As s o c i a t i o n o f N a t i o n a l E x c h a n g e s M e m b e r s o f I n d i a

INDIAN ECONOMY AND CAPITAL MARKET REPORT

Presented By Mr. Bijay Murmuria President, ANMI Association of National Exchanges Members of India Email: president@anmi.in September, 2008

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ABOUT ANMI

Association of National Exchanges Members Of India (ANMI) is a pan India body of members of the two largest stock Exchanges of India viz National Stock Exchanges of India Ltd (NSEIL) & Bombay Stock Exchange (BSE). ANMI provides a healthy platform to its members to regularly interact with each other aids them to identify and understand the Problems / Difficulties / Issues being faced by them / Investors / Financial Fraternity from time to time. It gives the members the opportunity to brainstorm the matters before making it a formal issue.

ANMI regularly conducts Educational Training /Awareness Seminars / Workshops / Programs for the benefit of its members / Investors / Intermediaries & other related financial entities. The Investor Awareness programmes give a unique opportunity to spread the equity cult and educate the Investors / Financial Fraternity /Intermediaries all over the country.

It also works for the enhancement of the skill levels of the employees of its members and initiates and emphasizes moral code of conduct like discipline, ethics and transparency in the complete functioning. In its humble way it contributes and acts as a catalyst for the development and growth of Indian Capital Market and economic development of our country.

The Association has a vision I.E. to be the acknowledged Thought Leader in the Capital Market. It mission is to provide principle centre leadership, to create long term value for the members and to be a Catalytic Agent for the development and growth of Capital Market.

For Further Information Contact: Mr. Chandi Das Ghosh, Executive Officer President Secretariat Association of National Exchange Members of India Martin Burn Building, Mezzanine Floor, Room No. 4 R.N.Mukherjee Road, Kolkata 700001 Telefax: (+91)033 2243 8214 Email: anmieirc@vsnl.net, Web: www.anmi.in

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INDEX
SR.NO 1. CONTENTS Indian Economy Quick facts about India Economic Review Monetary Policy Review Highlights Economic Growth Exports/Imports Forex Reserves Inflation Interest Rate Scenario FDI Inflow FII Inflow Private Equity 2. Indian Capital Market Review Primary Market Secondary Market India vs International Markets Mutual Fund Participation in Capital Markets FII Participation in Capital Markets 3. Overall Outlook of the Indian Economy 3-5 6 7-9 10-12 13-14 15-16 17-18 19 20-21 22-23 24 25 26-27 27-28 29-31 32 33 34-37 PAGE NO

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QUICK FACTS ABOUT INDIA

Industry/Manufacturing
India's manufacturing base, which is the fourth-largest among emerging economies, is among the fastest growing and has seen more investments as a proportion of gross domestic product than any country except China India's power sector has attracted a majority share in the Rs 6,33,906crore (US$ 150.79 billion) investment announced by the industry majors during January-June 2008, Of the investments tracked by the industry body during the first half of calendar year 2008, the energy sector has attracted 18.64 per cent at Rs 1,95,913 crore (US$ 46.60 billion ). Power majors like Tata Power, Sterlite Industries, Jindal India Thermal Power and Lanco Group are among the companies that have lined up big investments in the sector. Undaunted by the high interest rates, the real estate sector ranked second in terms of flow of funds, attracting 14.38 per cent of investments at Rs 1,51,084 crore (US$ 35.94 billion) for the next two to five years. The steel sector follows, with investment announcements worth Rs1, 08,609 crore (US$ 25.84 billion) accounting for 10.33 per cent of the total capital expenditure tracked by the study. The sector attracted investments from steel majors like Vedanta Resources, Tata Steel, Bhushan Steel and JSW Steel. With the retail sector growing at an estimated 25 per cent, corporate retailers and real estate developers like Reliance Retail, Parsvanath Developers and Videocon Industries announced investments worth Rs 89,200 crore (US$ 21.22 billion) for January-June 2008, accounting for 8.24 per cent. Aggressive marketing and falling tariffs by major telecom players like Reliance Communication, Aircel and Quippo Telecom Infrastructure contributed to the boom in the Telecom sector, which attracted investments of Rs 89,100 crore (US$ 21.20 billion). Oil majors the Hindujas, ONGC, Reliance Industries and OIC announced plans worth Rs 88,790 crore (US$ 21.12 billion) during the first half of 2008 for setting up of refineries and expansion of pipeline to increase oil production over the next two to five years. Auto companies announcing substantial capacity expansion as well as investments in the R&D, the sector attracted investments, worth Rs 49,529 crore (US$ 11.78 billion) for the next two to eight years.Tata Motors, Maruti Suzuki, Fiat India, Mahindra and Mahindra lead the race in lining up investments for this ever growing sector. Taking advantage of skilled and low cost workforce, the IT firms have also lined up Rs 39,654 crore (US$ 9.43 billion) capital expenditure plans during January-

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June 2008 for expansion, upgradation and setting up of IT parks and software development centres over the next 2-10 years. The construction and manufacturing sector announced investments of Rs36,790 crore (US$ 8.75 billion) for the next two to five years, while the ports and shipping sector attracted inflows of Rs30,690 crore (US$ 7.30 billion) by companies like Essar Shipping Ports, Jindal Saw (JSL), Shipping Corporation of India and JSW Infrastructure. The other sectors that saw investment announcements during the period under review were hospitality Rs 23,340 crore (US$ 5.55 billion), aviation Rs 20,890 crore (US$ 4.97 billion), engineering Rs 7,435 crore (US$ 1.77 billion), consumer durables Rs 6,000 crore (US$ 1.43 billion), pharma Rs 4,475 crore (US$ 1.06 billion) and education Rs 2,796 crore (US$ 0.67 billion). 'Made in India could become the next big manufacturing exports story' says a report by McKinsey. India, with its proven track record in the skill-intensive industries and the global trend to manufacture and source products in low cost countries, is well placed to emerge as one of the leading hub for manufactured exports. Also, manufacturing contributes about two-thirds of the total exports of the country. It is estimated that manufacturing exports could increase from US$ 40 billion in 2002 to US$ 300 billion in 2015, simultaneously increasing its share in world manufacturing trade from 0.8 per cent to 3.5 per cent.

Market
The National Stock Exchange has become the world's second fastest-growing bourse in terms of number of listed companies, while the Bombay Stock Exchange is the biggest bourse. India'US$ 35.17 billion rural retail market is expected to cross US$ 45.22 billion by 2010 and US$ 60.29 billion by 2015, as per a Confederation of Indian Industry - Yes Bank study. The size of the luxury market in India is estimated at around US$ 3.5 billion, and could easily leapfrog to US$ 30 billion by 2015. As many as nine Indian banks, led by HDFC Bank and ICICI Bank, have made it to the list of top 50 Asian Banks, as per this year's Asian Banker 300 report. India's e-commerce market is expected to touch US$ 2.33 billion by FY200708, as per a survey by the Internet and Mobile Association of India and Indian Market Research Bureau. Indian consumer spending could more than quadruple to US$ 1.77 trillion by 2025 - from about US$ 431.69 billion in 2005 - steered by a ten-fold jump in its middle-class population and a three-fold rise in household income, according to a McKinsey study.

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The Indian product engineering offshoring market is expected to witness a 23 per cent CAGR by 2012, as large captive centres of global corporations continue to expand their activities.

Investment
Indians are expected to have US$ 1 trillion in investable wealth by 2012, with the country's robust economic growth driving a four-fold surge from just US$ 250 billion in 2007. India has recorded a huge rise in the number of corporate entities, with about 55,000 companies incorporated annually in the last two years. India receives the world's largest remittances - US$ 27 billion per year according to a World Bank study, and global wealth managers are targeting the Indian diaspora to invest in the country. India at second place in AT Kearney's 2008 FDI Confidence Index continues to attract investors in the high value-added services industries like financial services and information technology.

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ECONOMIC REVIEW
Key highlights of the Economic Survey 2008-09 tabled by the Finance Minister P Chidambaram in Parliament on 28 Feb2008.

