India market outlook

This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. This is not a research
report and has not been produced by a research unit. Important disclosures can be found in the Disclosures Appendix. 1
This reflects the views of the Wealth Management Group 16 January 2014

Time to pause
Executive Summary
RBI likely to leave rates unchanged at its January meeting.
Bonds rally as inflation concerns subside.
Sensex touches all time high in December.
Rupee gains marginally.

Macro update

The RBI (Reserve Bank of India), contrary to popular opinion,
refrained from a rate hike in December despite higher inflation in
November. The RBI suggested the November inflation print was a blip
and would await the December inflation numbers to validate its
stance. The numbers are out and the RBI was right. December CPI
(Consumer Price Index-based inflation) printed at 9.87% y/y, down
from 11.16% y/y in December. The WPI (Wholesale Price Index-
based inflation), too, fell to 6.16% y/y, down from its November print of
7.52% y/y. This likely paves the way for another pause at the RBIs
January policy meeting.

The recent sharp drop in vegetable prices could be an indication of
relatively subdued inflationary conditions going ahead. A stable rate
regime could be the much needed catalyst required for improved
economic growth. We expect inflation to be contained this year and,
therefore, expect the repo rate to remain unchanged through the
calendar year. In line with the above, we retain our call for status quo
on RBIs January policy meeting and expect indications liquidity
tightening measures may be eased.

On a positive note, we expect the current account deficit to remain in
check, likely beating pessimistic expectations. Lower gold imports,
restricted non-oil and non-gold imports supported by global growth
aiding exports augur well for Indian export, providing some cushion for
the Indian rupee as well. All in all, an optimistic note to begin the year
2014 with.


Contents
Executive Summary 1
Macro update 1
Bonds update 2
Equity update 2
Currency update 3
Disclosure Appendix 4











Indian tactical asset allocation January 2014
Asset Class 12-month View
Equity Neutral
Bonds Overweight
Commodities Underweight
Cash Neutral
Source: Standard Chartered









Inflation: December blip likely over
Month-end WPI, CPI (y/y %)

Source: Bloomberg, Standard Chartered


0
2
4
6
8
10
12
Apr-13 Jun-13 Aug-13 Oct-13 Dec-13
WPI CPI
India market outlook | 16 January 2014



This reflects the views of the Wealth Management Group 2

Bonds update

Bonds as an asset class experienced heightened volatility in early
December as concerns around elevated November inflation numbers
grew. The 10 Y GoISec benchmark yield rose to about 9% in late
December from an initial low of about 8.7% in late November.
However, volatility does occasionally throw up opportunities.
Consistent with the view expressed in the December India Market
Outlook, the 10Y GoISec yield subsided to 8.6%, from its December
high of about 9%.

The spread between the repo rate and benchmark 10 Y GoISec (i.e.
the yield curve) is trading close to historical wides, suggesting room
for further capital gains for bonds especially in light of expected
stability in the repo rate. The supply of GoISecs is also likely to be
relatively restricted this quarter as compared to Q4 CY14 along with
likelihood of limited (or no) fiscal slippage.

We believe the sweet spot lies in the 2 to 5 year maturity profile,
aided by the governments likely debt-switch program. Prevalent yields
on AAA corporate index, ranging from 9.5% to 9.8% for the 3 to 5
years segment, too, seem appealing.

To summarise, the RBIs likely stance of a rate pause, driven by early
indications of slowing inflation, should continue to support Bonds as
an asset class. Risk on account of higher than expected fiscal
slippage and re-emergence of inflationary pressures seem controlled
for now.

Equity update

Despite turbulent headwinds including persistent inflation, political
pitfalls on economic reforms and sluggish GDP growth, Indian equities
still clocked in a 9% gain in CY13. Global investors continued to pour
in as foreign institutional investors (FIIs) invested about 20bn USD in
Indian equities in 2013.

2013 ended on a strong note with positive election outcomes in some
states driving momentum in Indian equities momentum. Markets
remain optimistic of a clear majority, a market friendly outcome that
may help spur faster decision making and likely improved reforms.

Near term guidance will likely be led by Q3 FY14 results and the
RBIs policy announcement related to the withdrawal of prevalent
liquidity tightening measures. We also await any data that may
indicate economic growth might have bottomed. We continue to
believe that though nominal equity indices are approaching all-time
highs, their valuations are far from it. This suggests any market
pullback may be an opportunity to average in.

Oversold 10 Yr rallies as its yield falls
Benchmark 10 yr GoISec yield (%)

Source: Bloomberg, Standard Chartered
























Sensex: Ending 2013 on a high note
Sensex closing values

Source: Bloomberg, Standard Chartered

8.45
8.50
8.55
8.60
8.65
8.70
8.75
8.80
8.85
8.90
8.95
16000
17000
18000
19000
20000
21000
22000
24-Dec-12 24-Apr-13 24-Aug-13 24-Dec-13
India market outlook | 16 January 2014



This reflects the views of the Wealth Management Group 3

Currency update

The recent benign inflation print is likely to support the case for Indian
economic growth, which may augur well for the rupee. Recent
evidence of a contraction in the current account deficit amidst
improved exports and reduced imports is likely to support the rupee
further.

However, many risks to the currencys outlook remain in place. Should
the RBI begin adding to its reserves aggressively and any adverse
reaction from global investors in light of Fed Tapering re-emerge, the
rupee could be under pressure again. Also risks on account of political
uncertainty and concerns around a bloating fiscal deficit cannot be
ruled out completely.

INR: Early gains in the year
USD INR (spot rates)

Source: Bloomberg, Standard Chartered

61.00
61.20
61.40
61.60
61.80
62.00
62.20
62.40
30-Dec-13 6-Jan-14 13-Jan-14
India market outlook | 16 January 2014


4
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THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT.