india _global market

Indian and Global MacroeconomicIndian and Global Macroeconomic environment

Jan 2012

Summary

• The global growth is expected to slow in 2012 as the euro zone enters recession with knock-on effects tothe rest of the world. The US economy should be resilient, while reconstruction spending should supportJapan. However, a euro breakup could trigger a sharp drop in euro area GDP, tip the US into recessionand create non-linear effects in Asia.

• India’s GDP growth may remain muted in both FY12 and FY13 on lagged impact of RBI tightening, highinflation, global outlook, anemic investment, poor consumer and business confidence, slow pace ofmarket-friendly reforms. Growth might revive in second half of next fiscal if reforms get a push after thestate elections.

• Inflation has peaked and may start coming down sharply now on high base, slowing growth, lowercommodity prices. RBI has signaled a reversal of tightening cycle (or rate cut) going forward.

• Fiscal deficit in FY12 is expected to be higher at around 5.3%-5.5% of GDP. Impact of additionalborrowing will be negated by RBI’s OMO ( Open Market Operations). Government might try to keep fiscald fi i l b i l i il b id d fdeficit lower next year by implementing oil subsidy and tax reforms.

• Investment in medium to longer tenor duration fixed income fund will offer a very attractive investmentopportunity with a investment horizon of one year and above in light of current economic developmentsand expectations of yields peaking out from current levels.

Some more PE compression cannot be ruled out in coming months but there is certain value emergingSome more PE compression cannot be ruled out in coming months, but there is certain value emergingin Indian equities amidst turbulence. While the setting for decisive equity upturn may not be visible invery near term, current valuations do present a case for selective value picking.

On near term basis, the sharp fall in INR looks overdone. With recent RBI action, near term INR stabilitylooks likely. We believe INR is reflecting the deteriorating domestic macro situation (low growth, highfi l d t t d fi it ) Thi l bi ti i t k INR d i i

Confidential Slide

fiscal and current account deficits). This ugly combination is to keep INR under pressure in comingmonths. From medium term perspective we believe that INR weakness may persist against mostEmerging Markets (EM )peers which run current account surpluses.

Source : RMF Research 2

Indian and Global Macroeconomic environment

• Global Economic Outlook• Domestic Outlook

– Macro Economic– Fixed Income OutlookFixed Income Outlook– Equity Market– ForexForex

Confidential Slide 3

Global Manufacturing Purchasing Managers Index (PMI) in December, 2011 indicates that Output is shifting from contraction to expansion

• JP Morgan’s global manufacturing PMIg g grose 1.1 points to 50.8 in December.Although the PMI remains depressed,the reading was the highest since June.

• The increase was broad-based. Theoutput index rose strongly, gaining 2.4pts to 52.1. The new orders andemployment indices posted moderateincreases of 1.3 points and 1.0 points.

• The global PMI’s increase also was fairlybroad-based by region. PMIs rose in theUSA, the Euro area, Japan, and China.

• The December PMI suggests that theweakness in global manufacturing isstarting to diminish. Global output wasexceedingly weak in late 2011, decliningin the two of the three months throughNovember These declines were

Confidential Slide

November These declines werejuxtaposed with solid gains in retailsales volume, creating the conditionsfor constructive inventory adjustments.

Source : JP Morgan, RMF Research 4

In US, the economic growth improves and unemployment g yeases

ISM reduces downside risk to mfg. Unemployment eases

• The economic data from US was encouraging as industrial production, housing activity andconsumer holiday spending showed signs of improvement.y p g g p

• The November US ISM manufacturing survey bounced to their highest levels since April, with neworders rising 4.3pts to 56.7 and production rising 6.5pts to 56.6.

• The unemployment rate plunged 0.4%-pt to 8.6% from 9.0% in November.

Th i t f th FOMC ti ti d b t ti f f th t ti l Th th

Confidential Slide Source : JP Morgan, RMF Research

• The minutes of the FOMC meeting mentioned about options for further monetary stimulus. The threepotential options were -- besides the exercised option of Operation Twist – 1) expanding the balancesheet, 2) changing their communications, and 3) lowering the interest on reserve rate.

5

Euro summit delivers a comprehensive package but leaves plenty of gaps

• European Central Bank (ECB) cut its policy rate by 25 bps to 1% and offered a lot of support toEuro area banks but did not announce any large scale bond purchase program.

