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THE WEEK GONE BY AND THE WEEK AHEAD .

March 22, 2013

Markets across the globe remained in a risk- averse mood this week over the funding crisis in Cyprus and renewed pessimism about the Euro Zone with investors returning to safe havens US dollar and gold.

Global markets remained cautious this week over concerns about the funding crisis in Cyprus and renewed pessimism about Euro zone. Equity markets in Europe and Asia remained weak as data from Germany and France indicated deterioration in economic activities in the region while the euro after touching a three month low earlier in the week, advanced as Cyprus moved closer to a deal to prevent a financial collapse. Japans Nikkei retreated while the Japanese Yen advanced after the new BOJ governor while reiterating his commitment to achieve the 2 percent inflation target in two years stopped short of announcing fresh monetary easing.

The US Fed, at the FOMC meeting this week, kept the interest rates unchanged and decided to keep its monetary easing program intact till notable improvements in the job markets. The US dollar gained against major currencies as investors looked for safe havens in a risk off environment. US stock markets on the other hand remained volatile and closed slightly lower on global uncertainty despite positive economic data pointing towards a slow recovery. Closer home, the RBI delivered a 25 bps 28 rate Dec cut,2012 on expected lines while pointing out that the headroom for more rate cuts in future remains limited and the key challenge bring the economy back to growth is to revive investment by bridging supply constraints, fiscal consolidation and improving governance. The equity markets remained weak amidst political uncertainty following the exit of DMK from the UPA. The INR remained volatile and ended marginally lower on the back of global cues and large dollar demand from importers locally.

The key events of last week:

Euro area international trade deficit in goods for the month of January dropped to 3.9 bn Euro, as against 9.1 bn in January 2012 and 10.8 bn Euro in December 2012. Seasonally adjusted exports increased by 2 percent m-o-m and imports increased by 3.1 percent m-o-m.

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Japan reported a negative merchandise trade balance for the eighth consecutive month. However, trade balance in February narrowed to 777.5 bn from a record 1.630 tn in January, slightly lower than estimates. Exports declined by 2.9 percent while imports jumped by 11.9 percent. Japans industries activity index fell more than expected to -1.4 percent in January from 1.6 percent increase in the previous month, primarily due to a fall in tertiary industry. Construction industry activity grew by 3.5 percent and industrial output increased by 0.3 percent. CPI in UK rose 2.8 percent in February, the fastest in nine months, as against 2.7 percent in the previous month. Core CPI was constant at a seasonally adjusted 2.3 percent in February. Producer price index rose more than expected to 3.2 percent in February as against 1.3 percent in January. US housing starts increased marginally by 0.8 percent to a seasonally adjusted annual rate of 917,000 in February as against a revised January estimate of 910,000. The housing index for March eased to a lower than expected 44 from 46 in February. A reading above 50 means that more builders view conditions as good rather than poor. Existing home sales in US rose 0.8 percent in February to 4.98 mn units, the highest level since November 2009, from a revised 4.9 mn in January. Homes available for sales rose by 9.6 percent to 1.94 mn units while the inventory of existing homes available for sales was 19.2 percent below listed inventory.

And closer home.

RBI Mid-Quarter Policy Review Key Takeaways
The Reserve Bank of India in its Mid- Quarter Policy Review reduced the LAF repo rate by 25 bps from 7.75 percent to 7.5 percent, in line with our expectations. Consequently, the LAF reverse repo rate, the marginal standing facility (MSF) rate and the Bank Rate are revised to 6.5 percent and 8.5 percent respectively. The CRR remains unchanged at 4 percent. The RBI does not expect inflation to ease any further from current levels. On the contrary, dismantling of administered prices and MSP increases are expected to have adverse impact on inflation. Therefore, even though the RBI has changed its policy stance from managing inflation to promoting growth, the headroom for rate cuts remains limited.

