Dear Investors,

The equity markets globally are moving in a range bound manner with a downward bias since February 2012. In the month of April 2012, S&P 500 Index and NASDAQ-100 Index declined 0.75% and 1.15% respectively while Nifty index, MOSt 50 basket and CNX Midcap index declined by 0.90%, 2.35%, and 3.12% respectively. The bond markets were volatile with yields of the 10 year benchmark Government of India bond maturing on 8th Nov, 2021 moving between 8.34% to 8.73% before closing at 8.67% on 30th Apr, 2012 up from 8.57 on 30th March 2012.

Domestic markets The slowing growth rate of Indian economy, high crude prices and deteriorating external position were the key factors impacting FII flows, RBI monetary policy and Rating outlook downgrade by Standard & Poors'.

 

• Monetary Policy Review: The Reserve Bank of India followed up the 125 bps reduction in the Cash Reserve Ratio made between January - March 2012 with a 50 bps reduction in the Repo and Reverse Repo rates. The deeper than expected rate cuts took markets by surprise. The action was driven by need to stimulate economic growth.

• Rating outlook downgrade by Standard & Poors': Citing potential deterioration in external position (read Balance of Payment), diminishing growth prospects and slow fiscal reforms arising out of weak political setting, S&P cut India's credit rating outlook from stable to negative. This is expected to have an impact on Foreign Institutional Investments in India both in debt and equity markets.

• GDP Growth: Central Statistics Office has estimated that the Indian GDP grew at 6.9% in FY 12 down from 8.5% in FY11 and 8% in FY10. For FY13, Government of India expects GDP to grow at 7.6% while the Reserve Bank of India expects GDP growth of 7.3%. However, for growth to recover, government policy actions on various fronts are needed to remove supply bottlenecks in infrastructure, energy, minerals and labour sectors.

• Index of Industrial Production for the month of March 2012 contracted by 3.5% continuing the weak trends since December 2011.

• Inflation: WPI inflation for March 2012 was 6.89%, the third consecutive month when inflation has been below 7% (6.55% in January 2012 and 6.95% in February 2012) driven by declining manufactured product inflation (4.87% in March 2012, 5.75% in February 2012 and 6.49% in January 2012). Although energy inflation is declining (10.4% in March 2012, 12.83% in February 2012 and 14.61% in January 2012), energy inflation is suppressed as the government has not passed the impact of increases in crude oil prices.

 

• Liquidity Adjustment Facility (LAF): Liquidity continues to be tight with borrowings under LAF window being `1,135 bn as on 30th Apr, 2012. Although borrowings have declined from `1,975 bn as of 30th Mar, 2012 driven by government spending in the month of April 2012, they are still higher than RBI comfort level of `500-600 bn deficit / surplus under the LAF window for effective transmission of monetary signals

• FII flows: After three months of inflows, FII flows turned negative to the tune of USD 200 mn as a result of ratings outlook downgrade by S&P and concerns surrounding General Anti-Avoidance Rules (GAAR).

• External Position: High imports (USD 488 bn growing at 32.2%) as compared to exports (USD 303 bn, growing at 20.9%) resulted in a trade deficit of USD 184 bn (more than 10.2% of GDP). This was driven by 47% increase in oil imports (USD 155 bn) and 45% increase in gold & silver (USD 62 bn).

• Sectoral Performance: FMCG, cement, pharmaceutical, auto, private sector banks, telecom sector companies are reporting in-line to better than expected results while public sector banks, power, metal and mining companies are reporting in-line to weaker than expected results

International environment
US economy continues its slow but steady recovery with employment increasing and multispeed GDP growth. Europe continues to show signs of stress and UK is in economic recession. Bloomberg consensus estimates project NASDAQ-100 earnings to grow at a CAGR of 25% over next two years. This has been driven by recovery in US economy along with expansion of target markets through product expansion and geographic expansion.

Outlook
Yields are expected to remain high till the government takes concrete steps to reduce fiscal deficit, passes the impact of oil price increase to the consumers, and steps are taken to reduce trade deficit. Corporate earnings are expected to benefit from expected recovery in investment and consumption demand especially in the second half of FY13 as a result of transmission of reduction in repo rates, coupled with policy actions expected to be taken to remove supply bottlenecks.