Indian Economy projected to grow at 8.7 percent in 2007-08 To top $ 1trillion this fiscal at market exchange rate Focus on containing inflation Fiscal deficit to decline to 3.3 percent Revenue deficit to decline to 1.5 percent Gross Tax GDP ratio to rise to 11.8 percent Domestic Investment & Savings drive growth Bank credit grows by 21.5 percent Increased activity at stock markets, key indices giving returns of around 38 percent Money registers annual average growth of 19.5 percent in 2006-07 Gross Foreign direct investments (FDI) inflows reaching $11.2 billion in first six months of 2007-08 150 percent increase in net FDI inflows in 2006-07 to $23 billion 70 percent export target achieved during April-Dec 2007 Services sector growth continues, transport and communication leads the way with 15.3 percent growth. 13.9 percent growth in financial services in 2006-07 Revenue expenditure grows 17 percent, higher than target of 5.4 percent Concern: Infrastructure Constraints Concern: Slow down in consumer goods sector Non foods crops production exceeds target Food grain production in 2007-08 expected to fall short of the target by 2.2 million tonnes Food stocks comfortable Concern: Loss of Dynamism in agriculture and allied sectors 42.7 million self help groups covered under micro finance Fundamentals continue to inspire confidence Investment climate full of optimism 100 percent foreign direct investment (FDI) in home appliances

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MONETARY POLICY REVIEW HIGHLIGHTS JULY 2008

GDP growth projection for 2008-09 revised from of 8.0-8.5 per cent to around 8.0 per cent, barring domestic or external shocks. To bring down inflation from current level of 11.0-12.0 percent to a level close to 7.0 per cent by March 31, 2009. Policy actions aim to bring down the current level of inflation to a tolerable level of below 5.0 per cent as soon as possible and around 3.0 per cent over the mediumterm. There are early signs of some moderation in money supply and deposit growth, but they continue to expand above the indicative projections warranting continuous vigilance and appropriate and timely policy responses. Liquidity management will continue to receive priority in the hierarchy of policy objectives, in view of heightened uncertainty in global markets and the dangers of potential spillovers to domestic markets. Overall stance of monetary policy in 2008-09 will continue to be: To ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum. To respond swiftly on a continuing basis to the evolving constellation of adverse international developments and to the domestic situation impinging on inflation expectations, financial stability and growth momentum, with both conventional and unconventional measures, as appropriate. To emphasize credit quality as well as credit delivery, in particular, for employmentintensive sectors, while pursuing financial inclusion. Domestic Developments Real GDP growth in 2007-08 was revised upwards to 9.0 per cent by Central Statistical Organization in its end-May 2008 estimates from the advance estimates of 8.7 per cent released in February 2008. Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, increased to 11.89 per cent as on July 12, 2008 from 7.75 per cent as at end-March 2008 and 4.76 per cent a year ago. On a year-on-year basis, inflation based on the consumer price index (CPI) for agricultural labourers and rural labourers increased to 8.8 per cent and 8.7 per cent, respectively, in June 2008 from 7.8 per cent and 7.5 per cent a year ago.

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Year-on-year inflation based on CPI for industrial workers and urban nonmanual employees stood at 7.8 per cent and 6.8 per cent, respectively, in May 2008 as compared with 6.6 per cent and 6.8 per cent a year ago. CPI-based inflation measures have increased in the range of 2.0-3.2 percentage points over their levels in January 2008. Price of the Indian basket of crude oil increased from $99.4 per barrel in March 2008 to $129.8 in June and further to $141.5 on July 3, before declining to $121.9 on July 25. Money supply (M3) increased by 20.5 per cent on a year-on-year basis on July 4, 2008, lower than 21.8 per cent a year ago. Year-on-year growth in aggregate deposits of scheduled commercial banks at 21.7 per cent (Rs.5, 89,646 crore) up to July 4, 2008 was lower than 24.6 per cent (Rs.5, 36,617 crore) a year ago. Up to July 4, 2008 non-food credit of SCBs rose by 25.9 per cent (Rs.4, 85,709 crore) on a year-on-year basis, higher than 24.6 per cent (Rs.3, 69,109 crore) a year ago. State-owned oil marketing companies provided $ 4.3 billion (Rs.19, 325 crore) against oil bonds purchased under the Special Market Operation scheme up to July 25. Total overhang of liquidity as reflected in the balances under the LAF, the MSS and the central governments cash balances taken together declined from an average of Rs.2,42,370 crore in April 2008 to Rs.2,12,201 crore in May 2008 and Rs.1,93,726 crore in June 2008 (with an intra-year peak of Rs.2,93,048 crore on April 8, 2008) before declining to Rs.1,45,200 crore on July 25, 2008. Financial markets reflected the changes in liquidity conditions during the first quarter of 2008-09. Yields in the government securities market hardened substantially during the current financial year in both primary and secondary segments. Deposit rates of SCBs increased, particularly at the longer end of the maturity spectrum, during the first four months of 2008-09 (up to July 25). Equity markets witnessed a major downturn in both the primary and secondary segments during the current financial year so far, continuing the moderation that had set in by early January 2008 Commercial banks holdings of government and other approved securities was 27.7 per cent of the banking systems net demand and time liabilities (NDTL) which was marginally lower than 27.8 per cent at end-March 2008 and 28.7 per cent a year ago.

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Gross market borrowings of the government through dated securities at Rs.72, 000 crore (Rs.73, 000 crore a year ago) during 2008-09 so far (up to July 25, 2008), constituted 41.0 per cent of the budget estimates (BE) whereas net market borrowings at Rs.47, 982 crore (Rs.45, 232 crore a year ago) constituted 48.5 per cent of the BE.

External Developments: Information released by the DGCI&S indicates that exports increased by 21.7 per cent in US dollar terms during the first two months of the current financial year, compared with 24.2 per cent in the corresponding period of the previous year. Imports rose by 31.8 per cent as compared with 37.9 per cent in the corresponding period of the previous year. Non-POL imports moderated to 24.6 per cent from 43.8 per cent a year ago, while POL imports increased by 48.6 per cent on account of surge in crude oil prices as compared with 25.7 per cent in the corresponding period of the previous year. As a result, the merchandise trade deficit widened to $20.7 billion during April-May 2008 from $13.9 billion in the corresponding period last year. Foreign exchange reserves declined marginally by $2.6 billion during the current financial year so far and stood at $307.1 billion on July 18, 2008. During the current financial year up to July 25, 2008 the rupee depreciated by 5.4 per cent against the US dollar, by 5.0 per cent against the euro, by 5.2 per cent against the pound sterling and by 1.3 per cent against the Japanese yen

India's economy is on the fulcrum of an ever-increasing growth curve. With positive indicators such as a stable 8-9 per cent annual growth, rising foreign exchange reserves, a booming capital market and rapidly expanding FDI inflows, India has emerged as the second fastest growing major economy in the world. The economy has been growing at an average growth rate of 8.8 per cent in the last four fiscal years (2003-04 to 2006-07), with the 2006-07 growth rate of 9.6 per cent being the highest in the last 18 years. Significantly, the industrial and service sectors have been contributing a major part of this growth, suggesting the structural transformation underway in the Indian economy.

