1. International
Global financial markets witnessed broad-based declines after the US Federal Reserve outlined plans to
taper asset purchases.The MSCI AC World Index ended 3.21% lower than last week levels and Emerging
Markets (EM) stock indices saw steeper declines on record outflows. Weak manufacturing data out of
China also added to investor pessimism. Global treasury bond yields spiked as investors assessed impact
of a less accommodative stance by central banks. Several EM nations cut/canceled scheduled bond sales
due to the market volatility. Commodity prices also reacted sharply to the statement and the Reuters
Jefferies CRB Index declined 2.83%. Gold retreated below the $1300/ounce mark and Brent futures
ended a tad above $100/barrel levels as the US dollar strengthened. Central banks in Emerging markets
took a range of measures to stem currency depreciation.
• Asia-Pacific: Global investor reallocation away from EMs caused sharp declines in EM Asian equity markets.
Indonesia and China were amongst the top losers.A fall in HSBC’s flash China manufacturing PMI index to
48.3 from 49.2 in May exacerbated weakness. Late in the week, the People’s Bank of China injected about
$8.2 bln to address the systemic liquidity tightness, after Chinese inter-bank money markets rates recorded
sharp increases. Japanese equity markets bucked the global trend, helped by a weaker yen and positive
economic data. Data showed yen depreciation had added to demand for Japanese goods and value of the
country’s exports rose 10%yoy in May.The JapaneseTankan index also gained showing business sentiment has
strengthened from latest measures.
• Europe: Concerns that the turning point in the global central bank stimulus cycle is near weighed on
regional equity markets. Closure of Greek state broadcaster ERT caused a rift between coalition partners
of the incumbent government and impacted Greek markets. Eurozone ministers agreed for the group’s
bailout fund to inject funds directly into ailing banks, but only after local governments shared part of the
burden. On the economic front, the Eurozone flash PMI indices continued to inch higher and UK retail
sales were quite strong in May. Sweden government managed to sell a 13.4% stake in Nordea for $3 bln,
which may be used to pare public sector debt. Spain announced it will rationalize/streamline government
body operations and expects such efforts to save €6.5 bln each year.
• Americas: The CBOE VIX index jumped about 22% and US equity markets reacted negatively to the Fed
policy statement. The Fed upgraded economic growth forecasts and said it could start winding down asset
purchases later this year and halt QE by mid-2014, if economy continues to recover as per expectations.
Meanwhile, US housing sector data remained positive and the Conference Board’s index of leading indicators
rose 0.1%.The Brazilian government rolled back the hike in public bus fares, but citizens continued to stage
protests against economic conditions. Colombia’s GDP report indicated slower economic expansion in Q1-
2013 – 2.8%yoy versus 3.1%yoy corresponding quarter a year ago. On the corporate front, Brazil’sVotorantim
Cementi deferred close to $5 bln IPO plans.
Market Review
WEEK ENDED JUNE 21, 2013

2. Weekly Weekly
change (%) change (%)
MSCI AC World Index -0.70 Xetra DAX -1.54
FTSE Eurotop 100 -1.74 CAC 40 -1.74
MSCI AC Asia Pacific 0.33 FTSE 100 -1.62
Dow Jones -1.17 Hang Seng -2.81
Nasdaq -1.32 Nikkei -1.48
S&P 500 -1.01 KOSPI -1.80
India - Equity
The weakness in EM countries weighed on India as well and domestic equity markets witnessed
declines, albeit less than some of the EM peers. Except technology, all sectoral indices closed in the red,
and real estate, metals and banking were the top losers. FIIs sold equities to the tune of $550 mln in
the first four trading days of the week.
The fall in Indian equities in recent weeks needs to be seen in the context of the short term global
reallocation away from EM assets, amidst concerns about a reversal in global liquidity trends.The near
zero interest rates along with quantitative easing had led to a rise in global investors increasing
allocations to EM countries such as India to benefit from relatively higher growth. Notwithstanding
the current slowdown, EM economies remain fundamentally well placed compared to the developed
markets, due to positive demographics, rising income levels and infrastructure investments. More
importantly, many of the EM countries remain relatively less leveraged and the financial systems are
quite robust. We believe these countries will continue to grow at a stronger pace than developed
markets in the coming years. Hence, once the short term reactions to global liquidity trends play out,
the long term fundamental story will attract global investors.
Having said that, over the near term, FII outflows and the domestic CAD (current account deficit)
situation, in particular, may cause markets and the currency to remain under pressure. Some of the
points to consider in the current situation would be -
• Economy/Policy: Economic growth has moderated over the last couple of years, but the key factors
behind the slowdown seem to be on the mend, and a gradual recovery seems to be underway. As we
have mentioned in the past, favourable monsoons, spending ahead of elections and reduced inflationary
pressures should help. The government has made progress on the fiscal consolidation front and project
execution bottlenecks are easing, albeit slowly.The Cabinet Committee on Investments is functional and
reportedly about $25 bln worth projects have been cleared.This week the government cleared a proposal
for pass-through of imported coal prices – this could potentially improve fuel availability for power
players, though will push up the import bill and increased tariffs.
• Rupee/Foreign Flows: The recent rupee depreciation is likely to offset potential benefits from the
fall in global crude oil and commodity prices, but could benefit exporters. Besides, higher domestic gold
prices along with government measures could help rein in domestic gold demand.We will however need
to be see if the rupee’s impact on export competitiveness is undermined due to a similar decline seen
in EM peer currencies.

