2. Equity:
Last week the markets entered a negative mode, ending down by 0.5%. This can be partially due to the IIP numbers which
were out at 4.4% against 7.3% for the last month and market expectations of 5.1%. The food inflation numbers for the
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week ending 28 May was higher than 9%. We will have the WPI numbers for the month of May coming in this week. It is
expected to be in the range of 8.5% - 9% or may be higher. The number is expected to be high because of the fuel price hike
in May and the minimum support price for various crops being increased in the range of 8% - 19%.
th
This week we will have the advance tax numbers coming in on June 15 which will give an indication of the Q1 earnings of
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FY11-12. Along with that we also have the RBI policy on June 16 where in we expect a 25 bps hike in the repo as well as
reverse repo rate.
In the short term, high inflation and interest rates remain a concern, which has resulted in a negative outlook on the real
estate and capital goods sector.
On the international front in the U.S we had the second round of quantitative easing coming to an end this month and
speculation whether QE3 will take place or not. The purpose of quantitative easing is to keep the long term interest rates
low to support the real estate sector and several other sectors thus reviving the economy. The Government had reduced
the short term interest rates consistently for several quarters. Their short term interest rates are between 0% - 0.25% and
clearly cannot be reduced any further. These rate cuts did have an impact on the long term rates also, however the 10 Year
rates remained higher than what the central bank wanted. So to have a real impact on the long term rates, the U.S
Government is issuing a lot of debt and the central bank is buying this debt by printing more money. By a combination of
this, the demand for U.S debt is rising and hence yields on U.S debt is falling. As yield on government bond goes down, the
corporate bond yields also move down thus reducing the longer term interest rate. Hence quantitative easing is basically
printing money to have liquidity in the economy to maintain interest rates at low levels. This could be of concern to us since
some of this liquidity will be invested in the emerging economy assets. If this continues for long the emerging markets could
witness asset bubbles. The impact of QE3 has to be watched on foreign investments in India and on the commodity prices.
The quantitative easing will also give an idea of how well the US economy is reviving.
In the Eurozone, the Greece debt restructuring will be closely monitored to assess the impact on the equity markets.
3. NEWS:
DOMESTIC MACRO:
The food price index rose 9.01 percent from 8.06 percent and the fuel price inflation was 12.46 percent as
compared to 12.54 percent last week. The headline inflation at 8.66 percent remains considerably above the
central bank's comfort level and is seen pressuring interest rates higher.
India's industrial output growth in April was 6.3 percent compared to the same period a year ago. The data was
the first of a new series with a different base year of 2004/05, new components and weightages. Under the old
series, annual industrial output growth in April was 4.4 percent compared with a median forecast for a 5.5 percent.
India's annual economic growth for the 2010/11 fiscal year that ended in March could be revised upwards from 8.5
percent on new industrial output index.
The government will have to raise prices of subsidized fuels further to achieve the budgeted fiscal deficit target of
4.6 percent of GDP for the current fiscal year to end-March 2012
India's net direct tax collections slid 47.93 percent on year in the first two months of the current fiscal year that
started in April as tax refunds surged.
GLOBAL MACRO
U.S.:
The U.S. trade deficit narrowed unexpectedly in April as exports hit a new high and imports from Japan tumbled
more than 25 percent. The trade gap narrowed 6.7 percent from March even after high oil prices. The data
suggested stronger second-quarter economic growth than expected.
China:
Exports rose 19.4 percent in May from a year earlier, while import growth accelerated to 28.4 percent from 21.8
percent in April. Thus it posted a smaller-than-expected trade surplus on Friday because of soaring imports and a
pullback in global demand, giving mixed signals about how the economy is faring.
Japan:
Japan's current account surplus fell less than expected in April from a year earlier, fuelling further hopes for an
early economic recovery as manufacturers restore lost production and mend supply chains after the March
disaster.
4. Swapnil Pawar Varun Goel Jharna Agarwal
Palak Nanjani Neha Arora Kanika Khorana
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