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INDIAN ECONOMY
ECONOMIC OVERVIEW 60 years after gaining its independence, India has overcome all odds and achieved phenomenal standards of economic stability, courtesy the indomitable contributions of various sectors such as agriculture, tourism, commerce, power, communications, science & technology, etc., which have acted as the pillars of the Indian economy. India is among the top 15 countries in terms of GDP at constant prices. The country is ranked fourth in terms of Purchasing Power Parity (PPP) in 2007 with a GDP of US$4.726 trillion. The business and regulatory environment is evolving and moving towards constant improvement. ECONOMIC GROWTH Indias GDP has witnessed high growth and was the second fastest growing GDP after China in the Year 2007-08.The sound performance of each industry segment is leading to the overall robust performance of the Indian Economy. The growth of real gross domestic product (GDP) in 2007-08 was revised upwards to 9.0 per cent by the Central Statistical Organization (CSO) in its end-May 2008 estimates from the advance estimates of 8.7 per cent released in February 2008. As per the revised estimates, real GDP originating in agriculture, industry and services rose by 4.5 per cent, 8.1 per cent and 10.7 per cent, respectively, in 2007-08 as compared with 3.8 per cent, 10.6 per cent and 11.2 per cent in the previous year. India's macroeconomic performance in 2007-08 is part of a phase of exceptionally high growth by historical standards, occurring as it did on top of 9.6 per cent in 2006-07 and 9.4 per cent in 2005-06. Accordingly, real GDP growth has averaged 8.8 per cent over the period 2003-08 as compared with 5.4 per cent in the preceding quinquennium. GDP at factor cost at current prices in the year 2007-08 is estimated at Rs. 43,03,654 crore (US$ 1023.75 billion), showing a growth rate of 13.6 per cent over the Quick Estimates of GDP for the year 2006-07 of Rs. 37,90,063 crore (US$ 901.58 billion), released on 31st January 2008. GDP at factor cost at constant (1999-2000) prices in the year 2007-08 is now estimated at Rs. 31, 22,862 crore as against Rs. 31, 14,452 crore estimated earlier on 7th February, 2008), showing a growth rate of 9.0 per cent (as against 8.7 per cent in the Advance Estimates) over the Quick Estimates of GDP for the year 200607 of Rs. 28, 64,310 crore (US$ 681.36 billion, released on 31st January 2008. The upward revision in the GDP growth rate is mainly on account of the revisions made in the estimated production of agricultural crops by the Department of Agriculture and Co-operation. The sectors which showed growth rates of 5 per cent or more, are manufacturing (8.8 per cent), electricity, gas and water supply' (6.3 per cent), construction (9.8 per cent), 'trade, hotels, transport and communication' (12.0 per cent), 'financing,

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insurance, real estate and business services' (11.8 per cent), and 'community, social and personal services' (7.3 per cent).

1200 1000
USD Billion

Indias GDP at Constant Prices: 2002-07

1068

838 737 638 556 469

800 600 400 200 0

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

2007-08 Revised Estimates

Sectoral GDP

Agriculture
100% 90%

Industry

Services

USD Billion

80% 70% 60% 50% 40% 30% 20% 10% 0%

191

237

398

439

564

103

125

204

245

314

105

105

135
2005-06

154
2006-07

190
2007-08

1999-00

2002-03

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GDP at factor cost at constant 1999-2000 prices is estimated by the CSO to grow at 9 per cent in 2007-08. This represents a deceleration from the unexpectedly high growth of 9.4 per cent and 9.6 per cent, respectively, in the previous two years. With the economy modernizing, globalizing and growing rapidly, some degree of cyclical fluctuation is to be expected. This was taken into account while setting the Eleventh Five Year Plan (2007-08 to 2011-12) growth target of 9 per cent (both in the approach paper and in the NDC approved plan). The Eleventh Five Year Plan targets a growth of 10 to 11 per cent as 9 per cent had already been achieved. Maintaining growth rate at 9 per cent will be a challenge and raising it to two digits will be an even greater one in the next fiscal year 2008-09.

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EXPORTS /IMPORTS The new Foreign Trade Policy (2004-09) has more than doubled Indias exports in 4 years. Indias export in 2007-08 has exceeded US$ 155 billion from US $ 64 billion in 2004, registering a cumulative annual growth rate of 23% year on year, way ahead of the average growth rate of International Trade. This is more so because during the past five years, the rupee has appreciated against the dollar nearly 12% and 5% in 2007-08.High domestic interest rates and an adverse trade environment too were obstacles in the way. But despite these handicaps, India was able to compete and forge ahead in the International Markets as Quality and cost Advantage are the two important parameters leveraged by the Indian producers to increasingly market products and services. Exports in April 2008 amounted to USD 4.4 billion increasing by 31.5 percent from April 2007.Services sector has been a major contributor to increased exports from India. Agriculture and allied products, engineering goods, gems and jewellery and petroleum products contributed about 69 per cent of export growth during 200708.

180 160 140 120 USD Billion 100 80 60 40 20 0 2002-03

Indias Exports: 2002-08

156 126 103 84 64 53

2003-04

2004-05

2005-06

2006-07

2007-08

Imports too maintain a strong momentum. At 27%, it outpaced the growth of exports by a sizable margin during 2007-08.The value of Imports during 2007-08 was at US $ 235.9 billion as compared to, US $ 185.7 billion a year ago.

Petroleum products & minerals are the major contributors towards Indias growing imports. Imports in April 2008 amounted to USD 24.2 billion increasing by 36.6 percent from April 2007.

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Indias Imports: 2002-08

250

236

200 USD Billion 150 150 112 100 62 50 78

185

0 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8

Merchandise imports on a payments basis rose by 29.9 per cent in 2007-08 as compared with 21.8 per cent in 2006-07. Imports of petroleum, oil and lubricants (POL) increased by 39.4 per cent on top of the growth of 30.0 per cent in 2006-07 mainly on account of an increase of 27.4 per cent in the average price of the Indian basket of crude oil during the year. Indias total merchandise trade (both exports and imports) will be US $ 400 billion during 2007-08, accounting for nearly 1.5% of world trade. Trade in services is added; our commercial engagement with the world would be to the tune of US $ 525 billion. The commerce ministry has stressed that India should achieve 5% share of world trade by 2020. As a means to achieve this, an export target of US $ 200 billion has been set for 2008-09 by the Ministry of Commerce.

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FOREX RESERVES In 2007-08, Forex reserves witnessed a growth of approximately 56 percent over 2006-07 making it close at US $ 310 billion-an increase of nearly US$ 110 billon from US$ 199.18 billion at the end of 2006-07.This makes it the third largest stock of reserves among emerging market economies .The increase in reserves is mainly due to increase in foreign currency assets from US $ 191.9 billion at end march 2007 to US $ 299.2 billion at end march 2008,higher overseas borrowings by Indian Companies and remittances from non residents. However this also raised the money supply that has partly contributed to the rise in inflation. The exchange rate of the rupee against the US dollar, which was Rs 43.59 at end march 2007 appreciated by 5.6 percent 5to Rs 41.29 at end April 2007 and further to RS 39.27 by January, 2008.In the subsequent period the exchange rate depreciated, easing to Rs 39.97 per US dollar by end March 2008. Indias Forex Reserves: 2001-08
310

350 300 250

199 USD Billion 200 150 100 54 50 0

01 20 2 -0 02 20 3 -0 03 20 4 -0 04 20 5 -0 05 20 6 -0 06 20 7 -0 07 20 8 -0

141 112 75

152

Foreign exchange reserves with the Reserve Bank of India dipped $1.4 billion and stood at US$ 307.1 billion during the week ended July 18 and the central bank sold dollars to meet demand from importers and foreign investors. According to the latest data released by RBI on the 26th July 2008 total foreign exchange reserves including gold and special drawing (SDR) rights with the IMF dipped $1,413 million to touch $307.1 billion. While foreign currency assets dipped $1,415 million, reserves with the IMF rose $2 million. The value of gold and SDR remained unchanged during the week. Forex pile up has been slowing down of late. In dollar terms, the reserve pile up has dipped $2.6 billion since April this year, compared to $22 billion that was added to the forex kitty in the same period a year ago. The slowdown has been due to a combination of factors. Capital inflows have not matched the importers demand resulting in dollar sales by the central bank. While foreign investors have been pulling out from the stock markets and inflows through overseas borrowing has slowed the capital inflows, demand for dollars from oil importers has risen due to rising global crude oil prices

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Reflecting the movements in payments, the accretion to amounted to US $ 92.2 billion 36.6 billion in 2006-07. Foreign end-March 2008.

current and capital accounts of the balance of foreign exchange reserves (excluding valuation) during 2007-08 which was much higher than US $ exchange reserves amounted to US $ 309.7 billion at

