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Maia Financial Service Pvt Ltd

MAIA
FINANCIAL ECONOMY 360 DEGREES
SERVICES PVT INDIA: AUGUST 2009
LTD
JULY 2009

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Economy Report:

Index

1) Market Pulse ……………………………………………….2


a. Market View as per Business Cycle…………………2
2) Economic Indicators
a. GDP growth and its projection………………………3
b. Credit growth…………………………………………..3
c. Money supply………………………………………….4
d. Interest rates……………………………………………4
e. Yeild curve……………………………………………..5
f. Corporate Bond spreads……………………………....6
g. 10 year governement bond yeild………………………7
h. Inflation and its projection……………………………..8
i. Core Infrastructure Industry……………………………9
j. IIP………………………………………………………….9
k. Business Confidence…………………………………….10
3) Economy Pulse………………………………………………….10

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Market Pulse:
Market View as per Business Cycle

In our previous report for the month of July, we had stated that we would be witnessing a 15-20% correction from the levels of
June and one should be buying once the correction gets over. We saw the markets fall from the June high of 15600 to 13219
which is equivalent to a 15% correction.

Indian equity markets have witnessed a 59% rally YTD, supported by a broad-based domestic recovery, global stabilization and
improving risk appetite. The trend has been a little volatile in the last month, with a 15% pullback witnessed from the June
peak and a strong rebound thereafter. We expect markets to remain volatile and witness these short pullbacks in line with
global market trends. These should provide entry opportunities for long-term investors. We recommend adopting an “add on
dips” strategy and increasing core equity exposure.

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Economic Indicators

GDP growth and its projection

The deterioration in the global outlook that started in September 2008 continued in the second quarter of 2009, although some
tentative signs of stabilisation have begun to emerge. Reflecting the continued decline, the IMF in its July Update of the World
Economic Outlook (WEO) has projected that the global economy will shrink by 1.4 per cent in 2009. In the US, real GDP declined at
an annual rate of 5.5 per cent in Q1 of 2009, driven mainly by a decline in consumption and exports. The IMF’s July WEO Update has
projected real GDP of the US to shrink by 2.6 per cent in 2009, a slight improvement from a contraction of 2.8 per cent projected in
the April WEO.

Credit growth:

Credit growth continued to be subdued at 16.3% y-o-y, lower than 25.5% recorded in the corresponding period in FY09. However, the
RBI has maintained its projection for a 20% credit growth in FY 10. As a result of continued deposit growth and subdued private
sector credit demand, bank’s investment in government securities increased to 30.5% of their Net Demand and Time Liabilities

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(NDTL), well above the 24% required. Due to weak private sector credit demand and liquidity injection by the RBI, there has been
ample liquidity in the banking system.

Money Supply

M3 growth remained high at 20% y-o-y, driven by a 21% increase in deposits. M3 growth remains well above RBI’s revised
projection of 18% y-o-y growth, which does not bode well for future inflation.

Interest rates

Since mid-September 2008, the Reserve Bank has reduced policy rates significantly: the repo rate by 425 basis points and the reverse
repo rate by 275 basis points. The CRR was also reduced by 400 basis points.

Taking cues from the reduction in the Reserve Bank’s policy rates and the easy liquidity conditions, all public sector banks, most
private sector and foreign banks have reduced their deposit and lending rates. The reduction in term deposit rates between October
2008 and July 20,2009 has been in the range of 125-325 basis points by public sector banks, 100-375 basis points by private sector
banks and 125-300 basis points by major foreignbanks.
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Yeild Curve:

The yeild curve is upward sloping and hence at this point of time there is no cause of worry.

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Corporate bond spreads:

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As can be ssen from the above figure that the cost of doing business is going down. The spread between a AAA rated 1 year, 5 year
and 10 year corporate bond and that of 1 year, 5 year and 10 year rated government bond is narrowing. This represents improved
confidence and will prove very good for corporates going down the line as their cost of borrowing is getting lower.

10 year Government Bond Yeild

Inflation:

RBI has upped its March 2010 end inflation target to 5% from 4% earlier, in view of the recent rise in global commodity prices and
expected domestic demand-supply conditions. Pressure on food prices are likely to sustain due to poor monsoon this year. However,
availability of large buffer stocks of food grains with the government and the likelihood of release of government stocks in the open
market will help prevent significant rise in prices. Over the medium term, RBI expects to manage inflation expectation at 4.0%-4.5%
and 3% in the long term. Overall due to inflation fears it is very likely for RBI to start raising interst rates by December 2009.

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As can be seen from the above figure WPI is in negative but CPI is still holding firm at 9%.

Business Confidence:

The Industrial Outlook Survey of the Reserve Bank, conducted during April-May 2009, shows a turnaround in the business sentiment.
The assessment for Q1 of 2009-10 suggests that the slide in sentiment in the preceding three quarters has been arrested on key
indicators such as production, order book position, capacity utilisation, financial situation and availability of finance. The business
expectation index (BEI) for the forward July-September 2009 quarter crossed the neutral 100-mark and moved into the growth terrain
on the perception of improvement in demand conditions. The Survey indicates that during Q2 of 2009-10, businesses expect
improvement in capacity utilisation as also increase in both input and output prices, returning some pricing power to them. While there
is a moderation of investment intentions in 2009-10 vis-à-vis 2008-09, capital investments by big companies are expected in food,
rubber, paper and cement groups.