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According to RBI, the moderation in core inflation is essentially due to softening of commodity prices globally and limited pricing power in the hands of manufacturers. However, high food inflation is keeping both the WPI and CPI above the threshold level. Also, current inflation remains suppressed due to lack of full pass through of oil price increases. Liquidity situation remains tight with government cash balance with the RBI remaining high. As a result, liquidity injection by RBI through LAF remains above the RBIs comfort zone. Going forward, the RBI says, it will continue to inject liquidity into the system through OMOs and other tools. On the external sector front, the RBI reiterated its concerns over CAD. Although merchandise exports have registered positive growth for the second consecutive month and non-oil imports have come down considerably, resulting in a narrowing of trade deficit, the excessive dependence on external capital flows is a key concern with current account deficit at a record high. Third quarter GDP growth at 4.5 percent was the weakest in last 15 quarters. Even service sector growth has decelerated to its lowest level in a decade. According to the RBI, in addition to a benign interest rate environment, the key challenge to bring the economy back to growth is to revive investment by bridging supply constraints, fiscal consolidation and improving governance.

Next week, markets will focus on the Cyprus deal for directions. Later in the week, focus will again return to economic data due to be released in the shortened week due to Good Friday holiday. Economic data coming from the US continues to add to confidence of a gradual recovery in the economy. The Euro zone worries have returned after the Cyprus crisis and a host of economic data pointing to the level of recession in the economies. Recovery seems far off as structural issues of financial deleveraging and sovereign debt crisis remain, with Cyprus being the latest. In Japan, the new BOJ governor is likely to announce a more aggressive monetary easing in the April meeting. Closer home, with worries about a political crisis having faded, markets will return to fundamentals and global cues in the shortened week due to Holi and Good Friday holidays.

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Important upcoming International events to be tracked:

Date 26-03-2013 26-03-2013 26-03-2013 26-03-2013 26-03-2013 26-03-2013 26-03-2013 27-03-2013 27-03-2013 27-03-2013 28-03-2013 28-03-2013 28-03-2013 29-03-2013 29-03-2013 29-03-2013 29-03-2013 29-03-2013 29-03-2013 Country US US US US US US US France UK US Germany US US Japan Japan Japan Japan Japan US Event ICSC-Goldman Store Sales Durable Goods Orders Redbook S&P Case-Shiller HPI New Home Sales (New Home Sales - Level - SAAR) Consumer Confidence (Consumer Confidence - Level) Richmond Fed Manufacturing Index (level change) GDP GDP Pending Home Sales Index Unemployment Rate Jobless Claims GDP CPI Unemployment Rate CPI (Ex Food-M/M) Household Spending (Month over Month) Industrial Production Consumer Sentiment (Sentiment Index - Level) Period wk3/23, 2013 Feb, 2013 wk3/23, 2013 Jan, 2013 Feb, 2013 Mar, 2013 Mar, 2013 Q4, 2012 Q4, 2012 Feb, 2013 Mar, 2013 wk3/23, 2013 Feb, 2013 Feb, 2013 Feb, 2013 Feb, 2013 Feb, 2013 Mar, 2013

Important upcoming Domestic Events

Date 25-03-2013 25-03-2013 25-03-2013 26-03-2013 27-03-2013 27-03-2013 27-03-2013 28-03-2013 29-03-2013 29-03-2013 29-03-2013 29-03-2013 29-03-2013 Event Output of Crude oil Output of Refinery Output of Natural gas IIP Core (YoY Chg) 91 day T- Bills auction of Rs 70 bln (cut-off yld) Reserve Money (change on wk) 182 days T- Bills auction of Rs 50 bln (cut-off yld) CPI-Industrial Workers Government finances -fiscal deficit BOP Current account balance WMA (ways and means advance) - to central govt WMA (ways and means advance) - to state govts FX reserve (change on wk) Period Feb Feb Feb Feb Wk to Mar 22 Feb Apr-Feb Oct-Dec Wk to Mar 22 Wk to Mar 22 Wk to Mar 22 Frequency Monthly Monthly Monthly Monthly Weekly Weekly Fortnightly Monthly Monthly Quarterly Weekly Weekly Weekly

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r TECHNICAL VIEW t Rupee depreciated sharply early this week from 53.9 to 54.55 due to fears raised out of political instability and then consolidated around 54.3 to 54.5 levels Since mid February, USDINR shows upward trend due to weakening rupee and we expect the next immediate support would be around 54.6 levels. Next week, we dont expect any eye-catching movement in USDINR. But if the prevailing up-trend continues then it may head towards 55.25 levels in coming few weeks.

Daily USD/INR Chart: Reuters

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