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INFLATION The Wholesale price Index (WPI), which is available on weekly basis, continues to be the most popular measure of headline inflation in India. There are however four consumer price indices (CPIs) that are specific to different groups of consumers .WPI is an economy wide index covering 435 commodities. Weights of the commodities are derived based on the value of quantities traded in the domestic market .It id therefore the most comprehensive measure of economy wide inflation available with high frequency .The other four consumer price indices are: CPI IW for industrial workers, CPI-UNME for urban non manual employees; CPIAL for agricultural labourers and CPI-RL for Rural Labourers.CPI IW is the most well known of these indices as it is used for wage indexation in Government and in the organized sectors.CPIs are compiled in terms of general standards & Guidelines set by the International Labour organization (ILO) for its member countries On a year-on-year basis, inflation based on the Wholesale price index (WPI) stood at 7.4 percent at end march 2008 as compared with 5.9 percent a year ago. During 2007-08, headline inflation declined from 6.4 percent at the beginning of the financial year to a low of 3.1 percent in mid October before firming up from mid February 2008 onwards. On an annual average basis, inflation at 4.7 percent during 2007-08 was lower than 5.4 percent in the previous year. Inflation soared to its highest in 42 months after the WPI rose following price hikes in manufactures goods and primary articles. The wholesale price index rose to its 13-year high of 11.05% in the week ending July 7, compared to 4.76% in the same period last year. Further more WPI reported a 16-year high inflation of 12.63% on August 9, 2008.

Inflation in WPI % Inflation at 16-Year High of 12.63% as on August 9, 2008

14 12 10 8 6 4 2 07.04.07 21.04.07 5.05.07 19.05.07 02.06.07 16.06.07 30.06.07 14.07.07 28.07.07 11.08.07 25.08.07 8.09.07 22.09.07 06.10.07 20.10.07 3.11.07 17.11.07 1.12.07 15.12.07 30.12.07 12.01.08 26.01.08 09.02.08 23.02.08 08.03.08 22.03.08 05.04.08 18.04.08 03.05.08 18.05.08 31.05.08 14.06.08 28.06.08 12.07.08 26.07.08 09.08.08

INFLATION (%)

Inflation at 13-Year High of 11.05% as on June 7, 2008

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Inflation expectations have been driven up partly by unrelenting pressures from international commodity prices, particularly crude oil, basic metals and selected food items. Prices of primary articles and manufactured products rose by 10.15 per cent and 10.72 per cent, respectively, on a year-on-year basis as compared with the increase of 11.13 per cent and 4.80 per cent a year ago. Prices of the fuel group increased by 16.94 per cent as against a decline of 1.44 per cent a year ago. Excluding the fuel group, year-on-year inflation rose to 10.52 per cent from 6.59 per cent a year ago. Similarly, excluding fuel and food, inflation rose to 11.83 per cent from 5.65 per cent a year ago. The main drivers of inflation during 2008-09 so far have been mineral oils (with a weighted contribution of 28.1 per cent), basic metals and alloys (18.8 per cent), oilseeds, edible oils and oil cakes (13.9 per cent), chemicals and chemical products (9.5 per cent), milk (2.7 per cent), and minerals (4.1 per cent) with a total weight of 36.8 per cent in the WPI basket and a combined contribution of over 77.3 per cent to overall inflation. On an annual average basis, headline WPI inflation was 5.98 per cent up to July 2008 as against 5.62 per cent a year ago. The price of the Indian basket of crude oil increased from US $ 99.4 per barrel in March 2008 to US $ 129.8 in June 2008 and further to US $ 141.5 on July 3, 2008 before declining to US $ 121.9 on July 25, 2008. While international crude (Indian basket) prices increased by 129 per cent in US dollar terms and 122 per cent in rupee terms during February 2007-June 2008, the domestic prices of freely priced products increased by about 76 per cent and the prices of administered products increased by only around 14 per cent over the same period. On a year-on-year basis, inflation based on the consumer price index (CPI) for agricultural labourers and rural labourers increased to 8.8 per cent and 8.7 per cent, respectively, in June 2008 from 7.8 per cent and 7.5 per cent a year ago. Year-onyear inflation based on CPI for industrial workers and urban non-manual employees stood at 7.8 per cent and 6.8 per cent, respectively, in May 2008 as compared with 6.6 per cent and 6.8 per cent a year ago. The CPI-based inflation measures have increased in the range of 2.0-3.2 percentage points over their levels in January 2008.

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INTEREST RATE SCENARIO During the current financial year 2007-08 the RBI after reviewing the macroeconomic and monetary situation adopted a pre-emptive policy stance to moderate inflationary expectations by raising policy interest rates. During 2007-08, the RBI used cash reserves ratio as a major policy instrument and so far CRR has been hiked 6 times during the year with cumulative increase of 225 basis points thereby bringing the level to 8.25 percent on with effect from the fortnight beginning May 24, 2008. During 2007-08, RBI kept Bank Rate, Repo rate and Reverse Repo unchanged at 6 percent, 7.75 percent and 6 percent respectively. Currently, India is witnessing high interest rates of 9 percent affecting the Industrial production and dampening the manufacturing sector and private consumption expenditure. Indias central bank has hiked interest ten times since 2004 to push inflation down. 2006-07 Q2 Q3 6 6 7.25 7.5 6 6 5 5.5 2007-08 Q2 Q3 6 6 7.75 7.75 6 6 7.5 7.45 2008-2009 Q1 Q2 6 6 8.5 9 6 6 8.75 9*

Bank Rate Repo Rate Reverse Repo Rate CRR

Q1 6 7 6 5

Q4 6 7.75 6 7

Q1 6 7.75 6 7

Q4 6 7.75 6 8.25

*CRR @ 9% wef Aug 30, 2008

During the first quarter of 2008-09, there were some shifts in liquidity conditions. As end-March balance sheet adjustments unwound and advance tax payments flowed back into the banking system with a large drawdown of Central Government's cash balances, liquidity conditions eased between the first week of April 2008 and the first week of May 2008. The increase in the CRR announced on June 24, 2008 in two stages of 25 basis points each effective from July 5 and July 19, 2008 sucked out an amount of nearly Rs.20, 000 crore from the system. LAF repo operations rose to a peak of Rs.52, 315 crore on July 21, 2008.

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FDI INFLOWS In the scheme of classification of capital flows based on duration, FDI has been the most attractive type of capital flow for emerging market economies because of its lasting nature and also because it is considered a vehicle for transformation of the domestic production process. The rapid growth of the economy, favorable investment regime, liberal policy changes and procedural relaxations, has resulted in a horde of global corporations investing in India. The generous inflow of FDI is playing a significant role in the economic growth of the country. In 2007-08, India's FDI touched US$ 29.8 billion, up 35 per cent against US$ 22.1 billion in 2006-07, and the country's foreign exchange reserves had crossed US$ 341 billion as on May 21, 2008. In 2005-06, the growth was even sharper at 184 per cent, up from US$ 5.5 billion in 2004-05. Net FDI inflows amounted to US $ 15.5 billion in 2007-08, sizably higher than US $ 8.5 billion in 2006-07. Inward FDI were channelised into sectors such as manufacturing, construction, business and computer services. Projections say that the country will attract US$ 35 billion in FDI in 2008-09 (as per data released by the Ministry of Commerce and Industry). FDI Equity Inflow India: 2001-08
30,000 25,000 20,000 15,000
USD Million 15,726 7,681 24,579

10,000 5,000 0
4,222 3,134 2,634 3,759

5,546

Gross FDI inflows during April-May 2008 were placed at US $ 7.7 billion as against US $ 3.8 billion a year ago According to a report by the National Council of Applied Economic Research (NCAER), "In the first nine months of 2007-08, the net capital flows rose to US$ 83 billion from US$ 30 billion the country received during the corresponding period of the previous year." The funds coming in as foreign direct investment (FDI) or external commercial borrowing, had also upped portfolio funds, as between FY 2004 and FY 2008, the reserves increased by more than US$ 150 billion.

