Interest rates and outlook

In its monetary policy review for FY 13-14, the RBI reduced the repo rate by 25 bps. We believe that the average inflation and growth

for 2014 will be lower than RBI's prediction of 5.5% and 5.7% respectively. This to our understanding will likely give RBI room to take

further steps towards monetary easing. We have seen demand side moderation in last 6 months and if that continues then trade deficit

will likely moderate further by about 20% for FY 2013-14 against FY 2012-13 number of 193 billion dollars. This may also result in

lowering of CAD for FY 2013-14 to be around 4.5% to 4.7%.

Inflation

Headline inflation eased sharply to 5.96% in March 2013 from 6.84% in February 2013 in year-on-year (y-o-y) terms, tracking a broadbased

moderation in inflation of the sub-indices, particularly primary food products (to 8.7% from 11.4%) and manufactured products

(to 4.1% from 4.5%). The initial inflation print for March 2013 is below market expectations, as well as the baseline projection of 6.8%

made by the Reserve Bank of India (RBI) in January 2013. Expectations of a normal monsoon and subdued commodity prices will aid

to softening trend in inflation.

(Data source: ICRA Research)