1. The World This WeekMay 16 May 21, 2011

2. Equity:Last week S&P threatened to downgrade the credit rating for Italy from stable to negative because of its failure to balanceits budget. Fitch ratings announced a further reduction in the credit rating of Greece by three notches and it is nowexpected that Greece will require significant debt restructuring which would amount to default on its borrowings. Withconcerns rising in peripheral Europe, we expect further pressure on the equity markets around the world. Euro hascontinuously weakened against the dollar in the last two weeks and any further rise in the dollar could lead to correction inthe commodity prices specially oil and other precious and industrial metals.SBI came out with results last week which was below the consensus estimates. Aasset quality at SBI has been deterioratingand we would expect further NPA to come out in the next 2 quarters . We continue to maintain bias towards private sectorbanks as we expect the coming two quarters to be tough for the public sector banks.The Oil Ministry announced a change in the ratio of the subsidy burden borne by the upstream Oil and Gas Companies. Theratio was increased from 33.5 to 38.5 which would lead to additional subsidy burden on companies like ONGC, Gail and OilIndia. The ratio was fixed at 33.5 for the last three years and a sudden change will have a negative impact on most of the Oil& Gas companies especially the ONGC FPO. With brent crude at $110 per barrel the subsidy burden is expected to crossRs.150000 Crs for this fiscal. We maintain avoid on upstream and downstream PSU oil and Gas companies.The IIP data came in for the month of March at 7.3%. We believe that the IIP data would have bottomed out in Februaryand expect the number for FY12 to be between 7%-8%.

3. NEWS:DOMESTIC MACRO: The food price index rose to 7.47 percent and the fuel price index climbed to 12.11 percent in the year to May 7. In the previous week, annual food and fuel inflation stood at 7.70 percent and 12.25 percent respectively. This is the slowest rise in food prices since end-March 2009. Inflation could ease to under 8 percent in August or September if the country receives good monsoon rains. Headline inflation dipped to 8.66 percent in April but hefty revisions to recent past data and prospects of higher energy prices will keep the pressure on the RBI to stick to its hawkish monetary policy and lift rates in June. Indias foreign exchange reserves fell to 307.493 billion from $309.535 billion in the previous week. India is expected to grow around 8.2 percent in the eleventh five-year plan, Montek Singh Ahluwalia, the deputy chairman of the Planning Commission.GLOBAL MACROU.S.: The cost to hedge against a U.S. government debt default rose on Friday to its highest level since January ahead of the governments sales of $99 billion in securities this week. Worries persist over Washingtons struggle to reach a deficit-cutting deal and to raise its $14.3 trillion legal borrowing limit, which was hit on Monday. New U.S. claims for unemployment benefits fell more than expected last week, but a rise in the four-week moving average to a six-month high indicated the labor market recovery will remain painfully slow. Manufacturing output fell 0.4 percent, breaking nine straight months of gains, as supply disruptions from Japans earthquake hit auto production. Overall industrial production was flat. Excluding cars and parts, manufacturing output rose a sluggish 0.2 percent.Japan: Gross domestic product fell 0.9 percent in January-March, nearly double the 0.5 percent forecast by analysts, translating into an annualized 3.7 percent decline compared with a 2.0 percent forecast, government data showed on Thursday. The economy shrank a revised 0.8 percent in the fourth quarter of last year, so a second consecutive quarter of contraction puts Japan in recessionEurozone: Fitch cut Greeces credit rating by three notches on Friday, pushing the country deeper into junk territory, and warned that any kind of debt restructuring would amount to default. The three-notch cut to B+ with a negative outlook takes Fitchs rating into "highly speculative" territory Standard & Poors cut its rating outlook for Italy to negative from stable, citing weak growth prospects and increased risks it would fail to slash its debt mountain. Standard & Poors affirmed its A+ long-term and A-1+ short-term sovereign credit ratings on Italy. The International Monetary Fund approved a 26 billion euro loan for Portugal to help the country recover from a debilitating sovereign debt crisis, saying it would immediately disburse 6.1 billion euros to ease investor concerns over the euro zone members debts. The funding is part of a joint IMF/EU 78 billion euro ($110 billion) bailout package. Norway has suspended the payment of a 42 million dollar grant to Greece as it did not fulfill its commitments and may have broken some rules.

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