds from the previous financial year (HUDCO, PFC, IRFC etc) because of fixed attractive rates for long term (10-15yrs) along with capital gains opportunities once rates start coming down

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Product Preference Matrix

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Risk Disclosure and Disclaimer

Aditya Birla Money Mart Limited has prepared this document on the basis of publicly available information and other sources believed to be reliable. Whilst no action has been taken based upon this information, ABMML makes no representation or warranty expressed or implied, as to the accuracy; completeness or reliability of any information compiled herein and hereby disclaims any liability with regard to the same. This is intended for general information purpose only and does not constitute any recommendation or solicitation of an offer, to subscribe to the securities or products. Investment decision if any shall be at your sole discretion. You may obtain your own legal, tax and financial advice before making an investment decision. Aditya Birla Money Mart Limited (ABMML) is an associate / group Company of Birla Sun Life Asset Management Company Limited /Birla Sun Life Mutual Fund (BSLMF). Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The Macro/Micro economic views, market trends, business, sectoral or financial outlook is solely of the author and should not be construed as any guidelines or recommendation on any course of action to be followed by the reader. The views and opinions expressed herein by the author are his own and do not reflect the views of Aditya Birla Money Mart Limited or any of its associate or group companies. The information, opinion or views contained in this document are as per prevailing conditions and are subject to change from time to time. Forward looking statements are not predictions and may change without notice. Aditya Birla Money Mart Limited, One India Bulls Centre, tower 1, Jupiter Mill Compound, 841, Senapati Bapat Marg, Elphinstone Road, Mumbai 400 013. Tel: 022-4356 8300 Fax: 022 43568310 (This presentation is for private circulation only)

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