• EU leaders committed to a new "fiscal compact" for the euro zone. Draft showed that the eurozone agreed to bring forward the launch of its permanent bailout fund, European StabilityMechanism (ESM), to July 2012. Both the temporary bailout fund, the EFSF (European FinancialStability Facility) and the ESM, could run in parallel for a year from mid-2012. The maximumlending capacity of the ESM (€500 bn) might not be diminished by the amount of money alreadylending capacity of the ESM (€500 bn) might not be diminished by the amount of money alreadyspent by the EFSF, as was the initial plan.

• The political changes should be supportive of the necessary reform process, but none of thiswill be sufficient to overcome the deep-rooted sovereign and financial crisis in the euro area.

General Government Debt and Balances (% of GDP), 2010

Confidential Slide Source : Eurostat, IMF WEO , RMF Research

Note: CAPB – Cyclically Adjusted Primary Balance

6





October Index of Industrial Production (IIP) at -5.1% yoy was ( ) y ythe lowest since April 2009

Trend in IIP (% YoY)• Oct IIP growth moved to negative territory on

high base, lower number of working days andslowing growth. The decline was broad-based.Consumer durables growth declined due tolagged impact of monetary tightening.Investments have not shown any sign of pick up.

• The Industrial production in November will bemove back to positive territory on higher numberof working days, lower base.

• High inflation, impact of monetary tightening anddeteriorating global outlook will keep IIP growthg g p gmuted. The lead indicators like Passenger carsales, credit growth, PMI data, port traffic, exportgrowth are all pointing to slow down.

Confidential Slide Source : CMIE, RMF Research 8

After averaging at 9.6% in FY11, Wholesale Price Index g g(WPI) inflation till now remains sticky above 9%....

• WPI inflation for November moderatedto 9.11% yoy from 9.73% in Octoberdriven down by Primary, particularlyFood prices. But it came a tad higherthan consensus expectation of 8.9%yoy as manufactured products

Nov WPI headline inflation at 9.11%

yoy as manufactured productsinflation remained sticky.

• Inflation remained in line with ourexpectation. It is the 12th month thatinflation has remained above 9% inspite of 13 rate hikes by RBI.

• November inflation was driven byManufactured products.

• Sequential rise in manufacturedproducts and core inflationproducts and core inflationaccelerated in November Depreciatingrupee did not help.

• Food prices are not expected tomoderate much even after a good

d t t t l

Confidential Slide

monsoon due to structural reasons.But inflation has definitely peaked.

Source : CMIE, RMF Research 9

….and expected to moderate from December’11p

• It may start moderatingsignificantly only after

WPI Inflation trend (% YoY)

significantly only afterDecember on high base, laggedimpact of tightening, softeningof commodity prices.

• December WPI inflation may

Actual Expected

ymove below 8% after almost twoyears. Moderating consumptiondemand will help keep inflationin check, but depreciating rupeemight complicate thingsmight complicate things.

• WPI inflation may averagearound 8.8% in FY12 (FY11 Avg:9.6%) with March end inflationclocking around 7% assuming• Inflation expected to average 6% to 6.5% instable food and commodityprice.

• RBI has also raised the FY12Mar-end WPI expectation to 7%from 6%.

1HFY13 vs. 9% average in FY12 under the basecase scenarios.

Scenario 1: Assuming no upward revisionof provisional numbers

Confidential Slide

from 6%.

Source : CMIE, RMF Research

Scenario 2: Assuming Provisional numbersare revised up by small amount

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FY12 will be a year of consolidationyQuarterly Real GDP Growth (%yoy) 2Q FY12 Real GDP grew at 6.9% yoy (7.7% in 1Q FY12), slowest

growth in last nine quarters.GDP by activity showed that growth was driven by strongperformance in Services that grew at 9 3% yoyperformance in Services that grew at 9.3% yoy.Industry slowed to 3.2%, driven down by disappointing miningand manufacturing growth.GDP by expenditure (demand side) raised concern as PrivateConsumption moderated and Fixed Capital Formation (thatindicates investments) contracted. But net exports contributed) ppositively to growth.

Going forward, Agriculture growth may slow to around 3% even with good monsoon on high base. Industrywill remain under pressure on higher interest rate, high inflation, and tight liquidity

From expenditure side, both consumption and investment may face lagged effect of the monetary tightening.Government consumption might not go down as much as expected before as Government fails to adhere tothe budgeted fiscal deficit. Net exports had contributed positively to GDP. This may not hold true for FY12 ast e budgeted sca de c t et e po ts ad co t buted pos t e y to G s ay ot o d t ue o asexports decelerate. GDP growth in FY12 to be around 7% yoy from 8.5% in FY11. Tight monetary policy mayalso keep GDP growth in FY13 subduedHowever, medium term prospects remain positive due to

• Robust expansion in private services• Strong consumption, both rural and urban

Confidential Slide

g p ,• Acceleration in export demand• Strong investment pipeline with emphasis on infrastructure

Source : CMIE, CSO, RMF Research 11

RBI indicated an end of tightening cycle and reversal of cycle if risk to growth increases

Trend in key policy rates Liquidity tightened considerably in Dec

• In mid-quarter policy review on 16th December, the RBI kept Repo rates at 8.50%. Reverse Repo and MSFrates remained at 7.50% and 9.50% respectively. CRR remains at 6%.

