The Index of Industrial Production (IIP) after depicting a contraction in the last couple of months, once again expanded to +2.4% in the month of January 2013. Even the eight core sectors (which comprise of crude oil, petroleum refinery products, coal, electricity, cement and finished steel) which have a weightage of 37.9% in the overall IIP, grew at +3.9% in the month of January 2013 which seemed to have led to an expansion in IIP for the month of January 2013. But overall the trend appeared 'see-saw' with series of contraction and expansion evident.

It is noteworthy that the cumulative growth for the period April 2012 to January 2013, stood at a +1.0%, while that for the calendar year 2012 was 0.8%. There are variety of reasons such for this diminutive cumulative growth, such as negative ripples of the global economic factors on the domestic economy, near to high level of interest rates in the economy, policy paralysis as witnessed during first-half of the calendar year gone by and political backlash amongst the others.
 

IIP continues its 'see-saw' movement

(Source: CSO, PersonalFN Research)  

So which were the constituents in the IIP, which led to industrial activity expand in the month of January 2013?
 

• Manufacturing index, which constitutes nearly 76% of the industrial production index, bounced back with a growth rate of +2.6% after contraction in the month of November and December 2012; although the cumulative growth for the index was mere +0.9%. In terms of industries, 11 out of 22 industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown positive growth during the month of January 2013 as compared to the corresponding month of the previous year. The industry group 'Electrical machinery and apparatus n.e.c.' has shown the highest positive growth of 46.7%, followed by 19.8% in 'Tobacco Products' and 18.1% in 'Wearing apparel; dressing and dyeing of fur'. On the other hand, the industry group 'Medical, precision & optical instruments, watches and clocks' has shown a negative growth of 24.5% followed by 22.8% in 'Publishing, printing and reproduction of recorded media' and 16.5% in 'Wood and products of wood and cork except furniture; articles of straw and planting materials'.
   
• Consumer goods index posted growth of +2.8%, after encountering contraction in the month of November and December 2012. However from the user based classification reveals, the consumer durables reported contraction, although petite of -0.9%; while consumer non-durables expanding by good +5.3% after a slight contraction seen in the month of November and December 2012.
   
• The Basic and intermediate goods index continued to expand as they did in the previous months. In the month of January basic good expanded at 3.4%, while intermediate goods at 2.0%. Capital good however, continued to be pressure series of negative growth rates reported.
   
• Electricity sector expanded by +6.4% in the month of January 2013 with series of positive growth number for the earlier months. Thus the aggregate growth in the sector for the period April 2012 to January 2013 stood at +4.7%.
   

Our View:

The bounce back in IIP seems to be aided by a reasonably good core sector growth for January 2013, reform measures taken by the Government in power, and a favourable base effect. The uptick in IIP, we believe could dim the chances of a rate cut from the Reserve Bank of India (RBI), although it has turned its focus on addressing to growth risk, because in the intermediate pressures persists (due to increase in freight and diesel prices) which remain a challenge for the central bank. In order to address the tight liquidity condition occurring on account of advance tax obligation in mid-March, the RBI we think could reduce the Cash Reserve Ratio (CRR) in its next mid-quarter review of monetary policy 2012-13 (scheduled on March 19, 2013). As far as reduction in policy rates are concerned, we think RBI may reduce policy rates only in its annual monetary policy 2013-14 (scheduled on May 3, 2013-14), depending upon growth-inflation dynamic and twin deficit situation.


What should equity investors do?

Since the time Budget 2013 has been announced, the Indian equity markets have thus far recovered (by +4.2%) after undergoing a corrective move in the month gone by. Clarification from the Finance Minister on TRC announcement saying that that there was no intention to question tax residency certificate holders and TRCs will be accepted as evidence of residence; has helped to restore confidence of FIIs towards Indian equity market. But going forward we believe, for FIIs flows to gush into Indian equity market, acceleration on reform measures would be needed if India wants to moniker as the Asia's fastest growing economy. At present the Q3GDP growth rate has been reported at 4.5% lower than the 5.3% a quarter ago and 6.0% a year ago. Moreover, economic growth estimates for the current fiscal year has revised downwards assessing the economic scenario. The Government has lined up a number key bill for consideration and passing during the ongoing Budget session, including The Forward Contracts Amendment Bill, The Pension Fund Regulator Bill, The Land Acquisition Bill and The Insurance Laws Bill; so determination to walk on the path of reforms seems visible. In our view the Budget 2013 has done a balancing act to bring back fiscal prudence, but now we need to see how the proposals go through in the Parliament and their implementation thereafter. Also, with India heading for general election next year (i.e. in 2014), political environment would also be carefully watched. Moreover, the markets would also be vigilant about what stance the RBI takes in its monetary policy.

Global cues too would be a driving force for the market. At present, the U.S. stocks markets trading at a record high would determine the sentiments of the global markets. They seem to shrugging the debt crisis in the Euro zone, so sentiments in the U.S. markets seem to be supportive for the recovery in Indian equity markets at present.

Thus in the background of the above, we recommend investor to stagger their investments to mitigate risk, since volatility could persist. While 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?

For the bond markets although the RBI has infused primary liquidity in the banking system vide its stance in its 3rd quarter review of Monetary Policy 2012-13, the liquidity is yet tight in the system with advance tax payments scheduled for mid-March. The average borrowing of banks under the LAF window, stood over Rs 1,00,000 crore in February 2013, and as result of the same short-term CD yields have inched-up; with 1-month and 3-month CD yields placed at 9.4% and 9.35% respectively. The benchmark 10-year bond yield rose as much as 2 basis points (bps) to 7.87% following the factory output data and CPI inflation data at 10.91% in February 2013. Going forward the debt market is awaiting the WPI inflation data which would set tone of central bank for its monetary policy stance. For the fiscal year 2013-14 the government has raised the budget expenditure and will need to borrow Rs 4.84 lakh crore or around 89% of the fiscal deficit from the bond markets. Such high borrowing target may keep the markets under pressure for some time.

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 a little more 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. One should also be cautious while investing in long term gilt funds, and refrain from speculating in a falling interest rate scenario.

Fixed Maturity Plans (FMPs) of a little over 1 year may be considered for some more time, as double indexation benefit that you may avail can provide you appealing post tax returns. It 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 further. At present 1 year FDs are offering interest in the range of 7.25% - 9.00% p.a.

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