1. 1 Page Morgan Stanley Investment Management Morgan Stanley Mutual Fund March 2010 Current Equity Market and Post Budget Scenario

2. 2 Page Morgan Stanley Investment Management Budget 2010 Highlights Fiscal consolidation. Change in Income Tax Structure 2% increase in excise duties across the board, plus the increase in import tariff and prices of petroleum products could lead to inflation. The move to re-capitalize public sector banks and induce more competition by giving banking licenses to private sector and NBFC’s. The finance bill seeks to bring down the fiscal deficit to 5.5% of GDP by FY11 and more importantly lay down road map for the next two years, to bring it further down to 4.1% of GDP by FY 13. This should boost consumption, particularly discretionary spend items and benefit sectors such as housing, autos, retail and others. While inflation may remain high for sometime, higher non food inflation will be balanced by lower food inflation on account of softening of food prices. Capital infusion to strengthen the banking system so that it can stimulate economic growth by supplying credit. Impact

3. 3 Page Morgan Stanley Investment Management Infrastructure thrust to continue Auto Sector Pharma Sector Energy Allocation for infrastructure continues to remain high - positive for Infrastructure sector companies. Excise Hike and Increase in Fuel Prices to be offset by increase in disposal income – Thus no adverse impact on demand An increase in weighted deduction in R&D, a lowering of the surcharge on income tax, higher expenditures for healthcare infrastructure, and no increase in excise duty will be a beneficial move across the sector. 5% Import duty on crude (Nil earlier), Increase in import duty on Petrol and Diesel from 2.5% to 7.5% –Negative for OMCs. Excise duty on Petrol and Diesel has gone up by Re. 1/litre is inflationary. Budget 2010 Impact on Key Sectors

4. 4 Page Morgan Stanley Investment Management Prospects of high inflation in 2010 on the back of high food & commodity prices Valuations no-longer cheap, significant risks remain as the recent rally has taken valuations back above their long term averages Correction in global equity markets, particularly USA and China Indian Equity Markets: Current Scenario Improvement in sentiments and risk-appetite globally Better than expected economic data supporting the view of global recovery in 2010 and faster growth in India Enthusiasm coming in from government reforms, growth oriented policies Corporate earnings picking-up on back of improvement in economic activity Current rally has build-up on Risk Factors

5. 5 Page Morgan Stanley Investment Management Post recovery in 2009 equities remain in consolidation phase Source: Morgan Stanley BSE SENSEX

6. 6 Page Morgan Stanley Investment Management Indian equities have delivered attractive returns over the long term Source: Bloomberg Best returns in the early part of bull run 5 Yrs Returns = 24% CAGR 3Yrs Returns = 40% CAGR Nifty

7. 7 Page Morgan Stanley Investment Management The market performance in 2009-10 seemed to be tracking what we experienced in 2003-04….. Source: Morgan Stanley Research Are we at the beginning of a new bull phase for equities ? An outcome similar to 2003-2004 was quiet evident in 2009 and the current rally could extend for a medium to long term period from now. 2004

8. 8 Page Morgan Stanley Investment Management Global Economic Themes for 2010 Central banks to crawl rather than rush towards the exit, so global liquidity continues to be ample, abundant and augmenting. ‘ AAA liquidity cycle’ remains intact Source: Morgan Stanley Research ‘BBB G10 recovery’: Bumpy, Below-par and Boring Growth in EM (6.5%) becomes more balanced and will by far outpace growth in the G10 (2%).

9. 9 Page Morgan Stanley Investment Management Indian Economy to sustain +7% real GDP growth for next few years It is expected that the global GDP growth rate would revive back to the 3% mark in the next 2-3 years and the Indian GDP growth on the back of global revival would scale up to the 7% mark. A tale of two worlds….. Source : Morgan Stanley Research Estimates

10. 10 Page Morgan Stanley Investment Management Trends in Industrial production indicating sharp uptick in economy Industrial production (IP) growth accelerated to 11.7%YoY in November 2009, highest in two years. India has surprised on domestic demand with almost a vertical rise in IP in the last few months after remaining largely flat between March 2008 and March 2009. Source: Morgan Stanley Research Vertical rise in IP from May 09

11. 11 Page Morgan Stanley Investment Management Corporate earnings are back in positive, exhibiting growth Source: CLSA Asia – Pacific Markets 34 47 28 35 30 24 41 32 21 17 16 23 28 44 31 34 27 21 15 12 9 (5) (6) 12 4 16 (20) (10) 0 10 20 30 40 50 60 1Q042Q043Q044Q041Q052Q053Q05 4Q051Q062Q063Q064Q061Q072Q073Q074Q071Q082Q083Q084Q08 1Q092Q093Q094Q09 1Q102Q103Q10 YoY change in Sensex Free Float PAT (%)

12. 12 Page Morgan Stanley Investment Management BSE Sensex earnings growth to compound at 18% annually to F2012 Source: Morgan Stanley Research as of Jan 10

13. 13 Page Morgan Stanley Investment Management Valuations close to long term average SENSEX P/E (x) SENSEX P/B (x) The Sensex’s current one year forward P/E is 16x. The Sensex’s current one year forward P/B is 3x. Source: Motilal Oswal

14. 14 Page Morgan Stanley Investment Management Equities finish the decade as the best asset class and may continue to outperform Post Tax Returns % Asset Class5 Yr CAGR Volatility in annual returns 10 Yr CAGR Volatility in annual returns 15 Yr CAGR Volatility in annual returns Gold19.5413.18.98.88.4 10 year treasuries4.40.16.50.85.92.1 Bank Fixed Deposit5.20.94.81.15.42.1 Property (across 7 cities)21.119.912.315.97.116.8 Equities (BSE Sensex)2350.215.243.712.240.1 5Y Returns: Gold Sparkles on a Risk- adjusted basis 15Y Returns: Equity at the top, Property at the bottom Source: Bloomberg, Morgan Stanley Research Over the past 5, 10 and 15 years equities has been the best performing asset class in India. Surprisingly, property was the worst performing asset class for the 15-year period. Asset Class Returns as on Dec 2009. Assumption: 10-year treasuries: For the return from 10-year treasuries, we assumed that the annual coupon was reinvested in one-year bank deposits post the payment of tax at the marginal tax rate. Bank FD: The bank fixed deposit return is the sum total of returns in annual bank fixed deposits together with the return on the reinvestment of post-tax interest earned on the deposit. The tax rate used is the marginal tax rate for individuals. Gold: The return on gold is the delta in the domestic gold price, which is determined by the import tariff on gold, the exchange rate and the global gold price. Equities: For equities, we have taken the BSE Sensex as the proxy for returns and reinvested post-tax dividends into the Sensex. Property: For measuring return on property, our sample consists of residential properties in various localities across seven cities (Mumbai, Bangalore, Delhi, Kolkata, Ahmedabad, Pune, and Chennai). The gains on property, equities and gold are reduced by the long-term capital gains tax of 10% at the end of the period.

15. 15 Page Morgan Stanley Investment Management Attractive Medium to Long Term Outlook for Equity Markets Sustaining strong corporate earnings growth Rise in risk appetitive globally on back of improved economic conditions Stable Government, Economic reforms Massive pent-up demand for infrastructure spending & consumption Equities to deliver above average returns Positive sentiment of FIIs towards Emerging Markets & India Stable government, Economic reforms One of the fastest growing economies in the world, averaging 7% GDP growth Double Digit Income growth driving consumption