• RBI finally hit the pause button after hiking rates for 13 times since early 2010.

• RBI was dovish as it mentioned about increasing downside risk to growth with inflation remaining onprojected path. Most importantly, RBI explicitly mentioned that tightening cycle is over and RBI mayreverse cycle (cut rate) if risk to growth increases. OMO may be done as and when required.

Confidential Slide Source : RBI, RMF Research

• In the upcoming policy meet on 24th Jan, RBI is expected to downgrade its FY12 GDP forecast. RBI mightindicate a reversal in policy cycle by announcing CRR cut to ease liquidity. RBI to continue with OMO.

12

Government’s 2H borrowing Rs 2 600 bn is 56% higherGovernment s 2H borrowing, Rs 2,600 bn, is 56% higher than budgeted Rs 1,671 bn – a slippage of Rs 930 bn.

• The Gross and Net borrowing in H2 FY12may be 70% and 98% higher than H2 FY11.y g

• Till now RBI had purchased bonds worthRs 412 bn. RBI is expected to continuewith OMO in coming weeks.

• Although the actual deficit can be as highas 5.7% to 5.8% of GDP, Government maytry to show a lower deficit by deferringpayment and using short term borrowings.

• With the expected bad news of additionalb i t i th b d k tborrowing out in the open, bond marketmay now react to other macro parameters.As inflation falls sharply, RBI can shift itsfocus to growth. Tight liquidity does makea case for CRR cut in near term followedby policy rate cut.

• The Government announced the second supplementary grant with additional expenditure of Rs570 bn (including Oil and Fertilizer subsidy of Rs 300 bn and Rs 138 bn). This takes theadditional expenditure to Rs 659 bn including the first supplementary budget.

Confidential Slide Source : Economic Research, Dept of Fixed Income

• Government is trying to garner Rs 400 bn of disinvestment revenue through cross-selling of PSUshares and SUUTI monetization. There can be risk to increased borrowing if that does not gothrough.

13

Statutory Liquidity Ratio (SLR)holdings (adjusted forStatutory Liquidity Ratio (SLR)holdings (adjusted for Liquidity Adjustment Facility ) moved to 29.5% from 27.3% in last eight months as incremental credit slowed

Trend in Credit growth and SLR ratio – 2011-2012

SLR Ratio (2011-2012)

Maximum SLR Ratio 30.3

Required SLR Ratio 24.0

Confidential Slide Source: RBI, RMF Research 14





Fixed Income Markets - Outlook

• Liquidity situation to ease from current level on expected RBI moves;

• Currently around negative INR 1000-1200 billion.

• Continuous OMO buybacks, expectations of CRR cut and slower credit growth

to support liquidity in near future

• RBI done with rate hike cycle might reverse the trend if growth impacts further

• Weak economic data on both global and local front

• Stabilizing commodity prices globally

• Expect inflation to start moderating from December,11 reading onwards

Confidential Slide Source: RBI, Bloomberg & RMF Research 16

Fixed Income Markets - Outlook• Inflation to moderate December 2011 onwards

• Impact of RBI’s aggressive rate hikes

• Base effect impact

• Stabilizing commodity prices globally

• Moderation in credit and economic growth

• 10 year G-sec benchmark yield is expected to trend lower on account of;

• Impact of continuous supply nullified by OMO buy-backs

• Consolidating growth and inflation numbers to support G-secs

• Slowing credit growth and current high yields to attract investors

• Additional borrowing announced to be supported by RBI via OMO buybacks

Confidential Slide

• We expect the spread between G-secs and similar maturity AAA PSU corporate bond to

narrow going forward on demand supply dynamicsSource: RMF Research 17

Broad Investment Strategies

• Announcement of OMO and series of weak economic data to support yields across thecurve

g

curve.

• Duration plays to be more prominent as inflation peaks out and on RBI initiates measuresto support liquidity and growth.

Duration to be achieved through active G secs across the curve and PSU corporate• Duration to be achieved through active G-secs across the curve and PSU corporatebonds at attractive spreads.

