1 Executive Summary Global Economy: Back to fundamentals The global economy is in transitionary phase, as market conditions improved on a ccount

of ECB unleashing EUR 1 tn of liquidity through two rounds of LTRO s. However, it is too early to conclude that the worst of the European debt crisis is behind us. The rest of the world s contribution to the evolving growt h prospects is mixed as incoming data shows that growth has picked up in the US. EM economies are showin g signs of moderation on account of EZ related concerns. Meanwhile, the changing political landscape in t he world s most economically powerful and geopolitically significant economies further add to the uncertainty . The policymakers resolve to support the financial system unconditionally, will cap the downside risk to the financial markets State of the Indian economy: Indian economy likely to witness gradual recovery t his fiscal The Indian economy faced a difficult year in FY2012 with substantial growth mode ration and high inflation pressures. While the economy still remains vulnerable due to both domestic and e xternal factors, we believe some gradual recovery is slated to take place in FY2013 amidst policy support an d renewed strength in private consumption and investment demand. Currency: It is likely to be a bumpy ride Rupee ended FY2012 at 50.88, historically the weakest level for a fiscal year en d. The currency weakened by over 14% during the previous fiscal and could remain under some pressure in the first few months of FY2013. However, over the medium term improving global growth outlook coupled with pick up in domestic growth momentum should support investor sentiment and buoy the Rupee. However, elevated crude poses a significant risk to the currency. Rates: Supply concerns weigh on bond market The bond market has witnessed massive sell off since mid March, with the 10-year benchmark bond yields rising by around 51 bps to hit a new four month high of 8.78% on supply concerns. Going forward, despite our call of 75-100 bps repo rate cut, we expect the bond yields to remain under pressure due to supply concerns, with the yields trading in the 8.60 8.85% range. However, likely improvement in systemic li quidity in April along with a 25 bps rate cut in the policy meeting later this month, will limit the downside in bonds. Inflation: Inflation likely to ease, but elevated oil prices pose risk Inflation is likely to ease in FY2013 on the back of base effect, moderation in growth and consolidation in commodity prices. However, the downside is likely to be capped due to structural supply demand mismatches in the food economy, particularly protein rich items. We expect inflation to averag e around 6.5% in FY2013 as compared to FY2012 estimate of around 8.6%. The risk to our view emanates from s pike in global commodity prices, especially oil and uncertainty around monsoons. Feature: The implications of high oil prices for India Amidst persistent threats of escalating crude oil prices, we investigate how Ind ia would compare to other

Emerging Market economies, in its ability to withstand higher crude oil prices a nd have also quantified the effect of oil price movements on India s current account deficit, inflation and fiscal defi cit. Amongst the BRICS, India fares as the most vulnerable to swings in international oil price, on account of high oil intensity, reliance on oil imports and current account deficit. Further, our calculations show that an USD 1/bbl increase in the crude oil price leads to around USD 1 bn rise in the current account deficit. On the infla tion front, a 10% increase in the Rupee adjusted India s crude oil basket, along with a 10% hike in diesel prices lead s to 0.8% increase in headline WPI while a USD 10/bbl increase would result in 0.15 percentage point increase i n India s fiscal deficit in FY2013. Global Overview Samir Tripathi Th e g l o b a l econ om y is in the ph ase o f trans i ti on , as th e t u rm oil of th e l a st quart er of 201 1 h a s eas ed s i g n i f ican

tl y ECB tw o ro unds of LT RO s h a s dr ive n posi t iv e s p i llo ver effec t s for Ital ia n a nd S p a n is h sover e ig n b ond m a rket s It is to o ear ly t o co n c lu de th a t th e wo rst of

th e Euro p ea n de bt cr isis is be hin d us as fu nd am en ta l cha l l e n g e s conti n u e t o persis t Th e l a ck o f solv enc y im prov in g me asures sugg ests t h at E Z econ om ies are o u t of

t h e woo d s Th e US ec o n o my has show n t e nt ati v e s i g n s of rene we d m o m e nt um a nd the pot en ti al t o mov e on the pat h of susta i n a b i l i t y Global Economy: Back to fu