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Week ended June 28, 2013 Indian Economic Update Cabinet Committee on Economic Affairs (CCEA) approved the coal price pass-through mechanism, while it deferred the decision on gas pricing. The Finance Minister indicated that the Cabinet is likely to take up the issue of FDI caps towards mid-July. India’ India’s Q4 Current Account Deficit (CAD) narrows to 3.6% of the GDP RBI released the Balance of Payment (BoP) data for Q4 FY2013 and FY’2013 one day ahead of schedule. Current account deficit corrected to 3.6% of the GDP in Q4 FY2013 from a historically high 6.5% of GDP in the previous quarter. For FY2013, CAD remained wide at 4.8% of the GDP as compared to 4.2% of the GDP in FY2012. Indices June 21, 2013 June 28, 2013 10 year G-Sec 7.44% 7.45% (7.16% 2023 Bond) IIP 2.3% (March 2013) WPI Inflation 4.70% (April 2013) 10 years US 2.53% 2.47% treasury yield Source: Bloomberg, Values taken at 17.00 IST Financing the CAD a key challenge going forward Indian Rupee has remained under stress in the near term and breached the psychological level of 60 during the week and is currently trading around 60.27. Though the depreciation pressure is primarily on account of stress in the global financial markets, led by hawkish FOMC comment regarding Fed QE tapering, wide current account deficit too poses a risk to the Rupee. Though the capital flows were relatively benign in FY2013, going forward, CAD financing could pose a challenge in light of tight liquidity scenario in the Global Financial Markets. Therefore, in the medium to long term, steps need to be taken to narrow the CAD, through efforts to boost exports sector performance. In this regard, enhancing productivity through higher investment in the manufacturing sector is a crucial step in the right direction. Meanwhile, the recent steps taken to discourage gold imports, should also improve CAD. India registered a Balance of Payment (BoP) surplus of USD 4 bn in FY2013 as against a deficit of USD 13 bn in FY2012, Fed QE tapering key risk to financing the CAD in FY2014. Global Update FED Chairman, Bernanke said the same day that the Fed may begin dialing down its quantitative easing this year and end it in mid-2014 if the economy is achieving the central bank's objectives. US economic data came better than expected, in terms of key data releases, durable goods orders rose by 3.6% in May, business spending plan was up 1.1%. Other reports showed that new singlefamily home sales were near a five-year high in May while the consumer confidence came at its highest level in more than five years. Overall, the data suggest that the US economy has started to pull out of a soft patch and it supports the Federal Reserve's view that risks to the economy have lessened. On the other hand, US Commerce Department noted that the economy expanded at a slower pace of 1.8% qoq (annualised), compared with a previously reported 2.4%qoq (annualised) pace. With the downward revision of Q1'2013 GDP data, the pressure of Fed QE tapering have eased somewhat. Equity Indian stocks started week in red amidst negative cues from Asian peers. Soon it turned green, aided by firm cues from European peers. Valuebuying in select stocks like oil and gas and capital goods aided the benchmark indices. Further depreciation in the Rupee weighed on expectations of a rate cut by the RBI in its next policy meeting kept indices under pressure. Equities rebounded sharply, tracking positive global cues. A narrowing of India's Q4 FY2013 CAD to 3.6% of GDP from previous quarter's print of 6.7% of GDP aided sentiment. Also, broad based value buying by investors, kept the benchmark indices supported. Indices June 21, 2013 June 28, 2013 Change BSE Sensex 18774.24 19395.81 3.20% Dow Jones 14799.4 15024.49 1.50% FTSE 100 6116.17 6240.49 1.99% Nikkei 225 13230.13 13677.32 3.27% Hang Sang 20263.31 20803.29 2.60% Source: Bloomberg, Values taken at 17.00 IST The Cabinet Committee on Economic Affairs (CCEA) approved a new method for gas pricing, in line with recommendations of the Rangarajan Committee. CCEA also approved a hike in the minimum support price (MSP) of Kharif crops for the 2013-14 crop year. BSE Sensex rallied 520 points, Nifty ends nearly 160 points up as CCEA approves gas price hike supported by positive global cues on last trading day of the week. Stock market ended week in green, Sensex by 3.20% and Nifty by 3.08%. Debt The 10Y benchmark bond yield rose 12 bps to end at 7.43% last week, its biggest weekly