FICC TIMES

THE WEEK GONE BY AND THE WEEK AHEAD

11 Jan 2013

Globally markets were well bid this week, with ECB providing a shot in the arm by indicating no interest in cutting European rates. Chinese data earlier supported risk taking through the week. India was lackluster due to profittaking ahead of the earnings season and an optically lower IIP number

This week saw mixed signals emerging from across the world. In Europe, the ECB held on to the existing interest rates while giving a cautiously optimistic outlook on the economy. Consequently, the Euro rallied to its highest level since April. Japan announced a fiscal stimulus in an attempt to spend its way into growth although concerns about deeper malaises in the economy remained unanswered. Japanese yen continued its slide against the dollar for the ninth week. Chinese trade data released during the week reaffirms signs of recovery in the economy. Markets in the U.S trended higher for a second week, buoyed by positive data coming from China in the later part of the week, while European and Asian markets were mixed. Locally, the most significant event in the week was perhaps the railways hiking fares first time in nine years. Indian stock markets ended lower on profit booking and lower than expected IIP numbers, after touching a two year high earlier in the weak. The INR ended slightly higher with a downward bias on the back on weak export data and large dollar demand.

The key events of last week:

The Euro area reported a record jobless rate in November, in line with estimates. Unemployment rate increased to 11.8% as against 10.6% in October, the highest since 1995. Spain (26.6%) and Greece (26.0%) recorded the highest unemployment rates and also the highest increases. The high unemployment rate is likely to continue as both businesses and governments cut jobs as demand remains slow in the face of the overall uncertainty in the economic environment. However, the Economic Sentiment Indicator in the Euro area improved slightly month on month across all sectors, except retail trade, mostly on the back on expectations of lower inflation in 2013

The European Central Bank (ECB) signaled a no change in its main refinancing rate while
remaining cautiously optimistic on the economy. ECB president Mr. Mario Draghi stated that 108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51 Page 1

THE WEEK GONE BY AND THE WEEK AHEAD.

economic activity should gradually recover and that the improved health of financial markets should work its way through the economy

Despite a 15% rise in USDJPY in the last few months, we are fairly bullish the currency pair and see it as a good trade to target 95 driven primarily by 2 factors: the Japanese government seems very inclined to stimulate the economy with large YEN liquidity and the macro in Japan continues to be weak as highlighted by the latest trade deficit numbers

Japanese cabinet approved a US$ 116 bn (10.3 tn yen) stimulus package in an attempt to kick
start the economy. The government expects this extra spending to increase GDP by 2 percent and create about 6.00,000 jobs

The yen continued its slide against the dollar and touched its lowest level since June 2010, on
the announcement of the stimulus and larger than expected current and trade deficits. The country slipped into a current account deficit of 222.4 bn yen in November from a 376.9 bn surplus in the previous month, much sharper than estimates. Also, the trade deficit increased to 847.5 bn yen in November as against 450.3 bn in October

China reported a slightly higher than expected 2.5 percent rise in Consumer Price Index (CPI) in
December on the back of rising food prices, making the possibility of further policy loosening less likely

China trade data for the month of December came in much stronger, with exports rising by 14.1
percent y-o-y in December, while the trade surplus almost doubled, providing further impetus to signs of recovery in the economy

And closer home....

The IIP growth remained largely stagnant y-o-y showing a slight -0.1 percent decline in November as against the revised 8.3 percent in October. The October IIP was an aberration due to the festive season demand and the November data is skewed owing to lower working days in the month, making it difficult arrive at a clear trend Sector wise, the mining sector (14.2) IIP declined by 5.5 percent, electricity (10.3) increased by 2.4 percent while manufacturing (75.5), with the highest weight grew by meager 0.3 percent, keeping the overall index almost flat On use basis, capital goods continued to be a drag on the index, contracting by 7.7 percent and consumer durables grew by 1.9 percent. IIP for the April-Nov period grew by a modest 1 percent as against a full year growth of 3.8 percent in 2011-12, indicating that growth is yet to 108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51 Page 2

THE WEEK GONE BY AND THE WEEK AHEAD.

pick up amidst weak demand

IIP Sectoral Mining Manufacturing Electricity

Nov' 12 -0.1 -5.5 0.3 2.4

Oct'12 8.3 0.0 9.8 5.5

Sept'12 -0.7 2.3 -1.5 3.9

Nov'11 6 -3.5 6.6 14.6

Apr-Nov'12 1 -1.5 1 4.4

Use Based Basic Goods Capital Goods Intermediate Goods Consumer Goods Consumer Durables Consumer Non-Durables
Source:MoS