3. Source:Various Stock Exchanges.
Source: RIMES, MSCI, Morgan Stanley Research
• Valuations: India equities remain attractively valued vis-à-vis earnings potential and compared to
history. Higher ROE apart, lower earnings cyclicality also strengthens the investment case for India.
Weekly change (%)
S&P BSE Sensex -2.10
CNX Nifty -2.42
CNX 500 -2.34
CNX Midcap -2.27
S&P BSE Smallcap -0.96
India - Debt
Indian bond yields continued to rise and the rupee weakened to record lows as traders reacted to US
Federal Reserve plans to reduce stimulus. However, the pace of FII outflows slowed to about $650 mln in
the first four trading days and foreign investors subscribed to about Rs 39171 crore of government
securities quotas vis-à-vis Rs. 42,022 crore on offer in the auction this week.
At the mid-quarter monetary policy review, the RBI kept policy on hold due to current account deficit
and inflation concerns
• Yield movements: Bond yields increased across maturity buckets.Yields on the 10-year and 5-year
papers increased by 10 bps and 17 bps respectively, while those on the 1-year paper rose 13 bps.Yield
on the 30 year Gilts also stood 13 bps higher than last week levels.
Yields on 5-year AAA corporate bonds increased 21 bps (to 8.72%) and consequently spreads over
similar tenured gilts rose to 111 bps from 107 bps a week ago.
• Liquidity/borrowings: Systemic liquidity conditions were little changed - overnight call money rates
closed at 7.20%, almost same levels as the prior week, and demand for liquidity at RBI’s LAF window
averaged about Rs. 67,000 crores. Scheduled bond auctions of GOI securities worth Rs. 15,000 crores
witnessed good response from market participants and there was no devolvement on primary dealers.
• Forex: The rupee dropped to fresh all-time lows of Rs.59.98/$ after the Fed’s stimulus withdrawal plan
helped the US$ strengthen and caused FII outflows from Emerging Markets including India. RBI
intervention and inflows related to a $1 bln overseas loan by Essar Steel helped the currency recover
slightly on Friday.
Figure 1: Net foreign buying in Emerging Asia (ex-China, ex-Malaysia)
EM Asia
ex-China &
India Indonesia Korea Philippines Taiwan Thailand Malaysia
Monthly data
Jan-13 4,059 590 -1,746 667 671 500 4,742
Feb-13 4,575 1,161 1,760 146 1,052 -583 8,111
Mar-13 1,675 188 -1,901 204 -902 212 -524
Apr-13 1,000 74 -2,589 284 1,068 -683 -845
May-13 4,067 -36 926 450 2,142 -173 7,376
Jun-13 -412 -1,596 -3,476 -265 -2,351 -1,178 -9,278
Annual data
2013 (YTD) 14,966 381 -7,025 1,485 1,680 -1,905 9,582
2012 24,372 1,694 14,990 2,540 5,006 2,502 51,104
2011 -358 1,163 -8,762 1,326 -9,178 -196 -16,005
Last update: 19 Jun 2013
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
2005
2005
2006
2006
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
2013
M SCI India ROE Relative to M SCI EM

4. As we have mentioned in the past, the rupee's sharp decline is not isolated - many EM currencies witnessed
similar declines – the chart below captures 2013YTD movement in the rupee and other EM currencies.
Select EM Currencies – 2013YTD Fall Against the USD
Source: MSCI, RIMES, Morgan Stanley Research.‘EM’ here is represented by the MSCI Emerging Markets Currency Index
• Policy: RBI’s decision to keep key rates unchanged (repo at 7.25% and CRR at 4%) was in line with
expectations, given the macroeconomic backdrop both in India and overseas. The bank acknowledged the
uneven global growth and increased risks of sudden changes to capital flows due to the monetary policy stance
of important central banks such as the Federal Reserve. Notwithstanding the weak growth trends in India, it
has indicated that uncertain inflation outlook has weighed on its policy stance. Key factors impacting inflation
outlook are – still elevated consumer inflation levels, potential increase in imported inflationary pressures due
to rupee depreciation and upward revisions to domestic fuel as well as minimum support prices (MSP).
• Outlook: While the recent global news flow has unnerved investors across markets, the changes outlined are
inevitable. Leading global central banks had resorted to extraordinary policy actions to stem growth slowdown
and aid de-leveraging. With the situation improving in the US, policymakers are signalling a gradual
withdrawal. The exit is expected to impact short-term flows into Emerging Market assets, but long term
investors should continue to focus on fundamental stories such as India.
In terms of India’s monetary policy, the latest statement indicates RBI is focused on durable/sustainable fall in
inflationary pressures and the Balance of Payments situation.The improvement in case of the former may be limited
over the near term as rupee depreciation limits pass through of fall in international commodity prices. The
government has been undertaking various measures to encourage foreign investments and reduce non-productive
gold imports, and trends will be closely watched to gauge impact on external position.While the measures may
provide some relief in the coming quarters, from a medium to long term perspective, there is clearly a need to
address the structural drivers of domestic inflation (read bottlenecks) and boost investment activity. RBI has
indicated it will remain on stand-by to intervene and alleviate stress caused by adverse developments.
We believe that Indian corporate bonds may fare relatively better than gilts in the current environment
primarily due to their relatively high yields (read coupon payments) along with limited supply going forward.
Gilt yields at the same time would be subject to fiscal deficit/borrowings news flow.Monetary policy direction
is likely to be driven by trends in rupee, inflation and deficits situation.
21.06.2013 14.06.2013
Exchange rate (Rs./$) 59.27 57.51
Average repos (Rs. Cr) 67,713 65,413
1-yr gilt yield (%) 7.47 7.34
5-yr gilt yield (%) 7.61 7.44
10-yr gilt yield (%) 7.57 7.47
Source: Reuters, CCIL.
-10.4
-3.0
-20.9
-8.3
-9.1
-4.4
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
Brazil Indonesia South Africa Turkey India EM

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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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