· Fixed Income – Time to play duration . Expect cumulative policy easing of ~100-150 bps by March 2013 as RBI expects to keep the repo rate above headline inflation (7%)

o RBI has clearly indicated over the last few months that the interest rate cycle has peaked and it's time to support growth. The growth rate estimates for FY 12 have been revised from 8% in Jan 11 to 7% in Dec 2011. Similarly for FY 13 the growth rate estimates have been revised to 6.5% much below the comfort zone of 7.5% - 8.0% of RBI

o Inflation has come down to the comfort zone of 7.0% - 8.0%. From the high of 10% seen in the month of Sep 2011 Inflation has come down to 7.47%.

o With slowdown in domestic consumption demand clearly demonstrated by lower import figures, lower inventory figures & decline in gross capital formation. We expect the inflation to continue its downward trajectory.

o The key risks to the above remain the fiscal policy of the government. Though the market is pricing in 5.5% fiscal deficit in 2012 it expects the fiscal deficit to come off in FY 13. Any indication to the contrary in the budget would reverse the falling yield scenario and yields could move back to 8.4% - 8.5% levels.

· Equities seemed to have bottomed out till we approach the Union Budget . Recent rally is nothing specific to India. This is happening across the globe from China, Turkey to Mexico in anticipation that a second round LTRO & possible QE3 could come in from the Fed.

o Liquidity is here to stay – ECB has injected $500 bn of liquidity into the system. Fed has also proposed to keep interest rates low till 2014

o Interest rate easing has started in India – The CRR cut by the RBI has signaled a start of easing monetary policy stance in India which could result in a cut of 150 bps – 250 bps over the next 12 – 18 months

o Results for the quarter have been in line with the consensus estimates and there hasn't been any downgrade to consensus estimates after 4 quarters

o Europe problems seem to have been temporarily resolved. The yield on Italy bonds 1 yr yield has moved from 2.62% to 2.14% ( peak of 8.45%)

· Still not the time to be overweight equities. Structural issues remain

o India has still not taken measures to address the supply side constraints plaguing the economy. Markets have moved in anticipation of reform and resolution of supply side issues post the assembly elections. Any negative surprise would result in markets giving away some of the gains seen in the last 1 month.

o The markets have more or less discounted a possible $100 billion Greece default. However, whether this would lead to a cascading effect is yet to be seen.

o Structural issues in Europe and US are still to be resolved. US is running $ 1 trillion deficit for the 4th year running. In Europe growth is unlikely to return with the austerity measures being proposed. Any reversal in easy liquidity conditions could have a big impact on the markets.

o With the interest rate cycle reversing , we expect consensus estimates for Sensex to move up to 1250 – 1275 range for FY 13. Our March 2013 target for Sensex at 16x P/ E would be 20,000 – 20, 500. On the downside we expect the Sensex to get strong support at 16,000 – 16,500 levels.

· Gold – Global liquidity to support prices. Increase allocation is advised

o Turning positive as continued injection of liquidity by Fed and ECB would support gold prices

o Rupee has appreciated significantly against the $ and we don't see a significant appreciation from the current levels. We would expect the rupee to give up some of the gains and see levels of 50 – 51 in the next 2 -3 months. This should support gold prices in rupees