1. The World This Week
July 29 – August 2, 2013

2. Equity View -
In the latest RBI policy there was no change in the repo rate and CRR rate. As we have been talking about
the RBI has been tightening interest rates for the last 3 weeks. Significant changes have been made to LAF
corridor and the MSF is now at 10.25%, as an effect of that the short term interest rates specially the call
money rates have gone up to almost 11% which has caused a negative impact on the short term borrowing
cost for most of the corporate and the banking space.
The banking sector has reacted to this with a significant correction in most of the large cap private sector
and public sector names. If you look at the earnings which have come in from the banking sector so far, the
earnings seem to be more or less in line with the expectation however, there will be some concerns with the
asset quality. With this hike in short term interest rates there may be some more stress on the banking front
which is getting reflected with a very sharp correction in most of the banking stocks at this point of time. We
believe that this correction will continue for some more time and hence we recommend a cautious stance
on the banking space in the short term.
We have seen auto sales number which continues to be quite muted for the month of July also. We have
seen most of the two wheeler companies deliver almost flattish sales growth. Most of the four wheeler
companies have declared de-growth in Y-o-Y sales numbers. The only silver lining has been a significant
increase in tractor sales in the last few months, primarily on the back of good monsoon and good sewing
season we have seen so far.
In terms of industrial sector growth we have seen core 8 industries growth coming at 0.1% on a Y-o-Y basis,
last month as compared to 2.3% for the month of May. So, industrial activity also does not show any
significant sign of revival at this point of time. In terms of results we have seen good set of numbers coming
in from the telecom space. It seems the pricing power has returned to the sector. There has been a
significant increase in Average Revenue per user for most of the companies like Bharti and Idea which have
delivered results last week.
We believe that this is the beginning of a peculiar trend as far as realization is concerned for most of the
companies. We expect the industry to undergo a consolidation phase in the next 1 – 1.5 years and thereby
we will be left with only 4 or 5 strong players which would come under significant pricing power so which
would come under significant pricing power, which calls for a structural reiterating of telecom space and we
have changed our view on telecom space from neutral to positive at this point of time and both Bharti and
Idea appear to be positive on the valuation perspective.

3. Commodity View –
There is a question in everyone’s head of what exactly happened at the NSEL. NSEL is the National Spot
Exchange Ltd so the total. As per the law anything above 11 days of contract is deemed to be a forward
contract. FMC and government have given a special permission to NSEL to carry out these spot trading
activities upto 10 plus 1 day which is 11 days. What these exchanges had predominantly done was launched
a contract which was T plus 60 so that it can be used as an arbitrage product. Typically what the clients do is
buy a T plus 2 contract and sell a T plus 60 contract. This is actually a kind of an arbitrage contract for the
millers and the sellers who actually wanted funding for their commodities which is lying idle in the
warehouse. This arbitrage is likely to give 14% – 16% depending upon the contract and the commodities on
the line. The key question here is that there are concerns raised on the quantity of the stocks. NSEL claims
that there is 1 lac ton of castor seeds in Rajkot warehouse and on the other side NCDEX which is the largest
commodity futures trading exchange in India with Pan India presence of warehouses has a 97 lacs tones of
cash stake. The NSEL claims that in one warehouse of Rajkot they have 1 lac castor seeds. This is true for
Jeera and all other commodity including the paddy. There was a clear violation going on for forward
contracts when permission was given for spot contract. There was no clear demarcation of the stocks which
were lying and there was no audit on those stocks, hence, creating a kind of a scam scenario. The sellers
keep selling and the buyers keep paying but at the end of the day there is no stock in the warehouse. Also
the settlement guaranteed fund which is claiming to be 800 crores happens to be 65 Crores today. So there
is no clear picture which is coming out and a lot more clarity is needed and there is no clear regulation for
the spot commodity exchanges. This is what the FMC has pitched for, to resolve these crises.
Gold View
We have witnessed almost a 38% fall from $1900 to sub $1200 level. In rupee terms the fall was close to
20%. The fall in the gold price was pre dominantly triggered due to gold being considered as an indicator for
US. At this point of time there are no fundamental or technical indicators that could drive the commodities
market but clearly the fund flows are driving the market. There are expectations that the Fed might trim
down QE from the current $85bn to $65bn in September and then $45bn in December. Fed has actually
toned down their stance from hawkish to dovish in the recent meeting. Gold has fallen below the production
cost. For the largest miner in South Africa, the Anglo-Asian, cost of production per ounce is like $1200 and
for the second largest its $1350 per ounce. Gold testing sub 1200 levels – i.e. $1181 to be precise, went
below the marginal production costs which have supported the price in the international market. There’s a
blessing in disguise at least in the domestic market. When gold fell from $1900 – $1200 rupee also
depreciated from Rs 52 – Rs 61, hence supported the fall domestically. Gold tested Rs. 25000 levels twice
and it has bounced back to Rs. 29000 levels.

