FICC TIMES //

The ongoing equity rally in the global markets got a boost from Chinese data, monetary easing by central banks and strong payrolls to end the week higher. A major change is that equities are rallying while USD is strengthening against other currencies, which used to be seen earlier as a sign of risk aversion. The markets are finally decoupling the two.

THE WEEK GONE BY AND THE WEEK AHEAD

March 8, 2013

Steady interest rates, positive US jobless and payroll data and continued monetary easing by central banks lent some more weight to the ongoing global market rally last week. In Japan, the BOJ kept the key interest rates unchanged while keeping its monetary stimulus plan unchanged for the year. The BOJ also painted an optimistic outlook for the economy stating that the decline in exports had stopped. This, added with positive economic data released during the week, led to a continued rally in the Nikkei. And after a brief pause, Japanese Yen continued its slide and touched new lows this week closing at a three and half year low of 96.50 against the dollar. In Europe, the ECB in its meeting kept the interest rates unchanged while painting what appeared to be an overtly optimistic outlook for the Euro region and underplayed the significance of the political stalemate in Italy, taking support from the resilient financial markets to justify its stance. Post the ECB meeting, the Euro gave up its early week gains and closed slightly lower against the dollar week-on-week. The US dollar, having started the week on weaker note, surged against most currencies in the later part of the week on the back of the positive US jobs data and resurgence of concerns about the Euro area post the ECB meeting which saw capital flowing back into safe havens. Closer home, in a largely uneventful week in terms of economic data, the Indian stock markets remained strong on global cues while the INR too closed the week stronger driven by dollar sales by banks.

The key events of last week:

The Euro zone PPI rose more than expected in January to 1.9 percent y-o-y. Prices excluding the energy sector increased by 1.4 percent and prices in energy sector increased by 2.8 percent. Non-durable consumer goods gained 2.4 percent and intermediate goods rose by 1.3 percent. On an m-o-m basis the index rose to 0.6 percent as against a 0.2 percent decline in December. The Bank of Japan kept its overnight rates unchanged at 0.1 percent and refrained from expanding the monetary stimulus while sticking to its plan to make asset purchases of JPY 101 tn by the end of 2013.

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The Bank of England kept interest rates unchanged at four year low of 0.5 percent and refused to expand the monetary stimulus plan against expectations. The ECB also kept the rates unchanged at 0.75 percent amidst renewed uncertainty in the Euro area after the election stalemate in Italy Japans GDP for the fourth quarter rose at an annualized 0.2 percent revised from an initial estimate of a 0.4 percent contraction. For the fourth quarter the GDP rose by 0.5 percent y-o-y. China merchandise trade surplus narrowed to a better than expected US$ 15.3 in February as against US$ 29.1 bn in January. Exports increased by 21.8 percent and imports were lower by 15.2 percent. However, the data is not strictly comparable to previous periods as the Chinese lunar holidays fell in February this year as against January last year.

And closer home.

India composite PMI data for the month of February came in at 54.8, lower than 56.3 recorded in January. While manufacturing output accelerated, there was a slowdown in services due to deceleration in new business. However, service providers signaled optimism regarding the outlook.

The government successfully raised Rs. 310 cr from the Rashtriya Chemicals and Fertilizers Ltd (RCF) offer for sale (OFS) on Friday. Three more issues of NALCO, MMTC and SAIL are lined up for divestment by the month end.

So what does the next week hold...?