20 01 -0 2 20 02 -0 3 20 03 -0 4 20 04 -0 5 20 05 -0 6 20 06 20 -0 08 7 2 -0 00 9* 7(A 08 pr * il -M ay )

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India topped the AT Kearney's 2007 Global Services Location Index, emerging as the most preferred destination in terms of financial attractiveness, people and skills availability and business environment. Similarly, UNCTAD's World Investment Report, 2005 considers India the 2nd most attractive investment destination among the Transnational Corporations (TNCs).

SECTOR WISE FDI

Source: Ministry of Commerce & Industry

Leading Japanese, Korean, European, French, and American automobile companies have set up their manufacturing base in India. Currently, FDI inflows into the Indian real estate sector are estimated to be between US$ 5 billion and US$ 5.50 billion. Investment in the Indian realty market is set to increase to US$ 20 billion by 2010. Prominent foreign players include Emaar Properties (Dubai), IJM Corp (Malaysia), Lee Kim Tah Holding (Singapore) and Salim Group (Indonesia). Many big names in international retail are also entering Indian cities. Global players, such as Wal Mart, Marks & Spencers, Roseby, etc, have lined up investments to the tune of US$ 10 billion for the retail industry. According to Mines Minister, Sis Ram Ola, "FDI of about US$ 2.5 billion per annum is expected in the mining sector from the fifth year of implementation of the new National Mineral Policy (NMP)." The surge in mobile services market is likely to see cumulative FDI inflows worth about US$ 24 billion into the Indian telecommunications sector by 2010, from US$ 3.84 billion till March 2008.

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FII INFLOWS Portfolio investment in India recorded net outflows by FIIs amounting to US $ 6.5 billion during 2008-09 up to July 18, 2008 Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors (FIIs).The number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (Sebi) has increased to 1,219 at the end of 2007 as against less than 1000 at the end of 2006. The registered sub-accounts of these FIIs also went up significantly to 3,644. FIIs showed huge interest in 2007, pumping in the highest ever net investment of US$ 17.2 billion in the equity markets and were instrumental in the BSE and NSE clocking record index levels of over 20,000 and 6,000 respectively. In fact, during the year, FIIs were net buyers in 10 out of 12 months, turning net sellers in the rest primarily to make up the losses on account of the sub-prime crisis in the US. Out of the total net inflows, a whopping 70 per cent was invested through the instruments of FCCBs, QIPs and IPOs. The remaining 30 per cent was invested through overseas offers, preferential offers and conversion of warrants.This surge in FII investment has led to the cumulative net investments by FII in to Indian equities to total US$ 66.8 billion by the end of 2007, since December 1993, when FIIs were allowed to enter India. However, the net investments by FII in Indian equities to total US $ 16.1 billion in 2007-08 as compared to US$ 6.7 billion in the 2006-07. Simultaneously, the up gradation of India's sovereign ratings combined with the improvement in the macro economic situation and growth fundamentals has led to a near tripling of FII investments in the debt market. Total investment in the country's debt market till November 2007 amounted to US$ 1.596 billion as against US$ 487 million in the corresponding period in 2006. This is a clear index of how bullish this this category of investors has been on the prospects of the Indian market. Net FII into India: 2001-08
18

16.1
16 14

USD Billion

12

10
10 8 6 4 2 0

10.2

9.4 6.7

1.8 0.6
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

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Some investment highlights: The Indian growth story has attracted global majors like CLSA, HSBC, Citigroup, Merrill Lynch, Crown Capital, Fidelity, Goldman Sachs, Morgan Stanley, UBS, T Rowe Price International, Capital International and ABN Amro among others to enter the Indian financial market. Goldman Sachs and Macquarie have acquired a 20 per cent stake each in PTC India Financial services Ltd. Temasek Holdings, Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup and India Equity Partners (IEP) have picked a combined stake of 10 per cent in Bharti Infratel. An entity of Merrill Lynch has picked up 49 per cent stake in seven residential projects of real estate major, DLF. Blackstone has taken up a 26 per cent stake in MTAR Technologies. Citigroup, Morgan Stanley, Goldman Sachs and BSMA have picked up a combined stake of over seven per cent in Gitanjali Gems. Fidelity Investments International has picked up close to seven per cent equity in Transport Corporation of India (TCI).

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PRIVATE EQUITY The year 2007 was a watershed for private equity market, which has emerged as the most preferred mode of fund mobilization for India Inc. The capital mobilized through this route was higher than the funds mobilized through IPOs, follow-on issues and qualified institutional placements put together. India, in fact, topped the Asia private equity chart for the first time in 2007 in terms of aggregate deal value.

80 70 60 50 40 30 20 10 0 2004 2005 2006 12.3 306 18.3 467 28.2 782

1081

1200 1000

70

800 600 400 200 0

207 10.4

2007

2008 No of Deals

Deal Value in USD Billion

*2008 -Data till June 2008

Overall, there were 207 deals worth $ 10.4 billion during first half of 2008, as against 178 transactions with a value of $ 6.69 billion during the corresponding period a year-ago, according to data compiled by Four-S Services, a provider of research, financial consulting and business content services. There was also an increase in average size of private equity (PE) deals in the first half of this year. Average deal size increased to $ 59 million as compared to $ 41 million in the corresponding period in 2007. Real estate and infrastructure have been driving PE activity in the first half of 2008 and are the main reason for the 58 per cent increase in deal value in first half of this year as compared to the first half of 2007. The top PE deals in the first half of this year include the $ 830 million investment by global bank Standard Chartered in DLF Assets (property fund of DLF Ltd), global private investment firm Providence Equity's $ 640 million investment in telecom services provider Idea Cellular. The other significant transactions include investment firm Symphony Capital's $ 450 million investment in DLF Assets, Steel tycoon L N Mittal and San Francisco-based Farallon Capital's $ 399 million investment in Indiabulls Real Estate and investment firm J P Morgan's 300 million dollar investment in Tower Vision India.

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INDIAN CAPITAL MARKET REVIEW

India's capital markets and regulatory environment is rapidly evolving. Since the continent is frequently described as booming, many Indian bankers and investors are focused on the role that capital markets will play in sustaining Indias economic growth. The Indian capital markets attained further depth and width in business transacted during 2007.The Bombay stock exchange (BSE) Sensex, which had been witnessing the upswing since the latter part of 2003 scaled a high of 20,000 mark at the close of calendar year 2007. . It has emerged as the third best performing market in the world with a dollar return of 71.23 per cent The National Stock Exchange (NSE) Index rose in tandem to close above the 6100 mark at the end of 2007. The National Stock Exchange (NSE) has climbed to the top spot in stock futures contracts and number-two slot in the index futures segment in the world. Both the indices more than tripled between 2003 to 2007.Sensex gave handsomely yearly returns of 47 % and the capitalization of the market crosses the US$1 trillion mark with an average increase of over US$ 10.18 million in every minute of trading during 2007. Over Rs 45,000 were raised in IPOs as market titans such as ICICI and DLF tapped the Indian Markets. Alongside the growth of business in the Indian capital market, the regulatory and oversight norms have improved over the years ensuring a sound and stable market. According to Ernst & Young, India was also the fifth largest market in terms of number of IPOs and seventh largest in terms of the proceeds for the year. Indian companies raised a whopping US$ 11.48 billion through public issues in 2007, which is 83 per cent higher than US$ 6.28 billion mobilized in 2006. The year 2008 marked the victory by sensex touching 21000 in the beginning of the year however Indian equities ended lower in January on the worries that the economy may not be as insulated on the global sub prime crisis s previously thought. The robust performance of the Indian stock markets can also be seen in the huge increase in the funds mobilised by the corporate India. During 2007-08, India Inc mobilized a whopping US$ 8.13 billion through issue of shares on rights issue, which is almost an eight-fold increase over US$ 926.32 million raised in 2006-07. In fact, the mobilisation of the funds in 2007-08 was more than the combined mobilisation of the preceding 12 years. Simultaneously, a whopping US$ 13.07 billion has been raised through by India Inc through public issues, according to data compiled by Prime Database. This is almost twice that of US$ 6.25 billion mobilised in 2006-07 and the highest ever in the last six years. While initial public offerings mobilised US$ 10.34 billion (about 79.14 per cent), follow-on public issues mobilised US$ 2.53 billion. The flurry of fund raising activity by the companies on the Indian stock exchange is likely to continue in 2008-09. Already, 125 companies have filed their draft offer documents (including rights and follow-on issues) with the Securities and Exchange Board of India (SEBI), to jointly raise around US$ 5.14 billion. These include: JSW Energy, Jaiprakash Power Venture, Adani Power, Bharat Oman Refineries and Future Ventures India among others.