• The shorter end of the yield curve looks most compelling due to high absolute levels, aflat to inverted yield curve and expectations of yields peaking out.flat to inverted yield curve and expectations of yields peaking out.

• Investments in the 1 to 3 year corporate bond space can pay off handsomely once thecurve starts steepening.

• To sum up investment in medium to longer tenor duration to offer a very attractive• To sum up, investment in medium to longer tenor duration to offer a very attractiveinvestment opportunity with a investment horizon of one year and above in light of currenteconomic developments and expectations of yields peaking out from current levels.

Confidential Slide Source: RMF Research 18

Recommendations:Recommendations:

• Investment in duration funds like Reliance Dynamic Bond Fund, RelianceIncome Fund and Reliance Gilt Securities schemes is suitable for investors

• With a investment horizon of 1 year and beyond

• With some appetite for risk / Volatility

C t hi h b d i ld ff d t it f it l i ti• Current high bond yield offers a very good opportunity of capital appreciationas yields starts to fall

• Investors comfortable with lesser appetite for risk (volatility of returns) canconsider Reliance Short Term Fund, Reliance Regular Savings Fund- Debtconsider Reliance Short Term Fund, Reliance Regular Savings Fund Debtand medium to long term FMP’s.

• High gross yields

• Expectations of RBI measures to ease liquidity to lower yields going forward• Expectations of RBI measures to ease liquidity to lower yields going forward

• Moderate duration will lead to low volatility and stable returns over a periodof time.

B fit d t ll d i R li Sh t T F d d RRSF D bt

Confidential Slide

• Benefit due to roll down in Reliance Short Term Fund and RRSF-Debtproducts.

Source: RMF Research 19





Indian Equities: Value emerging among turbulenceIndian Equities: Value emerging among turbulence

India’s valuations have materially declined. Indian market 12 months forward PE is at 12.3 times. Indianmarket’s last 8 years’ average forward PE is at 15.4x (multiple). Its correctly trading at near 20% discount to its8 years’ average multiples.

C h i d d F12 S i th b 7 5 t i th t t f 2011 Si il lConsensus has revised down F12 Sensex earnings growth by 7.5 ppts since the start of 2011. Similarly,earnings revision breadth remained negative throughout the year.

While some more PE compression cannot be ruled out in coming months, there is certain value emerging inIndian equities amidst turbulence.

While the setting for decisive equity upturn may not be visible in very near term current valuations do present

Confidential Slide Source: RMF Research

While the setting for decisive equity upturn may not be visible in very near term, current valuations do presenta case for selective value picking.

With significant macro effect at work, the time looks ripe for bottom up investment approach.

21





INR: Significant depreciation but not yet undervaluedINR: Significant depreciation but not yet undervalued

Indicators like net Forex assets of banking system & net FII flows (equity + debt) show that recent INRdepreciation cannot be ascribed to any material Forex outflows.

On near term basis, the sharp fall in INR looks overdone. With recent RBI action, near term INR stability lookslikely.

However, on trade weighted basis, INR does not look undervalued (on REER basis, level well below 100indicates undervalued).


Similarly, global deleveraging in not supportive of INR in coming months.

23

INR: Despite sharp depreciation INR still have to face headwinds

Consensus believes recent INR depreciation is temporary and may reverse by FY13Consensus believes recent INR depreciation is temporary and may reverse by FY13.

We highlight that INR movement is best explained by overall net capital inflows in India, which are predicatedon India superior and stable growth profile.

We believe INR is reflecting the deteriorating domestic macro situation. Further., there is a high correlationwith twin deficits and that also help explain INR underperformance.


p p p

While growth is expected to moderate in FY13. twin deficits are expected to rise to significantly elevated levelsin coming quarters. This ugly combination is to keep INR under pressure in coming months.

24

INR: Broad based decline against all and sundry

CNY has appreciated byappreciated by

63% against INR since Dec

2007

INR has been the worst performing currency in entire EM space.

Current account surplus currencies strengthening against INR (current account deficit currency)

From medium term perspective we believe that INR weakness may persist against most EM peers which runcurrent account surpluses.


However, given the growth and productivity differential between India and US, INR may stabilize and start toappreciate against US$ (but only) after few quarters.

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Disclaimers The views expressed herein constitute only the opinions and do not constitute any guidelines or recommendation on any courseof action to be followed by the reader. This information is meant for general reading purposes only and is not meant to serve asa professional guide for the readers. Certain factual and statistical (both historical and projected) industry and market data andother information was obtained by RCAM from independent, third-party sources that it deems to be reliable, some of which havebeen cited above. However, RCAM has not independently verified any of such data or other information, or the reasonablenessof the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracyof such data and other information. Further, many of the statements and assertions contained in these materials reflect the beliefof RCAM which belief may be based in whole or in part on such data and other informationof RCAM, which belief may be based in whole or in part on such data and other information.

