The Index of Industrial Production (IIP) continued to contract in the month of December 2012 as well, despite month-on-month core sector growth data (which has a weightage of 37.9% in overall IIP)having expanded marginally to 2.6% in December 2012 from 1.8% in November 2012. The IIP for December 2012 contracted to -0.6%, and moreover the data for November 2012 too was revised downwards to -0.8% (from the earlier estimates of -0.1%).So if we observe the cumulative growth for the period April 2012 to December 2012, it stood at a meagre 0.7% affected by the global economic factors, their rippling effect on the domestic economy as well as a high interest rate regime prevailing in the country.
 

IIP continues its 'see-saw' movement

(Source: CSO, PersonalFN Research)  

So which were the constituents in the IIP, which led the industrial activity to contract the month of December 2012?
 

• Manufacturing index, which constitutes nearly 76% of the industrial production index, continued to contract further with a growth rate of -0.7% as against -0.6% seen in November 2012.In terms of the industries, 12 out of 22 industry groups in the manufacturing sector reported negative growth during the month of December 2012 as compared to the corresponding month of the previous year. The industry group ‘Medical, precision & optical instruments, watches and clocks’ has shown the highest negative growth of 27.4%, followed by 24.0% in ‘Publishing, printing and reproduction of recorded media’ and 20.8% in ‘Office, accounting and computing machinery’. On the other hand, the industry group ‘Electrical machinery and apparatus n.e.c.’ has shown a positive growth of 48.2% followed by 18.8% in ‘Furniture; manufacturing n.e.c.’ and 9.3% in ‘Coke, refined petroleum products & nuclear fuel’.
  
  It is noteworthy that there has been an upward revision in manufacturing index data reported for October 2012 but manufacturing growth for the prior to that (i.e. September 2012), was revised downwards.
   
• Consumer goods index posted growth of -4.2%, thereby contracting further from -0.3% seen in November 2012. Moreover, the use-based classification reveals that it was consumer durables which witnessed the maximum contraction of -8.2% from an expansion of +1.3% seen in November 2012. Likewise consumer non-durables also reported negative growth of -1.4%, as against -1.6% seen in November 2012.
   
• The capital and intermediate goods index continued to contract in the month of December 2012. But a noteworthy point is that the dip was circumscribed to only -0.9% for capital goods as against a sharp contraction (of -8.5%) witnessed in November 2012. Likewise industrial activity in intermediate goods slipped to 0.1%.
  
  It was only basic goods which reported positive growth numbers. Basic good index for the month of December 2012 expanded to +2.6%, from +1.5% growth seen in November 2012.
  
  Apart from manufacturing index, mining activity also encountered a contraction of -0.4% in the month of December 2012.
   

Our View:
 

There has been a lull in the manufacturing activity primarily caused by high cost of borrowing and fewer capex plans by corporate. While the Government has brought in reforms on the forefront and deferred (General Anti-Avoidance Rules) GAAR until 2016, thereby attempting to make the investment climate conducive; there’s uncertainty yet clouding on the tax regime, which India would adopt in its path of fiscal consolidation. The RBI in its 3rd quarter review of monetary policy 2012-13 has reduced policy rates and CRR – both by 25 basis points (bps) each, and some banks passed this on to customers in the form of reduced lending rates. But we think that the impact of this may be less seen in January 2013 IIP data, than for the month of February. Also going forward much would depend upon what the Government enunciates for various industries, in the Union Budget 2013. The RBI too would also assess the impact of announcements in the Union Budget 2013, and thereafter decide its stance on policy rates and liquidity measures. In our view it seems unlikely that the RBI would cut rates in its next mid-quarter review of monetary policy 2012-13 (scheduled on March 19, 2013), but instead the central bank may reduce rates now in its monetary policy 2013-14 (scheduled on May 3, 2013-14), depending upon growth-inflation dynamic and twin deficit situation.

What should equity investors do?