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PRIMARY MARKET In the 12 months ended March 08 (FY08), 84 companies were listed on the BSE, raising Rs 41,810 crore. In 07, as many as 101 companies got listed on the bourses altogether, raising Rs 36,692 crore. According to the ETIG database, the primary section of the Indian equity market has not seen such a high number of listings at least in the past seven years. Construction, inclusive of real estate, was the buzzing sector in terms of number of listed companies and the money they raised. With 16 companies collecting over Rs 15,000 crore from the primary market, this sector topped the charts .The amount of money raised by the sector was largely skewed due to DLFs IPO, which raised more than half of the sum in May 07. Oil & gas and power were the other sectors that raised relatively large sums from the market. In January-March 2008, even as the number of primary market issues declined to 19 from 33 for the corresponding period of the last year, the amount raised in the Initial period offer market doubled with 122 percent rise to US$4.36 billion from Us$ 1.96 billion in the same period during 2007.The mega issue of Reliance power and rise in the overall stock market valuations were the main reasons for more than double increase in the money raised from the primary market. Sector wise the construction sector gathered a significant US$ 1.13 billion, despite two companies (Emmar MGF and Wockhardt Hospital) withdrawing their offer in the period. The construction sector contributed a share of 25.87 percent in the total IPO proceeds during the period January-march 2008.Significantly the year witnessed the largest ever IPO of Reliance Power, which had mobilized a whopping US$ 2.56 billion. Other major IPOs last fiscal include DLF, PGIL, Future Capital Holdings, REC and Omaxe. The 4.2-billion-dollar raised through 21 IPOs since the beginning of 2008 (Jan May 2008) marks an increase of 62 per cent from 2.6 billion dollars raised through 50 deals in the same period last year, according to global deal data provider Dealogic. Fund raising by India Inc has seen a sharp drop in the first quarter of financial year 2008-09. This is evident from an analysis of data on funds garnered by corporates from various routes, including initial public offers (IPOs), follow-on public offers (FPO), rights issues, debt, and private placements. The year may witness around 3035 public offerings as compared to 101 IPOs in 2007.The analysis shows that India Inc raised 67% less money in Q109 compared with the June quarter of the previous year. This also indicates the possibility of an impending slowdown in India Incs expansion plans. Each of the fund raising routes has witnessed a sharp decline in collections during the June 2008 quarter. Corporates raised just over Rs 1,547 crore from IPOs, indicating a fall of 88% from the year-ago levels. The data on number of IPOs that were issued are not encouraging either. In contrast to 21 primary issues in the Q107, only 13 IPOs were floated in the June 2008 quarter. This is also the lowest number of IPOs hitting the primary market in any of the June quarters in the past four years. India Inc was also shy of raising money through the FPO route. Not a single FPO hit the market during the June 2008 quarter compared with two FPOs during the yearago quarter. Even though the picture was gloomy for IPOs, FPOs and private equity funds, there was a moderate growth in funds raised through rights issues during the June 2008 quarter. The two rights issues that were floated during the quarter

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collected Rs 438 crore, reflecting a 20% rise over the year-ago levels. However, the number of rights issue has halved to two.

Resource Mobilization through Primary Market

US$ Billion Mode 1. Debt 2.Equity Of Which IPOs No of IPOs Mean IPO size 3.Private Placement 4.Euro Issues (ADR/GDR) Total

2004 0.6 8.47 3.14 26 0.12 23.67 0.51 33.25

2005 0.02 7.68 2.51 55 0.05 21.22 2.48 31.4

Calendar Year 2006 2007 0.1 0.15 8.27 14.87 6.27 8.59 75 100 0.08 0.09 29.77 28.31 2.86 10.52 40.95 53.85

2008 4.2* 21* 10.4** -

Source: SEBI, RBI, Economic Times *Data- (Jan May) ** Data- (Jan June)

SECONDARY MARKET

The Bombay stock exchange rose 20times from 1990s to reach 20,000 mark in November 2007.Emergence of Industries and confidence of Local investors has led to the upsurge of the Sensex. India is among the major destinations across the globe for inflow of US Dollar. However, The global meltdown has induced a bearish phase in the stock market of India. The secondary markets have seen more than 40 per cent fall in last six months from their peaks. In the secondary market, the BSE Sensex (1978-79=100) recorded a low of 12576 in July 16, 2008 before increasing to 14275 by July 25, 2008 which was 8.8 per cent lower than the end-March 2008 level and 31.6 per cent lower than the peak level of 20873 recorded on January 8, 2008. In the secondary market segment, the market activity expanded further during 2007-08 with BSE an NSE scaling new peaks of 21,000 and 6300 respectively in January 2008.Although the indices showed some intermittent fluctuations reflecting change in the markets sentiments the indices maintained their north bound trend during the year. This could be attributed to the larger inflows from Foreign Institutional Investors (FIIs) and the wider participation of domestic investors, particularly the Institutional Investors. During 2007 on a point-to-point basis, sensex and Nifty Indices rose by 47.1 and 54.8 percent, respectively. The buoyant conditions in the Indians bourses were aided by, amoung other things, India posting a relatively higher GDP amongst the emerging economies continued uptrend in the profitability of Indian corporates, persistence of difference in domestic and international levels of interest rates, impressive returns on equities and a strong

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Indian rupee on the back of larger capital inflows. Amongst the NSE indices, both Nifty and Nifty Junior delivered record annual equity returns(current year end index multiplied by 100) of 54.8 percent and 75.7 percent ,respectively during the calendar year 2007.While Nifty gave compounded returns of 34.4 percent ,Nifty Junior recorded compounded returns of 38.4 percent per year between 2003 and 2007. While the climb of BSE sensex during 2007- 08 so far was the fastest ever, the journey of BSE SENSEX from 18000 to 19000 mark was achieved in the first four trading sessions during October 2007.It further crosses the 20,000 mark in December 2007 and 21,000 in an intraday trading

24000 22000 20000 18000 16000 14000 12000 10000

Sensex at its high of 20873.33 on January 8, 2008 Sensex at its low of 12,576 on July 16 , 2008

.0 24 4.0 .0 7 17 4.0 .0 7 07 5.0 .0 7 28 6.0 .0 7 19 6.0 .0 7 7 9. .07 0 31 8. 0 .0 7 21 8.0 .0 7 15 9.0 .1 7 0 5. .07 1 26 1. 0 .1 7 17 1.0 .1 7 09 2.0 .0 7 30 1.0 .0 8 20 1.0 .0 8 13 2.0 .0 8 07 3.0 .0 8 30 4.0 .0 8 23 4.0 .0 8 13 5.0 .0 8 04 6.0 .0 8 25 7.0 .0 8 18 7.0 .0 8 8. 08

02

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INDIA VS. INTERNATIONAL MARKETS