4. The other major factor that has affected gold is India being the largest importer. In recent RBI restrictions, it
has been aiming towards nearly stopping the gold imports in India. The expectation this year is 500 tonnes
of import, which was close to 1000 tonnes of import last year. The true jeweler demand in India is close to
500 tonnes which has been kept in mind while deciding the restrictions. We see gold prices moving up in
dollar terms but, we don’t see prices moving up drastically in Rupee terms and consider Rs. 25000 as the
bottom level for gold. The reason for the prices being high is due to 8% import duty on gold imports which
has increased the premium domestically. The premium today for an ounce of gold is $25.
Crude View
Crude is an indicator for the economy, we expect Crude to trade in a range bound market scenario. There
was a Middle East tension but it has now been taken care of. Now Libya has started the production, Libya is
one of the largest of oil producing nations in Africa. The suppress is coming into play and as an alternate
shale gas is taking over the US economy. We don’t see oil prices shooting up in future and our view on crude
stands neutral with a downward bias.
News
DOMESTIC MACRO
The RBI left its policy repo rate at 7.25 percent and held banks' cash reserve ratio at a record low 4.00
percent but said it will roll back recent liquidity tightening measures when stability returns to the currency
market.
The government will sell shares in three state-owned firms through a share auction on Friday to meet the
market regulator's rules for a minimum 10 percent public shareholding in state firms including State Trading
Corp, Indian tourism Development Corp., Neyveli Lignite Corp.
GLOBAL MACRO
EURO
The European Central Bank left interest rates at a record low 0.5 percent on Thursday and affirmed that they
will remain there for some while to come and could yet fall further.
Unemployment in the euro zone remained unchanged in June from the previous month, at 12.1 percent
despite signs of an improvement in the economy.
US
U.S. economic growth unexpectedly accelerated in the second quarter with GDP at a 1.7 percent annual rate
stepping up from the first quarter's downwardly revised 1.1 percent expansion pace.

5. U.S. factory activity jumped to a two-year high in July when index of national factory activity rose to 55.4 last
month from 50.9 in June, buoyed by a surge in new orders and production.
The number of Americans filing new claims for unemployment benefits fell unexpectedly last week, touching
a 5-1/2 year low, suggesting a steadily improving labor market.
China
China's central bank injected funds into money markets via open market operations on Tuesday for the first
time since February, easing fears of another cash crunch ahead of the month end after a severe cash
squeeze in June caused market panic.
Indices
Date USD GBP EURO YEN
Crude
(Rs. per BBL)
Gold
(Rs. Per 10gms)
29/07/2013 59.29 91.18 78.71 60.58 6314 28116
30/07/2013 59.82 91.75 79.32 60.84 6371 28377
31/07/2013 61.11 92.97 80.95 62.44 6396 28600
01/08/2013 60.74 92.05 80.60 61.69 6582 28249
02/08/2013 60.80 91.95 80.36 61.04 6654 27990
03/08/2013 6625 28371
-2.48%
Rupee
Depreciated
-0.84%
Rupee
Depreciated
-2.05%
Rupee
Depreciated
-0.75%
Rupee
Depreciated
4.93% 0.91%
Debt:
Tenor Gilt Yield in % (Friday) Change in bps (Week)
1-Year 9.30 4
2-Year 9.04 13
5-Year 8.80 17
10-Year 8.28 12

6. Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Doshi
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