At present in the month of February 2013, thus far the Indian equity markets are depicting a descending move, although the fall is petite -1.5% (as on February 08, 2013). The markets seem to be quite cautious and concerned over how the Government would address to the twin deficit problem (occurred by ballooning fiscal deficit and widening Current Account Deficit (CAD)), and how will they (Government) tread over the path of fiscal consolidation. Also the Union Budget 2013 (to be presented on February 28, 2013), would now be an event for the markets. Ahead of general election next year, if the budget is a populist one in the Government's attempt to win on vote banks, it may further put pressure on the fiscal deficit problem. On the other hand, if the Government raises taxes - especially the indirect ones, it may impede economic growth as consumption too may get affected. So it's going to be tight rope for the Finance Minister to walk on. The mood in the Indian equity markets at present remains submissive, with the Central Statistical Organisation (CSO) and the RBI projecting India’s growth for fiscal year 2012-13 at 5.0% and 5.5% respectively. While the finance ministry wants more banks to reduce lending rates in order to provide economic growth, some banks seem are desisting on doing so, citing high cost of funds (which has attributed to slower deposit growth). Moreover, such an action of reducing lending rates would be guided by what the RBI announces in the following policy meets depending upon the inflation data for the ensuing months.At present while the subsidy on diesel and most fertilizers has been increased and rates of non-subsidised Liquefied Petroleum Gas (LPG) too have been hiked in an effort to at least be closer to its fiscal deficit target, the repercussions could be inflations remaining over the comfort zone of RBI.

The FIIs thus far even in the month of February 2013 are exuding confidence in the Indian equity markets, by being net buyers to the tune of Rs 17,211 crore (as on February 08, 2013). With the U.S. fiscal deal being passed (by the U.S. Senate), confidence has been imbued in the global economy. Likewise although the long-term worries over the Euro zone debt crisis yet remain, the bailout package doled out for Greece and loan restructuring permitted for Spanish banks have infused some stabilisation, by putting the intermediate risk to rest. Also easy money policy adopted by the central bank of developed economies in support of growth, has helped FIIs to bet on developing economies. Having said that, they would keep a watch on the domestic macroeconomic risks, budget 2013, what reform measures the Government takes going forward and the political scenario ahead of 2014 general elections. Domestic mutual funds too would be attentive to such factors and accordingly tread their activity in the Indian equity markets.

Thus in the background of the above, we recommend investor to stagger their investments to mitigate risk, since the situation looks a little volatile. 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?
 

Keeping in view the expected moderation in non-food manufactured products inflation, domestic supply-demand balances and global trends in commodity prices, the baseline WPI inflation projection for March 2013 is revised downwards by the RBI from 7.5%(as set out in the 2nd quarter review of monetary policy) to 6.8%. The RBI would continue to condition and contain perception of inflation in the range of 4.0% -4.5%; which is in line with the medium-term objective of 3.0% inflation consistent with India’s broader integration into the global economy.Going forward the RBI’s monetary policy action would be guided by evolving growth-inflation dynamics and the management of twin deficit risk.

As far as liquidity situation is concerned, we expected it to remain tight in February 2013 with the central and the state Government borrowing Rs 48,000 and Rs 20,000 crore respectively. Likewise, with forward dollar-rupee contracts maturing there will be further drain on the liquidity. Also with advance tax payment in March, the liquidity is expected to tighten further. The Indian debt markets are also watchful of how the Government would be tread on the path of fiscal consolidation and what the Union Budget 2013 enunciates. If the budget 2013 is very populist, it may not send good signals to the Indian debt markets.

We have already seen most of the debt market rally happening in the past few weeks on expectation of 25 bps rate cut from the RBI in its stance of addressing to growth risk (as reflected by the slowdown in GDP growth rate). Now for yields to fall any further, aggressive rate cuts are required; which looks dim in the backdrop of macroeconomic assessment done by the central bank and the risk factors. It is noteworthy that any spill leading to higher borrowing estimates and deficit may lead to a negative sentiment and bond yields may see an upside shoot of 25bps to 30bps. We expect totally a 75 bps reduction in policy rates till December 2013 if inflation indeed mellows down and signs of moderation therein appear.

Hence we may not see a swift bond market rally as we witnessed in the recent past, but the conditions still looks lucrative to make decent gains in debt markets. Any intermediate rally will be short lived and hence one should not get carried away towards instruments having high interest rate sensitivity. The key will be to spread your bond portfolio across maturity. If you wish to play the interest rates, then you need to closely monitor the yield movement and take timely step to shift portfolio maturity.

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.

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 further. At present 1 year FDs are offering interest in the range of 7.40% - 9.00% p.a.
 

Add Comments