January 8, 2011 Pankaj Vaish Head of Markets, South Asia, Citi 12 th FIMMDA – PDAI Annual Conference Udaipur January 7 – 9, 2011

2 Rolling 90-day Standard Deviation of S&P 500* *From 1919 to 1927 daily return are to the Dow Jones Composite Portfolio Source: Global Financial Data, NSI Volatility levels in U.S. resembled the 1930s

3 US BAA-AAA Corporate Spreads Source: NBER, Datastream, NSI Credit Spreads were discounting 1930s style credit cycle

4 12 Month Rolling relative US Stock / Government Bond Return Relative performance like Depression Source: NSI

5 US Macro economy – Great Depression Real GDP (constant 1999$) dropped between 27% to 35%, depending on source. Unemployment reached 25% in 1933, fell to 9% in 1937 and then remained in double digits till about 1940 when preparations for War began. Source: based on data in Susan Carter, ed. Historical Statistics of the US: Millennial Edition (2006) series Ca9.

6 P / E Levels Source: Bloomberg Sensex P/E in Feb 2009

7 Bernanke’s Rationale for QE2 (Transcript of “60 Minutes” Interview, Dec 2010) Q: What did you see that caused you to pull the trigger on the $600 billion, at this point? A: It has to do with two aspects. the first is unemployment The other concern I should mention is that inflation is very, very low, which you think is a good thing and normally is a good thing. But we’re getting awfully close to the range where prices would actually start falling …

8 U.S. Core PCE Deflator

9 NAPM Prices Paid Index

10 Bernanke’s Rationale for QE2 (Transcript of “60 Minutes” Interview, Dec 2010) Q: Many people believe that could be highly inflationary. That it’s a dangerous thing to try A: Well, this fear of inflation, I think is way overstated. we’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that’s what we’re going to do.

11 U.S. Currency in Circulation

12 U.S. M2

13 US 10 year Treasury Yield

14 Japan Nominal GDP vs 10-year JGB

15 Commodities – “In fashion” asset class!

16 Bernanke’s Rationale for QE2 (Transcript of “60 Minutes” Interview, Dec 2010) Q: Can you act quickly enough to prevent inflation from getting out of control? A: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now. Q: You have what degree of confidence in your ability to control this? A: One hundred percent.

17 …All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable. Chairman Ben S. Bernanke At the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois May 17, 2007 The Subprime Mortgage Market “One Hundred Percent” sure??

18 MSCI EM Vs SPX

19 DXY

20 US Macro Performance into QE2

21 Bank Lending Needs to Pick Up…seriously!