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July 2011

The move came earlier than anticipated but not entirely as a shock. There has been a sell-off in US treasury, Dollar and equity markets towards the end of last week and markets globally are likely to trade lower today. You may refer to our monthly commentary for views on global economy and our markets which remain unchanged post this event.

Given the size and depth and also the lack of alternatives, US treasuries will maintain the status of 'risk-free asset' for a long time. We don't expect US treasury yields to move up significantly in near term. Countries like Switzerland, Japan, Canada, Australia, Brazil whose currencies have appreciated against Dollar are already feeling the pinch and taking steps to stem further appreciation. Euro area faces a bigger sovereign debt crisis and can't offer a credible alternative to Dollar and US treasuries.

This move raises the possibility of a 'double-dip' recession. Though we believe policy makers may act swiftly to avoid a repeat of 2008 crisis. Having said that, the policy ammunition is running out as manoeuvrability on both fiscal and monetary side is quite limited.

As far as Indian markets are concerned, we have been bullish on bond market despite the fiscal concerns and hawkish stance of RBI. We believe RBI will soften its stance given the global situation. We are bearish on global commodities and that is actually positive for India. One of the other concern about India has been policy impasse but we believe that a crisis is a good opportunity for the government to get its act together. Signs are visible given some policy announcements over the last few weeks. The economy is slowing down, however, given the fears of a double dip and sharper slowdown in rest of the world, in a global context, relatively, India would look more attractive. Valuations are reasonable. Markets are likely to remain volatile due to global reasons and environment is quite hazy as the world is in an uncharted territory. But we believe that Investors should take advantage of the volatility rather than getting swayed by it. The long term fundamentals of Indian economy remain intact. Next few weeks/months offer good opportunity to increase allocation to equities.

History suggests dark clouds are always followed by a shining sun, this time would be no different.