1.7 -7.7 -1.1 1 1.9 0.3

4.1 7.5 9.34 13.7 16.9 10.7

2.8 -12.9 1.72 -0.06 -1.7 1.6

6.5 -4.7 1.3 12.8 10.4 15.0

2.8 -11.1 1.8 3.8 5.2 2.5

The trade data for the month of December came in slightly better than expected. Trade deficit improved to US$ 17.7 bn from US$ 19.3 bn in November. Exports continued to contract, however the rate of contraction slowed to 1.92 percent in December as against 4.2 percent in November and 5.5 percent in the Apr-Dec period. Higher oil imports continue to be a concern, with a growth of 23.5 percent in December vis--vis 12.18 percent in the Apr-Dec period Indian stock markets closed lower for the week, after touching a two-year high earlier in the week. However, the later part of the week saw markets edging lower on profit booking and lower than expected IIP data, despite better than expected set of numbers from IT major Infosys The rupee traded lower for most part of the week gaining slightly towards the end. However, it pared most of the gains on the back of a large dollar demand from banks and weak export data released on Friday, ending the week only slightly higher

The yield on the benchmark 10-year government securities slid further to 7.84% from 7.93% last week on expectations of a rate cut in the upcoming credit policy

So what does the next week hold...?

The stimulus plan in Japan, the positive tone ECB outlook, positive trade data from China build hopes of a recovery in the world economy. But sluggish global demand, debt ceiling in the U.S, fiscal tightening, and financial leveraging in Europe are worries that override the optimism. In the coming week, attention will turn to financial earnings in the US. Other key data to 108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51 Page 3

THE WEEK GONE BY AND THE WEEK AHEAD.

look at would the retail sales numbers and CPI data. China will release GDP and Industrial Production data. Closer home, the key data to look at next week is the WPI which assumes reasonable significance in the wake of expectation of rate cut in the upcoming credit policy. Market remains very hopeful of an interest rate cut in the policy.

Important upcoming International events to be tracked:

Date 01/12/2013 14-01-2013 14-01-2013 14-01-2013 14-01-2013 15-01-2013 15-01-2013 15-01-2013 15-01-2013 15-01-2013 15-01-2013 15-01-2013 15-01-2013 16-01-2013 16-01-2013 16-01-2013 16-01-2013 16-01-2013 17-01-2013 18-01-2013 18-01-2013 18-01-2013 18-01-2013 18-01-2013 18-01-2013 Country US China China China EMU Germany UK UK EMU US US US US Italy EMU EMU US US US US US Japan UK Canada US Event Treasury Budget (Treasury Budget - Level) Industrial Production GDP Retail Sales (Y/Y % Change) Industrial Production CPI CPI Producer Price Index Merchandise Trade Retail Sales Producer Price Index Redbook Business Inventories (Inventories - M/M change) Merchandise Trade (Level) HICP (Month over Month) HICP (Year over Year) Consumer Price Index Industrial Production Jobless Claims Fed Balance Sheet Money Supply Tertiary Index Retail Sales Manufacturing Sales Consumer Sentiment (p) (Sentiment Index - Level) Period Dec, 2012 Dec, 2012 Q4, 2012 Dec, 2012 Dec, 2012 Dec, 2012 Dec, 2012 Dec, 2012 Nov, 2012 Dec, 2012 Dec, 2012 wk1/12, 2013 Nov, 2012 Nov, 2012 Dec, 2012 Dec, 2012 Dec, 2012 Dec, 2012 wk1/12, 2013 wk1/16, 2013 wk1/7, 2013 Nov, 2012 Dec, 2012 Nov, 2012 Jan, 2013

Important upcoming Domestic Events

Date 14-01-2013 14-01-2013 14-01-2013 14-01-2013 14-01-2013 18-01-2013 18-01-2013 18-01-2013 Event WPI Inflation (YoY Chg) New Series (Base 2004-05) CPI Inflation - Rural (YoY Chg) CPI Inflation - Urban (YoY Chg) CPI Inflation - Combined (YoY Chg) OECD composite leading indicator for India CPI - Agricultural Labourers(YoY Chg) CPI - Rural Labourers (YoY Chg) WMA (ways and means advance) - to central govt Period Dec Dec Dec Dec Nov Dec Dec Wk to Jan 11 Frequency Monthly Monthly Monthly Monthly Monthly Monthly Monthly Weekly

108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51

Page 4

THE WEEK GONE BY AND THE WEEK AHEAD.

18-01-2013 18-01-2013

WMA (ways and means advance) - to state govts FX reserve (change on wk)

Wk to Jan 11 Wk to Jan 11

Weekly Weekly

Technical Based View:

USD INR had another volatile week, hitting a high of 55.35, a low of 54.35 and closing the week at 54.78 The currency was well offered through the middle of the week when sudden interest from offshore drove the pair lower towards 54.35 On Friday profit taking emerged at lower levels and despite a sharp risk in the Euro, USD INR remained well bid No major technical patterns in sight, we continue to see USD INR range bound between 54.35 and 55.35, seems like a range play for now with a slight softer bias as indicated by the moving averages cross-over on the daily charts

Daily USD/INR Chart: Reuters

108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51

Page 5