The Sponsor, the Investment Manager, the Trustee or any of their respective directors, employees, affiliates or representativesdo not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Whilstno action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts areaccurate and opinions given are fair and reasonable. This information is not intended to be an offer or solicitation for thep gpurchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising outof their own investigations. Readers are advised to seek independent professional advice, verify the contents and arrive at aninformed investment decision before making any investments.

None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representativesshall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profitsarising in any way from the information contained in this material.

The Sponsor, the Investment Manager, the Trustee, any of their respective directors, employees including the fund managers,affiliates, representatives including persons involved in the preparation or issuance of this material may from time to time, havelong or short positions in and buy or sell the securities thereof of company(ies) / specific economic sectors mentioned herein

Confidential Slide

long or short positions in, and buy or sell the securities thereof, of company(ies) / specific economic sectors mentioned herein.

26

Statutory Details & Risk factorsStatutory Details & Risk factorsStatutory Details: Reliance Mutual Fund has been constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882.Sponsor: Reliance Capital Limited. Trustee: Reliance Capital Trustee Co. Limited. Investment Manager: Reliance Capital AssetManagement Limited (Registered Office of Trustee & Investment Manager: “'H' Block, 1st Floor, Dhirubhai Ambani Knowledge City,Koparkhairne, Navi Mumbai - 400 710, Maharashtra). The Sponsor, the Trustee and the Investment Manager are incorporated under theCompanies Act 1956 The Sponsor is not responsible or liable for any loss resulting from the operation of the Scheme beyond their initialCompanies Act 1956. The Sponsor is not responsible or liable for any loss resulting from the operation of the Scheme beyond their initialcontribution of ` 1 lakh towards the setting up of the Mutual Fund and such other accretions and additions to the corpus.SchemeClassification and Investment Objective: Reliance Dynamic Bond Fund (An Open ended Income Scheme): The primary investmentobjective of the scheme is to generate optimal returns consistent with moderate levels of risk. This income may be complemented by capitalappreciation of the portfolio. Accordingly, investments shall predominantly be made in Debt Instruments. Reliance Income Fund (An Openended Income Scheme): The primary investment objective of the scheme is to generate optimal returns consistent with moderate level ofrisk This income may be complemented by capital appreciation of the portfolio Accordingly investments shall predominantly be made inrisk. This income may be complemented by capital appreciation of the portfolio. Accordingly, investments shall predominantly be made inDebt & Money Market Instruments. Reliance Short Term Fund (An Open ended Income Scheme): The primary investment objective ofthe scheme is to generate stable returns for investors with a short term investment horizon by investing in fixed income securities of a shortterm maturity. Reliance Regular Savings Fund (An open ended Scheme) Debt Option: The primary investment objective of this Optionis to generate optimal returns consistent with moderate level of risk. This income may be complemented by capital appreciation of theportfolio. Accordingly investments shall predominantly be made in Debt & Money Market Instruments. Reliance Gilt Securities Fund (AnO d d G t S iti S h ) Th i i t t bj ti f th h i t t ti l dit i k f t bOpen ended Govt. Securities Scheme): The primary investment objective of the scheme is to generate optimal credit risk-free returns byinvesting in a portfolio of securities issued and guaranteed by the Central Government and State Government.Risk Factors: Mutual Funds and securities investments are subject to market risks, and there is no assurance or guarantee thatthe objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Schemecan go up or down depending on the factors and forces affecting the securities market. The names of abovementioned Scheme(s)are only the names of the Schemes and do not in any manner indicate either the quality of the respective Schemes or their futurey y q y pprospects or returns. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future performance of the Scheme. TheMutual Fund is not assuring that it will make periodical dividend distributions, though it has every intention of doing so. All dividenddistributions are subject to the availability of distributable surplus in the Scheme. The NAV of the Scheme may be affected, interalia, bychanges in the market conditions, interest rates, trading volumes, settlement periods and transfer procedures. For detailed risk factors,please refer to the respective Scheme Information Document & Key Information Memorandum, which is available at all the DISC,Distributors and www.reliancemutual.com. Investors can also call at our call centre 1800-300-11111 (toll free) for more details. Please read

Confidential Slide

Distributors and www.reliancemutual.com. Investors can also call at our call centre 1800 300 11111 (toll free) for more details. Please readthe respective Scheme Information Document and Statement of Additional Information carefully before investing.

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