Global equity markets declined due to concerns about the Eurozone, particularly Spain. In the US, economic data like GDP and durable goods orders were weaker than expected. In Asia, Chinese and Hong Kong markets rebounded on liquidity measures while Japanese data disappointed. In India, core infrastructure growth was modest and the balance of payments recorded a small surplus. The power sector reform package and borrowing plans were seen positively. Bond yields ended mixed and the rupee strengthened against the dollar.

1. Market Review
WEEK ENDED SEPTEMBER 28, 2012
International
Global equity markets appeared to be in a consolidation mode after recent highs and renewed concerns about the
Eurozone (particularly Spain) weighed on sentiment. The MSCI AC World Index slid 1.79% led by declines on
both sides of the Atlantic (up 2.93% in September).The CBOE VIX index jumped before settling down towards
the end of the week.While increased demand for safety boosted treasury markets in the US and Germany, yields
on long-dated UK treasuries increased amidst relatively better economic data. In Britain, the FSA unveiled a plan
to overhaul the LIBOR, with a focus on strengthening regulatory oversight and harsher punishments for any
manipulation.The 10-point plan under Wheatley review includes replacing BBA in its rate setting role, increase
in number of banks submitting quotes and reduction in the number of reference rates to 20 from 150 by phasing
out those currencies/maturities that are thinly traded. Recovery in commodity prices towards the close of week
helped the Reuters Jefferies CRB Index finish marginally higher. Reduced risk appetite helped the US dollar
regain some ground this week and cap monthly decline at 1.6%.
• Asia-Pacific: Regional equity markets continued to fare better than Western counterparts. This week’s
outperformance was led by sharp gains in China/Hong Kong markets. Shanghai markets rebounded
towards close of week as People’s Bank of China injected about $58 bln liquidity into the banking system.
Lacklustre economic data weighed on Japanese equities – industrial production fell 1.3% in August and
core consumer price inflation was down 0.3%yoy. On the M&A front, Heineken managed to win control
of Asia Pacific Breweries for $4.5 bln and Sony said it will buy 10% stake in Olympus for $644 mln.
• Europe/Africa: Key regional equity indices underperformed global counterparts on varied
economic/policy concerns. Spain and Greece announced budget cuts, while France unveiled tax hikes
on the wealthy and businesses alongside spending cuts to narrow the deficit to 3% of GDP from current
4.5%. Spain’s bank audit report brought some relief to markets at end of week - half of the 14 banks
evaluated did not need to raise more capital and overall capitalization needs were estimated at $76 bln.
Its Catalonia territory voted to hold a referendum on independence. On the economic front, German
IFO business confidence index fell and jobless claims rose. UK’s Q2 GDP data was revised upwards –
output contracted by 0.4% compared to 0.7% estimated earlier. Central banks in Hungary and Czech
Republic cut benchmark policy rates by 25 bps each to 6.50% and 0.25% respectively.
• Americas: Lacklustre economic newsflow and Eurozone concerns led US stock indices to trim
monthly gains. US Q2 GDP growth rate (annualized) was revised down to 1.3% from 1.7%. Durable
goods order index fell by over 13% reflecting weakness in business spending. At the same time, the US
Conference Board consumer confidence indicator jumped to multi-month highs and consumer
spending rose though largely due to higher fuel prices. In Canada, strength in retail and manufacturing
sectors helped the economy expand for the fifth month in a row. Mexico’s lower house approved labour
reform that seeks to introduce flexibility in current system by allowing part-time hiring, hourly wages
and establishes clear rules on outsourcing. Colombia central bank left key rate unchanged at 4.75%. On
the corporate front, Bank of America agreed to pay $2.43 bln to settle an investor lawsuit alleging the
firm made false/misleading statements about the health of Merrill Lynch at the time of acquisition and
Crown Castle bought rights to T-Mobile cellular towers for $2.4 bln. Santander Mexico raised close to
$4 bln through IPO.

2. Weekly Weekly
change (%) change (%)
MSCI AC World Index -1.79 Xetra DAX -3.16
FTSE Eurotop 100 -2.74 CAC 40 -4.98
MSCI AC Asia Pacific -0.82 FTSE 100 -1.89
Dow Jones -1.05 Hang Seng 0.51
Nasdaq -2.00 Nikkei -2.63
S&P 500 -1.33 KOSPI -0.31
India - Equity
A sharp rally on Friday helped frontline equity indices close with marginal gains. Gains in mid and small caps
continued to outpace large caps.Amongst sectors, trends were mixed – oil & gas and metal indices closed in the
negative territory while consumer durables and FMCG notched sharp gains. FIIs bought equities to the tune of
$1.4 bln during the first four trading days of the week.
• Macro: Core infrastructure industries (with 37.9% weight in IIP) output grew by 2.1%yoy following a
downward revised 1% last month. Expansion was led by robust increase in coal and petroleum refinery
output, while most other sectors reported contraction in output. On a cumulative basis (April-August),
production has increased by 2.8% vis-à-vis 5.5% a year ago.
Helped by moderation in the current account deficit (CAD), India’s Balance of Payments (BoP)recorded
a small surplus of $0.5 bln in the June quarter (3.9% of GDP) as against a $5.7 bln deficit in the previous
quarter.The improvement in CAD was largely driven by fall in trade deficit (lower oil/gold imports) and
increased remittance flows. In the quarter ending September, a rise in commodity prices and export
slowdown could weigh on the numbers. However, there was also a sharp pick-up in FII inflows during
this period, which could help the BoP.
Average cost and realised tariff
Capacity addition and energy deficit
Source: PFC, CLSA Asia-Pacific Markets
• Power: Continuing with its recent focus on the policy front, the government has cleared a debt
restructuring package to address the issue of high debt/losses at State Electricity Boards (SEB).This has been
mainly due to increased subsidies and absence of price rise leading to deficits, and accumulated losses are
estimated at nearly $35 bln.As per the restructuring plan, 50% of the short-term liabilities of SEBs are to be
converted into bonds and shall be taken over by respective state governments over the next 2-5 years.The