Performance of Asian indices in 2008 has not been promising so far. This is mainly attributed to the instability in the global growth outlook, slowdown of the US economy, rising crude and flaming inflation. The Jakarta Composite Index has outperformed its Indian peer the BSE Sensex by 6 percent. While the BSE Sensex fell by 27.75 percent, its other Asian peers like SSE composite China fell by 46.75 percent, Hang Seng by 17.79,Kospi by 17.04 percent ,Nikkei by 14.45 percent and Jakarta composite by 18.10 percent from its previous close in Dec 2007. In 2007 among the Asian Stock markets, Indonesian markets outperformed the Indian Markets in terms of cumulative performance over 2003 levels. While the BSE Sensex rose by 47.1 percent during 2007 as compared to a downfall of 27.75 percent in 2008, SSE composite Index (Shanghai, China) rose by 96.7 percent in 2007and the Jakarta composite Index (Indonesia increased by around 52 percent. Other International Indices which rose appreciably in 2007 were Hang Seng (Hong Kong) by 39.3 percent, Kospi (South Korea) by 32.3 percent and Kuala Lumpur Comp Index (Malaysia) by 31.8 percent. Cumulative Change in movement of global indices a INDEX CUMULATIVE CHANGE OVER END -2003 2004 2005 2006 2007 BSE Sensex India 13.08 26.89 33.16 36.53 Hang Seng Index,Hong Kong 13.15 9.64 17.28 22.44 Jakarta Composite Index,Indonesia 44.51 29.65 37.68 41.14 Nikkei 225,Japan 7.61 22.84 17.29 9.43 Kospsi Index,South Korea 10.48 30.26 20.92 23.67 Kuala Lumpur Comp Index ,Malaysia 14.23 6.47 11.34 16.15 TSEC Weighted Index ,Taiwan 4.23 5.43 9.92 9.62 SSE Composite Index ,China -15.36 -11.93 21.35 36.92
Source: Derived from various country sources. a End month closing

LEVEL 2008 20.21 12.7 26.58 4.17 14.19 7.86 3.52 13.36

Considering financial turbulence in BSE Sensex price-to-earnings (P/E) ratio stands at 18.54 in the first week of August 2008 as compared to 20.15 for the same period a year ago (August 2007). As the stock indices scaled new highs, investors wealth as reflected in market capitalization also rose correspondingly. The market capitalization in India nearly doubled in 2007.The markets were more stable in 2007 as measured by the standard deviation of daily volatility of the Indian Indices as compared to the previous year. The price-to-earnings (P/E) ratio, which partly discounts future corporate earnings reflecting investors expectation of corporate profit, was higher at around 27 by end December 2007 as compared to around 21 at end-December 2006.

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Equity Returns, Volatility, Market Capitalization & P/E Ratios Index

2004 2005

Calendar Year
2006 2007 2008 till date

Nifty: Returns(percent) End-year market capitalization Daily Volatility a End-year P/E Nifty Junior Returns(percent) End-year market capitalization Daily Volatility a End-year P/E BSE Sensex Returns(percent) End-year market capitalization Daily Volatility a End-year P/E BSE 500 Returns(percent) End-year market capitalization Daily Volatility a End-year P/E
Source: NSE & BSE *June 30, 2008 1US$=42.038 INR

(US$ billion)

10.7 228.56 1.73 15.32 30.8 41.88 1.94 14.19 13.1 186.21 1.6 17.1 17.5 400.19 1.8 15.2

36.34 341.87 1.11 17.07 24.43 55.34 1.22 17.11 42.3 307.31 1.1 18.6 36.6 577.61 1.1 17.5

39.83 500.15 1.64 21.26 28.24 84.48 1.96 21.78 46.7 445.28 1.6 22.8 38.9 844.69 1.6 20.2

54.77 891.78 1.6 27.62 75.73 162.94 1.71 26.48 47.2 724.39 1.5 27.7 63 1638.2 1.5 29.1

-18.34* 579.03* 3.04* 18.99 -22.02* 90.17* 3.04* 14.4 8.12 516.64* 2.2* 18.54 N.A 1098.75 N.A 18.12

(US$ billion)

(US$ billion)

(US$ billion)

The valuation of Indian Stocks as reflected in P/E multiples of around 27 times at end-December 2007 was the highest amongst the select emerging market economies such as South Korea, Thailand, Malaysia and Taiwan. P/E of Indian markets in 2008 hovers around 17.06 and 18.22 as compared to 11x of its peers in other emerging markets.

P/E ratios in select emerging markets. Index/Market March 2007 Dec 2007 South Korea KOSPI 11.36 15.04 Thailand SET 10.59 19.92 Indonesia JCI 19.54 18.43 Malaysia KLCI 16.97 16.07 Taiwan TWSE 17.92 20.14 BSE Sensex 20.50 27.67 S&P CNX Nifty 18.38 27.62

March 2008 14.96 15.52 20.18 20.63

July 2008 11.30 11.97 17.06 18.22

The turnover in the spot and the derivatives market, both on NSE and BSE, continued to show an upward trend. During 2007, NSE and BSE spot market turnover showed a rise of over 60 percent and 47 percent, respectively, over the previous year. In respect of NSE and BSE derivatives, the increase was around 70 percent and 200 percent respectively. The spot market turnover (one-way) for NSE and BSE (together) amounted to US$ 1141.45 billion. In the derivatives market, the

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NSE and BSE turnover added up to US$ 3078.66 billion during 2007, showing a quantum growth over the previous year. During 2007, as a proportion of market capitalization of Nifty, the turnover in NSE spot and derivatives markets was 87.8 percent and 339 percent, respectively. The turnover in BSE spot and derivatives accounted for 22 percent and 3 percent, respectively, of market capitalization of BSE 500.
Market Turnover (US$ billion)

Market NSE Spot BSE Spot NSE Derivatives BSE Derivatives

Source: NSE and BSE 1US$=42.038 INR

2004 296.28 135.06 654.87 4.85

Calendar Year 2005 2006 2007 478 485.12 783.29 177.47 243.46 358.16 994.14 1783.97 3023.01 0.5 4.57 55.65

2008 497.10 1661.09 -

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MUTUAL FUND PARTICIPATION IN CAPITAL MARKETS The Assets under management as on June, 2008 stands at US$124.15 billion as compared to US$ 95.35 billion for the corresponding period a year ago. As compared to June 2007 figures mutual fund AUM rose by 30.20 percent.

Mutual funds AUM as on June 2008 Schemes 2004 Money Market 15.05 (39.5) Gilt 1.23 (3.2) Income 12.01 (31.5) Growth 7.99 (21.0) Balanced 1.39 (3.6) Equity Linked Savings Scheme 0.44 (1.2) Gold Exchange traded Fund Other Exchange Traded Fund Funds of Funds Investing Overseas Total 38.11
Source: AMFI Figures in parentheses indicate percentage of total.

US$ Billion 2005 16.38 (32.5) 0.94 (1.9) 13.39 (26.6) 17.00 (33.7) 1.73 (3.4) 0.99 (2.0) 50.43 Calendar Year 2006 2007 24.75 28.44 (30.2) (20.4) 0.52 0.50 (0.6) (0.4) 21.86 49.96 (26.7) (35.9) 30.26 48.64 (36.9) (34.9) 2.32 5.05 (2.8) (3.6) 2.21 4.83 (2.7) (3.5) 0.12 (0.1) 1.69 (1.2) 81.92 139.22 2008 21.94 (17.67) 0.52 (0.42) 60.92 (49.07) 32.63 (26.28) 3.35 (2.70) 3.44 (2.77) 0.15 (0.12) 0.48 (0.39) 0.73 (0.58) 124.15

With accelerating investor interest shown in mutual fund segment, the number of investor folios of the MFs increased to 43.7 million at the end of March 2008, from 27.9 million at the end of January 2007 (a growth rate of 54 per cent). Simultaneously, there has been an increase in the number of distributors to 72,108 (excluding 107 banks) till March 2008 from 54,000 in January 2007. In the new fiscal year (200809), the growth momentum of the mutual fund industry continues. Total fund mobilization has increased by a whopping 84.08 per cent to US$ 221.73 billion during AprilMay 2008, compared to US$ 120.45 billion in April May 2007. Consequently, average AUM of the mutual fund industry has increased to US$ 140.04 billion for May 2008, against US$ 90.1 billion in the corresponding period in 2007. Continuing the growth, the Indian mutual funds market is estimated to grow at a CAGR of 18 per cent in the next five years, with the countrys mutual funds assets expected to more than double to US$ 298.73 billion by 2012, according to a report by US-based financial services research and consulting firm Cerulli Associates. Consequently, there would be an entry of about 15 new fund houses, in addition to the 33 fund houses already in operation by the end of 2007.