rise since early August-2012, amidst continued FII debt sell off. The sharp Rupee depreciation has further exacerbated losses in gilts, given that it poses a constraint towards monetary policy easing. This week, Indian Government bonds were volatile as sharp depreciation in the Rupee weighed on expectations of a rate cut by the RBI in the next policy meeting. Movement in US Treasuries kept influencing gilts during the week. Yield Curve has steepened sharply Source: Bloomberg, ICICI Bank Research Recovery in Rupee towards the end of the week boosted sentiments, sharp decline in FY2013 CAD and increase in BoP surplus provided support to gilts. LAF has improved sharply in this month on account of a sharp increase in Government spending. As the volatility in the markets persists amidst persistent Rupee depreciation and rise in US treasury yields coupled with domestic supply pressures, the bond markets are likely to remain under pressure. The 7.16% 2023 bond yield closed at 7.45%, higher than previous week close of 7.44%. Gold Post rally in gold prices on Friday, gold was trading lower, hovering around the lowest level since September 2010 amidst broad based speculation of tapering of bond buying by the Fed and significant Dollar strength. IMF report showing that Central Banks of Turkey, Russia and Kazakhstan increased their gold holdings in May provided support to the yellow metal. However, Gold prices fell sharply as positive US economic data releases added to speculation of tapering of Fed's asset purchases. Strength in the US Dollar coupled with weak investment demand for the bullion further weighed on prices. Downward revision in US Q1 GDP data, weakness in the Dollar and value buying supported gold prices towards end of the week. However, gold prices slipped sharply on the back of strength in the Dollar and uncertainty surrounding the duration of the Fed's bond-buying programme. Oil Last week Brent declined amidst continued strength in the Dollar coupled with concerns over economic recovery in China, following the recent credit-crunch faced by banks. INR corrected following the Fed rhetoric However, prices received some support on the back of value buying after the recent losing streak and continued geopolitical tensions in the Middle East early this week. Prices also remained supported as data released by US Energy Department showed that refiners in US boosted crude processing rates to 90.2% last week, the highest since this year. However, the report also showed that crude inventories rose by 18,000 barrels last week, which capped the upside in prices. Source: Bloomberg, ICICI Bank Research Currency (USD / INR) The depreciation pressure on Indian Rupee persists and USDINR tested the level of 60.71 during the week. The pressure on the INR stems partly from relatively hawkish FOMC comment, trade deficit and Capital outflows from India. The currency received support from the Q4 FY2013 BoP data releases which showed a significant improvement in CAD and increase in BoP surplus. Dollar sales by banks and exporters coupled with firm gains in domestic stocks further supported the Rupee. However, strong month end Dollar demand by oil importers capped the downside in the USDINR pair. Indices June 21, 2013 June 28, 2013 Change Gold spot ($/ounce) 1296.42 1202.22 -7.84% Brent ($/bbl) 100.91 102.87 1.91% WTI ($/bbl) 93.69 97.27 3.68% USD / INR 59.2675 59.39 -0.21% DXY Index 82.318 82.894 0.69% EUR USD 1.3122 1.3069 0.41% Source: Bloomberg, Values taken at 17.00 IST Overall while the currency is likely to witness heavy volatility in line with other EM currencies. We expect some stabilisation from the current levels on account of prospects of improving domestic fundamentals and policy action. We believe that the Dollar Rupee pair will trade most of the time within 56-58.5 band, although intermittent spikes beyond our range cannot be ruled out as global market volatility will continue unabated. Disclaimer This communication is meant solely for the selected recipients and does not carry any right of publication or disclosure to any third party. The information set out in this newsletter has been prepared by ICICI Bank based in good faith and collated from sources considered reliable by ICICI Bank. There can be no assurance that such information will prove to be accurate. Except for the historical information contained herein, statements in this newsletter which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. 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