After BOJs policy meeting this month, the focus is on the next meeting in April, to be headed by the new BOJ chairman Haruhiko Kuroda after his approval by the Japanese parliament, where the markets are expecting additional stimulus announcement to reach the 2 percent inflation target. While the markets focus on the short term recovery and money printing mechanism to bring the country out of years of recession, the larger issues about the structural problems facing Japan in addition to the countrys appetite to absorb 2 percent inflation with a public debt to GDP ratio of around 240 percent remain unaddressed. In Europe, resurgence of concerns about recession in the Euro area after the inconclusive elections in Italy could possibly see the ECB renewing its bond purchase plan. In US after the budget cuts taking effect, focus will now be on the next fiscal deadline of March 27 which would see expiration of funding for government agencies and programs Page 2

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unless a senate reaches an agreement. The US Fed has stated that it will continue its asset purchase program till unemployment reaches 6.5 percent. A better than expected jobs data this week will possibly see the Fed tapering off its monthly asset purchases sooner than expected. Closer home, the markets will be focused on the inflation and IIP data next week and the RBI mid quarter policy review the week after.

Important upcoming International events to be tracked:

Date 03/09/2013 03/09/2013 03/09/2013 03/09/2013 03/11/2013 03/12/2013 03/12/2013 03/12/2013 03/12/2013 03/12/2013 13-03-2013 13-03-2013 13-03-2013 13-03-2013 14-03-2013 14-03-2013 14-03-2013 14-03-2013 14-03-2013 15-03-2013 15-03-2013 15-03-2013 Country Japan China China China Germany Japan Germany UK UK UK EMU US US US UK US US US US EMU US US Event GDP Industrial Production (Yr/Yr % change) Consumer Price Index (Y/Y % change) Producer Price Index (Y/Y % change) Merchandise Trade CGPI (PPI) CPI Merchandise Trade Industrial Production Merchandise Trade Industrial Production Retail Sales Business Inventories (Inventories - M/M change) EIA Petroleum Status Report Producer Price Index Jobless Claims Producer Price Index Current Account (Current Account) EIA Natural Gas Report HICP Consumer Price Index Industrial Production Period Q4, 2012 Jan, 2013 Feb, 2013 Feb, 2013 Jan, 2013 Feb, 2013 Feb, 2013 Jan, 2013 Jan, 2013 Jan, 2013 Jan, 2013 Feb, 2013 Jan, 2013 wk3/8, 2013 Feb, 2013 wk3/9, 2013 Feb, 2013 wk3/8, 2013 Feb, 2013 Feb, 2013 Feb, 2013

Important upcoming Domestic Events

Date 03/11/2013 03/11/2013 03/11/2013 03/12/2013 03/12/2013 03/12/2013 03/12/2013 Event Foreign merchandise trade Exports (YoY Chg) Foreign merchandise trade Imports (YoY Chg) OECD composite leading indicator for India IIP (YoY Chg) CPI Inflation - Rural (YoY Chg) CPI Inflation - Urban (YoY Chg) CPI Inflation - Combined (YoY Chg) Period Feb Feb Jan Jan Feb Feb Feb Frequency Monthly Monthly Monthly Monthly Monthly Monthly Monthly

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13/03/2013 13/03/2013 13/03/2013 14/03/2013 15/03/2013 15/03/2013 15/03/2013

91 day T- Bills auction of Rs 70 bn (cut-off yld) r Reserve Money (change on wk) 182 days T- Bills auction of Rs 50 bn (cut-off yld) WPI Inflation (YoY Chg) New Series (Base 2004-05) WMA (ways and means advance) - to central govt WMA (ways and means advance) - to state govts FX reserve (change on wk)

Weekly Wk to Mar 8 Feb Wk to Mar 8 Wk to Mar 8 Wk to Mar 8 Weekly Daily Monthly Weekly Weekly Weekly

USD/INR retraced sharply from around the 55 mark to close at 54.28 last week. We see buying opportunity between 53.80-54.00 for short term imports as the upside for the rupee remains limited in the shortrun due to a widening CAD.

Technical Based View:

> USD/INR staged a sharp up move after the budget related disappointment led to serious short-covering > Last week some of that pessimism reversed with INR gaining all the way to 54.28 from the week's high of around 55 > The INR was supported by a sharp rally in equity, index gaining over 5% in the last 3 days > Going forward, we expect 53.80-54.00 to hold, and believe that USD/INR is a clear buy on dips

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