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FII PARTICIPATION IN CAPITAL MARKET In terms of Institutional players, FIIs leveraged their activity in the Debt market during the year. While the net investments by FIIs in both spot and derivatives markets witnessed quantum increases during 2007 the corresponding 2008 data shows a sharp decline in trade. The no of FIIs in 2008 rose to 1458 from 1210 in 2007.Similarly the no of sub accounts rose to 4416 from 3644 at the end of year Dec 2007.

Transactions End-year number of FIIs End-year number of sub accounts 1. Equity market activity a. Spot Gross Buy Gross Sell Net (Gross buy Gross Sell) b. Derivatives Activity Gross buy Gross Sell Net (Gross buy Gross Sell) c. Total Equity(a+b) Gross Buy Gross Sell Net (Gross buy Gross Sell) 2. Debt Gross Buy Gross Sell Net (Gross buy Gross Sell) 3. Total FII Investment (1+2) Gross Buy Gross Sell Net (Gross buy Gross Sell) Total FII Investment (Net) Source: SEBI 2005 823 2273

Calendar Year 2006 2007 1044 1210 3045 3644

2008 1458 4416

72.41 60.47 11.94

120.41 111.16 9.25

206.3 188.2 18.1

122.92 129.04 -6.13

64.39 63.26 1.13

143.01 142.83 0.18

276.77 275.98 0.79

-10.74 -0.63 -10.1

136.8 123.73 13.07 1.78 3.17 -1.39 138.57 126.9 11.67 11.67

263.42 253.99 9.43 2.8 1.78 1.02 266.22 255.77 10.45 10.45

483.07 464.18 18.89 7.95 5.57 2.38 491.03 469.75 21.28 21.28

112.18 128.41 -16.23 4.26 3.21 1.05 116.44 131.62 -15.18 -15.18

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OUTLOOK OF THE INDIAN ECONOMY

The Indian economy is likely to grow at 9% in 2008. The challenge is to aspire for and achieve a 12-to-14% growth that alone can take the country to an economic power status by 2020. Indias latest run of strong economic growth and continuing macroeconomic stability is a tribute to the important progress made in recent years in macroeconomic management techniques as well as to an earlier generation of structural reforms. Indias economy has now expanded at an average rate of about 8 percent for four years running, on the back of rising productivity and sustained investment. Inflation after ebbing in the second half of 2007 has now returned in full force and become one of the most pressing macro problems facing the Indian economy.

India pacing ahead to emerge as a Major Economy in the World

India ranks second in the AT Kearney Global Retail Development Index (2008).

2008 Global Retail Development Index (GRDI)

100 90 80 70 60 50 40 30 20 10 0
tn am

88 80 72 67 66 66 62

GRDI Score

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pt M or ro co Sa ud iA ra bi a

ia

R us si a

In d

hi na C

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India is expected to outperform its rivals in the BRIC, in terms of GDP growth rate from 2015 onwards

8
GDP Growth Rate (%)

Projected GDP Grow th Rates for Select Upcom ing Econom ies

0 200510 201015 201520 202025 202530 203035 203540 204045 204550

Services Sector continues to attract interest from major Global players and large investments are being pumped into it. AT Kearney has placed India as the most preferable destination for Services Sector.

1.5

1.1

3.3

Indonesia
2.6

1.8

1.5

Brazil

1.2

1.6

3.2

Thailand

1.3

2.8

Malaysia

2.3

1.4

2.9

China

2.3

1.4

3.2

India 0 1

Financial Structure

People and skill availability

Business Environment

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Views on the major concern According to one of the ratings agency, higher oil prices and insufficient government response may make the Indian economy riskier but it will not affect its ratings. "The revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7% and this seems to be not unreasonable.

However while the inflation process in India still has some momentum, as the global economy slows thus reducing pressure on commodity prices - and monetary tightening reins in domestic demand, Indias inflation peak can not now be far away. Despite constant ups and downs oil prices have been generally falling since hitting the record high of US$147.27 a barrel on July 11, and by August 1st they had dropped around 15 per cent in a mere three weeks. If this trend continues then India should eventually obtain some notable relief and this is why it is so important to maintain strict monetary policy and avoid second round inflation effects at this juncture. The rupee appreciated significantly during 2007, raising concerns about the competitiveness of Indian industry. In nominal bilateral terms vis--vis the dollar, the appreciation has been particularly notable, reaching successive nine-year highs as it rose about 12 percent over the year. Although the increase has been lower in nominal and real effective termsonly about 77 percentthe appreciation of the effective rupee has taken it out of the historical range in which it fluctuated during most of the last decade.

Outlook on Key indicators Following the most recent rate hike market expectations have now solidified towards further interest rate increases in the pipeline. The driving force here will, as ever, be inflation running above the central bank's comfort zone. The current rate hike cycle may possibly peak at 9.5%. Key factors here will be the behavior of oil prices, and wages and fiscal policy in India itself with election year approaching. The Rupee is likely to continue to be supported by central bank tightening and declining demand for dollars from oil producers as oil prices ease. Also should the Rupee continue to head upwards and inflation start to fall, a win-win process will again be set in motion as investors see the prospect of currency related increasing returns once more opening up. In the great global search for yield there is no better winning strategy than to back a winner. At some point however macroeconomic fundamentals will undoubtedly take over, and as the economy slows and inflation moves down towards the comfort zone (around 5%) the central bank will also move into easing mode pushing the Rupee down in the process. A violent correction however is not expected.

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Obviously, with the domestic credit induced consumer boom now fading, exports are going to become more important than ever for India's headline GDP growth. India's Trade Ministry recently set the target of more than tripling India's share of world trade to 5 percent by the year 2020 from the current 1.5 percent. This is a worthy target, and perfectly realizable, but it will require India to conduct a substantial infrastructural overhaul and to introduce widespread regulatory reform. In the shorter term India is targeting exports of $200 billion in the current fiscal year, up 28 percent from the $155.5 billion achieved in the previous year. This is attainable exports were up 23.5% y-o-y in June - but with a deteriorating external environment it will be quite hard work. GDP growth is expected to moderate in 2008 compared to the levels seen in the last three years but at this point growth projections remain solid (probably 7.5 to 8% in calendar 2008).Indias mid term sustainable growth rate as being above the consensus 7%-8% rate once inflation is firmly under control, and expect double digit annual growth rates to be hit in either late 2009 or 2010 depending on the extent to which the global slowdown in 2009 negatively affects Indias GDP growth. It is expected that India's credit ratings to remain broadly stable even as the nation weathers higher oil prices and slowing economic growth a view which was endorsed in a statement at the start of August by Moody's Investors Service. Moody's has a Ba2 rating on India's long-term, local currency debt, leaving it two levels below investment grade, although it rates India's foreign-currency debt Baa3, the lowest investment level. The buoyancy in the economy is also estimated to lead to a four-fold increase in India's investable wealth from US$ 250 billion in 2007 to US$ 1 trillion. Simultaneously, according to a report by Celent, an international consultancy firm, India's wealth management will rise to an estimated 42 million by 2012 from about 13 million in 2007. Clearly, there is huge potential in this segment. Significantly, wealth management revenues are expected to account for 32-37 per cent of the total full-service financial institutions by 2012. The market is also expected to undergo a structural transformation with organized players increasing their market share.

Looking Ahead The Indian stock market will continue to be a safe haven for global investors in 2008-09 due to the economy's low exposure to slowing global growth, say the strategists of global investment banking firm, Merrill Lynch. According to its Investment Strategy report, portfolio investors will continue to pour money into the Indian economy, buoyed by the surging Indian economy which is growing at a much faster pace compared to most other countries of the world. As an endorsement of the attractiveness of Indian market, Standard and Poor, which compiles a list of stocks meeting the legendary investor's appetite twice a year, has named the three of the biggest names in Indian IT space alongside global giants Microsoft, Oracle, Ericsson, Cisco Systems, Diageo, China Mobile and SAP in its latest model portfolio.

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