3. remaining has to be restructured in consultation with creditors. Participation in this bailout programme is
not mandatory for all states, but the Centre has offered some incentives to attract interest. The Central
Government will support the states in terms of grants and capital reimbursement provided certain
operational efficiency and loss reduction targets are met.While we await fine print on the plan, the proposal
is broadly positive for various companies in the power value chain as well as for banks/financial institutions
(especially the public sector ones) that have been financing the losses.This along with the recent relaxation
in FDI norms for power exchanges indicates the government recognizes the need to boost the power sector
to meet India’s energy needs.
This restructuring comes after the 2001 tripartite deal to rescue SEBs and there is a need to address the
fundamental issues rather than the symptoms. From a structural/longer term viewpoint, it is important to
consider measures to address the uncertainty about coal linkages, land/environment clearances and
liberalized pricing regime. This should provide a boost to the power sector as a whole. This alongside any
move towards privatization of SEBs can potentially set the ground for sustainable growth.
Weekly change (%)
BSE Sensex 0.05
S&P CNX Nifty 0.21
S&P CNX 500 1.08
CNX Midcap 2.49
BSE Smallcap 3.06
India - Debt
After being range-bound for most part of the week, Indian bond yields eased on Friday as the government H2
borrowing plan was in line with budgeted estimates.This along with policy newsflow helped the rupee add gains
against the dollar.
• Yield movements: Overall bond yields closed mixed - the yield on the 10-year benchmark paper
closed down, while that on the 5-year paper was marginally higher than last week levels.Yields on
the short-end of the curve (1-year) were unchanged.
• Liquidity/borrowings: Liquidity conditions remained tight this week – demand for liquidity
under the RBI’s LAF window averaged Rs. 72,400 crore, similar to last week. Overnight call
money rates closed flat. Scheduled GOI bond auctions received good response.
• Forex: The rupee remained on a strong footing – fresh round of policy measures alongside weakness in the
US dollar helped the currency gain 2% against the greenback. As of Sep 14, forex reserves aggregated $294
bln, $2.4 bln higher than last week levels.
• Policy: As per the borrowing calendar unveiled this week, the government will borrow Rs. 200,000 crore in
the second half of the fiscal year, in line with the budgeted borrowings estimate. The programme envisages
Rs.12-13000 crore borrowing each week until February 2013 – this is much lower than the average
borrowing seen in H1.About 49% of the proposed issuance is concentrated in the 10-14 year maturity bucket.
In addition, the government will auction Rs. 130,000 crore treasury-bills in Q4, while redeeming Rs. 149,000
crore t-bills.
While the government has indicated it will stick to borrowing targets this year, there may be a need for
additional funds, if disinvestment and/or 2G spectrum auction plans fall through and tax collections remain
weak. Clarity on this front is likely to emerge towards close of 2012.

4. The Kelkar committee appointed to outline a fiscal roadmap released its report this week.Without any policy
changes, the panel expects fiscal deficit to touch 6.1% of GDP versus 5.1% budgeted at the beginning of the
year. Broadly, the key recommendations to reduce deficit are –
• Tax measures: In the near term, penalize non-compliance on tax payments and prune negative list on
services tax. From a medium term perspective, revisit the Direct Tax Code as in its current format as it could
lead to considerable revenue losses and Introduce GST in the winter session of the Parliament.
• Disinvestment: Sell minority stakes held in private entities and consider disinvestment through multiple
routes. Proposes a call option model and ETF model – the latter involves creating a portfolio of PSUs the
government would like to sell stake.
• Expenditure rationalization: increase fuel & urea prices to reduce subsidy burden gradually and eliminate
completely over the next two-three years. Introduce direct subsidy payments to prevent leakages. Has
suggested that the Food Security Bill may be phased in slowly, given the current difficult fiscal situation.
Further the committee believes plan expenditure may be reduced by proper prioritization and efficient
utilization of resources.
The committee believes that implemented of these measures can help contain the deficit at 5.2% of GDP in
FY13 and reduce it to 4.6% and 3.9% in FY14 and FY15 respectively.While the overall roadmap is positive,
implementation remains the key risk.
28.09.2012 21.09.2012
Exchange rate (Rs./$) 53.01 53.45
Average repos (Rs. Cr) 72,420 71,096
1-yr gilt yield (%) 8.09 8.09
5-yr gilt yield (%) 8.20 8.17
10-yr gilt yield (%) 8.22 8.25
Source: Reuters, CCIL.
The information contained in this commentary is not a complete presentation of every material fact regarding any industry, security or the fund and
is neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproduction
without prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to them
and do not constitute investment advice.
Risk Factors: All investments in mutual funds and securities are subject to market risks and the NAVs of the schemes may go up or down depending
upon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Group
and its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Document
carefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton International
Inc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the Indian
Trust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager.
Copyright © 2012 Franklin Templeton Investments. All rights reserved