Showing signs of improvement, the Index of Industrial Production (IIP) for the month of August 2012 grew at 2.7% as against -0.2% in the previous month. Moreover, the IIP for the period April 2012 to August 2012 stood at just 0.4% as compared to 5.6% growth over the same period a year ago. Additionally, the IIP for the month of July 2012 underwent a downward revision to -0.2% from 0.1% estimated earlier. IIP jumps to 2.7%
The start of the festive season in the month of September 2012 assisted the overall index to breach the negative terrain. The manufacturing index too, maintained a positive bias; however, the capital goods index played a spoil-sport as it couldn’t break out from the negative terrain.
(Source: CSO, PersonalFN Research)
The following factors had their bearing on the IIP data for the month of August 2012:
- Manufacturing index, which constitutes about 76% of the industrial production index, displayed a robust growth of 2.9% as against -0.4% growth in the previous month. Out of the 22 industry groups in the manufacturing sector, 13 industry groups displayed positive growth while the rest (9 industry groups) were in the negative terrain.
- Consumer goods index maintained its green turf by registering a growth of 5.0% for the month of August 2012 as against 0.5% in the previous month. While the consumer durables registered a robust growth of 4.0%, the consumer non-durables too, managed a healthy growth of 5.8%. The festive season seems to have added the fervour to the consumer goods index.
- The capital goods index continued with its descending performance since the month of March 2012, and registered a negative growth of -1.7% in the month of August 2012 as against -4.5% in the previous month. Going forward with the Government unleashing fresh reforms, business confidence is expected to pick up which in turn will witness implementation of capex plans by business houses.
We believe that the slew of reforms undertaken by the Government will reflect in the industrial growth albeit with a lag. Effective implementation of the reforms too, holds the key going forward. Moreover, the Finance Ministry has also promised to continue with the reforms bandwagon in order to keep up with the investment mood and bring India on the high growth trajectory. Thus, the IIP growth may spruce up owing to the festive season and implementation of reforms in the following months.
Improvement in the IIP growth going forward may preclude the RBI from reducing the repo and reverse repo rate at its upcoming second quarter review of monetary policy scheduled on October 30, 2012. Moreover, with the stickiness still prevailing in the WPI inflation, the RBI may not reduce rates. However, RBI has promised to keep a strong vigil on the financial system in the country and infuse liquidity as and when required.
What should equity investors do?
With the reforms at the forefront on the Government’s agenda, the investment mood in the country is expected to remain upbeat. The capital market regulator Securities Exchange Board of India (SEBI) too is likely to keep the "feel good factor" created by the Government going, by taking market friendly measures, which may include the following amongst others:
- Reduce transaction costs (to attract more investors)
- Faster public issuance (by compressing the Initial Public Offer (IPO) system)
- Making ASBA (Application Supported by Blocked Amount) compulsory for retail investors (to cut down on the time taken to complete an Initial Public Offer (IPO)
- Moving to "T+1" settlement regime (from existing "T+2")
- Enhance the eligible list of securities they can participate in
However, the troubled nations namely, U.S. and Euro zone are still vulnerable and any dissemination of negative news may derail the positive mood for some time. The IMF has already expressed that the global confidence will be very fragile and Euro zone crisis remain a key threat.
Thus given the fact the economic and geopolitical environment is dynamic, flagging concerns to risks to the global economy, we recommend investors to stagger their investments. While in investing in equity mutual funds, we recommend one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years
What should debt investors do?
Considering the present growth inflation dynamics, the interest rates are expected to remain around the present elevated levels, until signs of moderation in the WPI inflation are evident.
Hence at present while taking exposure to debt mutual funds and fixed income instruments, one should clearly know their investment time horizon. Investors with an extreme short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next 1 month, or liquid plus funds for next 3 to 6 months horizon. However, investors with a short to medium term investment horizon (of 1 to 2 years) may allocate a part of their investments to short-term income funds which should be held strictly with at least 1 year time horizon.
The present scenario also seems comfortable to look at longer horizon debt mutual funds. Thus, if you have a longer time horizon, then you can now hold some exposure to pure income funds. Since longer tenor papers could become attractive, longer duration funds (preferably through dynamic bond / flexi-debt funds) can be considered, if one has an investment horizon of say 2 to 3 years. However, one may witness some volatility in the near term as there is always an interest rate risk associated with longer maturity instruments.
Fixed Maturity Plans (FMPs) of upto 1 year may for some more time yield appealing returns and can also be considered as an option to bank FDs only if you are willing to hold it till maturity. You can consider investing your money in Fixed Deposits (FDs) as well, before the interest rates offered on them are reduced. At present 1 year FDs are offering interest in the range of 7.50% - 8.50% p.a.