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July 2012

The Indian equity markets represented by the S&P CNX Nifty broke their three-month losing streak and posted 7.2% returns in June. There was a revival in investor confidence driven by positive global and domestic cues. On the global front, positive cues from the EU summit were supported by victory of the pro-bailout New Democracy Party in Greece elections. On the domestic front, there was increasing hope of policy action as the Prime Minister Dr Manmohan Singh took charge of the finance ministry. The falling commodity prices further boosted investor sentiments.  

In its mid-quarter monetary policy review, the Reserve Bank of India kept the repo rate, reverse repo and CRR unchanged citing rising risks to inflation and limited role of interest rates in reviving growth given the policy issues. The domestic macroeconomic indicators continued to disappoint. The index of industrial production (IIP) remained nearly flat at 0.1% for the month of April. Despite the weak growth, WPI-based inflation rose to 7.55% in May from 7.23% in April driven by double digit food inflation. The government increased the minimum support price for Kharif crops for 2012-13 which is expected to keep inflation high in the coming months.

All domestic sectoral indices gave positive returns for the month. The capital goods index gave the highest return of 13.7% driven by (a) Government’s announcement of thrust on infrastructure development in the fiscal, (b) News that power ministry may approach the Union Cabinet to levy 21% duty on imported power equipment in a bid to protect domestic manufacturers from Chinese and Korean competition, and (c) Surge in industry heavyweights – L&T and BHEL – on bagging new orders. Power Index posted 9.6% returns in expectation of decision on debt restructuring of state electricity boards. Banking index gave 9.4% returns in-line with the broader index. Consumer durables index was the worst performer and gave flattish returns m-o-m as these stocks corrected from their high valuations of previous month and were impacted by slowing demand. 

We expect developments in the Eurozone, policy actions by the Indian government and timely arrival of monsoons are key monitorables. Unless there are positive developments on the aforementioned fronts, upside from current levels will be limited.

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