The World This Week - 1st June to 6th June, 2015

1. The World This Week
June 01 – June 08, 2015

2. Equity View:
Last Week had an expected reduction in interest rate but the good news might be limited to that. The RBI
Governor’s commentary is very clear that further interest rates decline is contingent to both, global and local
factors. Global factors would be primarily related to Fed’s Interest rate stance. On Sunday the non farms payroll
data has made dollar very strong against emerging currencies and also against Euro. The consensus expectation in
the global markets is that the Fed will increase the interest rates twice this year. Also, even if you tone down the
expectations, conditions are increasingly becoming favorable for the Fed to think of exiting the easy monetary
stance. However, the major impediment for them still remains a very strong dollar and in case they decide to
increase rates, then the dollar might become even stronger because in very near term, flows will chase higher yields
and if that happens to be dollar, the yields out there will fall and to that extent the dollar will strengthen which is
not a good sign for sustained recovery. Therefore, it is not a done deal but if you are betting on it then the odds of
higher interest rates over the fed increasing the interest rates in next 6 months have only become stronger.
If the fed were to raise interest rates, then emerging markets like India, whose currencies are already overvalued,
cannot continue their reduction in interest rates unabated. They will have to pause and review the situation.
Moreover, one needs to consider the monsoon. Although it has arrived a week late in Kerala the spread and
distribution is to be determined only in the middle of next month. To that extent, inflation expectations will play a
major role. IIP data has already been weak and the corporate results have been poorer than expected. Even the
commentary does not look great. So it is a Catch-22 situation in the sense of domestic equity where conditions are
very favorable for reducing rates but the global factors are such that interest rates cannot go down in a hurry. On
top of it, even if rates are to be reduced, the corporate balance sheets are so leveraged that it is difficult for the
private investment Capex cycle to start immediately. So, the onus completely now falls on the government. Even in
the 2015 Budget documents, around 45% increase in infrastructure outlay that the government put; a majority is
coming through government’s budget as well as the PSUs budgets. Therefore, capex and more importantly how
PSUs swim into action for the next 3-4 months is very important to monitor.
So, we are in interesting times and tactically, export oriented sectors which thrive under Rupee weakness should be
the ones to be preferred i.e., IT and Pharma. On steep declines private sector banks can be looked at for longer
term prospective.
PSU Banks throw a good opportunity for Value focused investors but with conditions – Troubled book, high
government shareholding, a very high risk appetite and a very long period of time frame – One could expect a CAGR
of 24% (Dividends plus capital appreciation) in the next 5 years.

3. News:
DOMESTIC MACRO:
 Policy repo rate under the liquidity adjustment facility (LAF) reduced by 25 basis points from 7.5%
to 7.25% with immediate effect.
 OECD says India is expected to grow 7.3% in 2015 and 7.4% in 2016 on the back of revival in
investments even as more reforms are needed to reduce uncertainties over taxation norms.
 FDI in India fell 40% year-on-year to $2.11 bn in March.
 India’s core sector output contracted by 0.4% in April after declining by 0.1% in March.
 India Meteorological Department revises its rainfall forecast from 93% to 88% of average.
GLOBAL MACRO
EURO
 European Central Bank opts to keep its key refinancing interest rate at a record low of 0.05%.
 Euro zone’s final May manufacturing PMI was 52.2, just ahead of April's 52.0, while services PMI fell to 53.8
in May from April’s 54.1; the composite PMI fell to 53.6 in May from the April reading of 53.9.
 Euro zone’s annual inflation growth was 0.3% in May following a flat reading in April.
United States
 IMF downgrades US’ growth forecast for 2015 from 3.1% to 2.5% citing significant uncertainties as
to the future resilience of economic growth; also slashes its forecast for 2016 to 3% from 3.1%.
 US trade deficit narrows to $ 40.9 bn in April from the March reading of $ 50.6 bn.
 US factory orders slipped 0.4% in April after a slightly upwardly revised 2.2% increase in March.
China
 China’s HSBC/Markit manufacturing PMI stood at 49.2 in May, up a touch from April's 48.9, while
services PMI for May was 53.5, up from 52.9 in April; composite PMI was 51.2 in May, down fractionally
from 51.3 in April.
Indices:
Date Sensex Midcap Auto Bankex CD CG FMCG HC IT Metals O&G Power Realty Teck
1/6/2015 27,849 10,712 19,014 21,394 10,651 17,132 7,929 16,425 10,907 9,715 9,710 2,078 1,562 6,102
2/6/2015 27,188 10,475 18,619 20,654 10,480 16,834 7,705 16,166 10,753 9,511 9,614 2,051 1,503 6,027
3/6/2015 26,837 10,329 18,336 20,363 10,301 16,579 7,439 15,928 10,770 9,398 9,417 2,005 1,419 6,021
4/6/2015 26,813 10,347 18,208 20,380 10,224 16,676 7,415 15,805 10,792 9,294 9,467 2,008 1,431 6,033
5/6/2015 26,768 10,354 18,099 20,190 10,259 16,809 7,493 15,913 10,706 9,459 9,530 2,019 1,410 6,006
-3.88% -3.35% -4.81% -5.63% -3.69% -1.89% -5.50% -3.12% -1.84% -2.64% -1.85% -2.85% -9.74% -1.58%

4. Commodities and Currency:
Date USD GBP EURO YEN
Crude
(Rs. per BBL)
Gold
(Rs. Per 10gms)
01/06/2015 63.6083 97.2698 69.6256 51.2000 4180 26772
02/06/2015 63.8330 97.1028 69.7376 51.2100 4127 26914
03/06/2015 63.8515 98.1206 71.2838 51.5200 4180 26883
04/06/2015 64.1775 98.3007 72.2510 51.6000 4074 26798
05/06/2015 63.8955 97.9774 71.8185 51.3300 3981 26556
-0.45%
Rupee
Depreciated
-0.72%
Rupee
Depreciated
-3.05%
Rupee
Depreciated
-0.25%
Rupee
Depreciated
-4.76% -0.81%
Debt:
Tenor Gilt Yield in % (Friday) Change in bps (Week)
1-Year 7.72 -1
2-Year 7.91 13
5-Year 8.02 18
10-Year 7.80 -2

5. Phani Sekhar Ponangi Jharna Agarwal
Nupur Gupta Ridhdhi Chheda
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