Core Infrastructure Industries:

The Index of Six core industries having a combined weight of 26.7 per cent in the Index of Industrial Production (IIP) with base 1993-
94 stood at 251.6 (provisional) in June 2009 and registered a growth of 6.5% (provisional) compared to a growth of 5.1% in June

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2008. During April-June 2009-10, six core industries registered a growth of 4.8% (provisional) as against 3.5% during the
corresponding period of the previous year.This growth was led by growth in electricity, cement and coal. The revival in cement
production indicates revival of construction activity, led by government infrastructure spending.

IIP:

Industrial Production, which had decelerated significantly to 0.1% in Q4FY09, also bottomed out in Q1FY10. IIP grew at an average
rate of 1.9% in April and May 09. 10 out of 17 two digit manufacturing industry groups have registered a positive growth rate.

Industrial Production faces problems from weak external demand. The acceleration in intermediate goods and consumer durables
production indicates a recovery in industrial production. However, the decline in capital goods and consumer non durables production
remains a matter of concern. Improvement in capital goods production remains a key factor to watch out as it would signal a revival of
private corporate investment

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Economic Pulse

Parameter Indication Type of Indicator Good/Bad

GDP growth (Coincident Indicator) Relative Improvement in India’s


GDP growth could be veryh
likely be seen by 2010.

Credit growth (Leading) Bad. The credit gowth is well below


the RBI’s target.

(Leading Indicator) Good. The growth in money supply


Money supply is healthy. However caution has to
be adopted since this could lead to
inflationary effects

(Lagging Indicator) Good. RBI has reduced interest


Interest rates[CRR, Repo, rates. By keeping the interest rates
Reverse Repo] unchanged in the recent monetary
and credit policy review it has done
a good job.

Yeild curve (Coincident Indicator) Yeild curve is normal which is a


good sign of improvement.

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Corporate Bond spreads (Leading Indicator) Very Good. Spreads have been
decreasing.

10 year governement bond yeild (Leading Indicator) Bad. Yeilds for 10 year bond has
started rising

Inflation and its projection (Lagging Indicator) Good.

Core Infrastructure Industry (Coincident Indicator) Good

IIP (Coincident Indicator) Good

Business Confidence (Coincident Indicator) Good

(Coincident Indicator) Good


Capital Flows

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For the coming August month we feel that prospects for Indian economic recovery shall improve with coordinated monetary and fiscal
stimuli as well as the global economy showing Initial signs of stabilisation, albeit not recovery. We will see a full fledge recovery in
Indian economy once the credit offtake takes place. As we saw from our above indicators that the credit growth is still
subduded and it remains at only 16% well below RBI’s target of 20%. This indicates that corporates are even now postponing
their expansion and capital expenditure plans. However the pace of decline in economic activity in several major advanced economies
has slowed, frozen credit markets have come into action and equity markets have begun to recover. Recent months have witnessed
industrial activity reviving in a number of emerging market economies (EMEs) such as China, Korea, Brazil and India. The IMF has
revised upwards its growth outlook for India. According to the RBI, leading indicators of service sector activity, such as railway
freight and new cell phone connections, have shown positive signs.

Thus we expect the Indian economy to recover by Second quarter of the year 2009-10 provided global economy shows more signs of
revival and recovery. However if there is a delay in recovery of global markets we expect Indian economy to recover only by 4 th
quarter of 2009-10.

Analyst Name: Company Name: Maia Financial Services Pvt Ltd

Avani Mehta Address: 713, C wing, Bsel Tech Park,

Maia Financial Services Pvt Ltd Oppposite Vashi Station,Vashi,

Email Id: avani_513@yahoo.co.in Navi Mumbai


Contact No: 022 27810674/75/76

Disclaimer: This report is purely for information purpose only. It contains information from sources which we believe are reliable but we do not
guarantee. It also includes analysis and views expressed by our analysts. This report should not be construed to be investment
recommendation/advice. Investors should not solely rely on the information contained in this report and must make investment decisions based on
their own independent inquiry, investigation and analysis and shall not have any claim on “Maia Financial Services Pvt Ltd”. Efforts are made to
ensure accuracy and to avoid errors and omissions, but errors and omissions may creep in. It is notified that neither “Maia Financial Services Pvt
Ltd” nor its employees will be responsible for any damages or loss of action to any one, of any kind, in any manner, therefrom. Moreover this
report is the property of “Maia Financial Services Pvt Ltd”. No content can be copied, reproduced, republished, uploaded, and/or distributed for
any use without obtaining prior written permission of “Maia Financial Services Pvt Ltd”. All legal disputes are subject to Mumbai jurisdiction
only.

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