the world this week: july 02 - july 06 2012

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The World This Week July 02 July 06, 2012

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Page 1: The World this Week: July 02 - July 06 2012

The World This Week July 02 – July 06, 2012

Page 2: The World this Week: July 02 - July 06 2012

Equity View: Market performance last week was less than expected, but not a disaster. A new cloud forming over the horizon was actually the London Interbank Offer Rate (LIBOR) scandal. Barclays bank’s CEO resigned recently and so did the COO on the back of the allegations that Barclays was involved in manipulating LIBOR. It’s pretty much at the heart of most global financial contracts because everything is set as LIBOR plus something. Even Indian firms when they borrow from abroad, RBI puts a cap on how much they can borrow in terms of LIBOR. They can’t borrow Libor plus 5 these days. So Libor is at the heart of most global contracts and there is a now a growing scandal that many banks are involved in having manipulated it through the last 2- 3 years. So far, only Barclays has actually been named. Many of the Wall Street banks also might be involved and might cause a renewed lack of confidence in the banking system which in this case might be credibility driven than liquidity or solvency driven. So we won’t actually fear a failure of a bank but more like some sort of witch-hunt amongst the politicians of respected countries trying to bring the bankers in line. This might result in regulations which actually will be in the short term potentially draconian. We do not know how this would play out. That’s a cloud to watch. It might go without causing too much trouble. Domestically we do not have any new negative stimulus. In fact this week we have results of 4 important company’s Infosys, TCS, HDFC and HDFC bank. Of these HDFC and HDFC Bank are expected to be relatively muted unless they come up with a surprise we do not expect them to be “events”. They continue on the track of rarely sustainable low NPA growth. Infosys and TCS might be expected to revise the future earnings downwards which would mean that we might actually see a correction in the same. TCS is expected to hold on better than Infosys which has been the story for last 2 quarters. If someone wants to play a pair on that then ‘Long TCS - Short Infosys’ would be good. IT sector has been in general downgraded across various other brokerages as well. We ourselves consider fairly negative outlook on that especially since rupee slide is now halted and the direction might be reversing or at least stabilizing. The free lunch which came to IT sector is now pretty much over. It is marked by global weakening of demand so it was sort of neutral for IT sector but now it will be negative. On banking we are concerned that if RBI does not actually reduce the repo rate on 31st July as widely expected, then banks might take a hit which is probably going to be sharper for public sector banks than private sector banks because those actually have been depending on bonds price increase on the back of yields cooling off for the recent weeks. NPA’s might start hurting public sector banks again. The sector might actually see some increased volatility at the end of this month. Expectation is that RBI might go ahead and reduce the rates. But the tone of the recent RBI announcements has been more hawkish or more inflation oriented than growth oriented. It is very tricky whether RBI will cut the rates or no. A lot of the market sentiment will hinge a few weeks on that announcement. So our debt outlook remains neutral or mildly positive on that.

News: DOMESTIC MACRO:

India's exports fell 4.16 percent year-on-year to $25.68 billion in May, while imports fell 7.36 percent year-on-year to

$41.9 billion.

The Reserve Bank of India has allowed companies to continue to buy back foreign currency convertible bonds (FCCBs)

under the approval route. The central bank will consider proposals from Indian companies for buyback of FCCBs, if the

buyback value is at a minimum discount of 5 percent on the accreted value, it said in a statement.

The government has asked state-run banks to reduce bulk deposits to 10 percent of the total and CDs to 5 percent by

September. Many state banks source roughly 20 to 30 percent of their deposits through bulk deposits and CDs

GLOBAL MACRO

Euro:

Greece's new finance minister Yiannis Stournaras on Saturday pledged to carry out reforms and privatisations demanded under its latest financial rescue in an attempt to regain credibility with international partners stumping up money to keep the country afloat.

Page 3: The World this Week: July 02 - July 06 2012

The European Central Bank cut interest rates by quarter point to 0.75%, a record low on Thursday to breathe life into a deteriorating euro zone economy but steered clear of more dramatic measures such as buying government bonds or flooding banks with fresh liquidity.

Markit's Eurozone Composite Purchasing Managers' Index (PMI), which surveys thousands of companies, was revised up in June to 46.4 from a preliminary reading of 46.0 that matched the May figure.

US:

U.S. jobless rate came in at 8.2% in June unchanged from month of May, raising pressure on the Federal Reserve to do more to boost the economy and dealing another setback to President Barack Obama's reelection bid.

China:

The benchmark one-year lending rate was cut 31 basis points to 6 percent and the one-year deposit rate was reduced by 25 basis points to 3 percent, the PBoC said in a statement on its website.

The China HSBC services purchasing managers index (PMI) stood at 52.3 in June, down from 54.7 in May, indicating a marginal expansion of activity that capped job creation at a three-month low and bolstering expectations that Beijing will deliver further policy measures to boost growth.

Page 4: The World this Week: July 02 - July 06 2012

Satadru Mitra Varun Goel Jharna Agarwal Abbas Naheed Kishan Jakotia Kinjal Mehta

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