February inflation at 6.95%, will RBI start its rate cut exercise?
Mar 14, 2012

Author: PersonalFN Content & Research Team

After cooling down for two consecutive months, the Wholesale Price Index inflation jumped to 6.95% for the month of February 2012 as against 6.55% in January 2012. Moreover, the WPI inflation for the month of December 2012 has been revised upwards to 7.74% instead of 7.47% estimated earlier.

The main reason for the WPI inflation bouncing back to 6.95% for the month of February 2012 was higher food inflation. Food inflation for the month of February 2012 shot up to 6.07% from -0.52% in the previous month. The weightage of food articles in the overall WPI is 14.34%.
Inflation bounces back!

(Source: Office of the Economic Advisor, PersonalFN Research)

Moreover, the crude oil price (Brent crude) which has been hovering over $125 per barrel may be a worrisome factor as rising crude oil prices may shoot up the import bill further. Also, development taking place between Iran and the rest of the Developed nations will have to be closely monitored as any supply disruptions of crude oil from Iran may push the crude oil prices exponentially high.


So, would RBI go in for a rate cut in the upcoming monetary policy review?

We believe that until March 2012, it is unlikely that the RBI will go in for a rate cut soon and may consider reducing the repo and reverse repo rates from April 2012 onwards. Recently to manage the liquidity crunch in the banking system, the RBI reduced the CRR by 75 basis points on March 09, 2012 thereby ushering in liquidity of Rs 48,000 crore approximately.

Policy rate tracker

Increase / (Decrease) since March 2010 At present
Repo Rate 375 bps 8.50%
Reverse Repo Rate 425 bps 7.50%
Cash Reserve Ratio (125 bps) 4.75%
Statutory Liquidity Ratio (100 bps) 24.00%
Bank Rate 350 bps 9.50%

(Source: RBI website, PersonalFN Research)


Our View on inflation:

Going forward inflation numbers may harden further if the food inflation continues its northward movement. Also since the crude oil prices are stubbornly high (above $125); the overall inflation numbers may not cool down soon. We expect the fiscal year end inflation to be in the range of 7.00% to 7.50%.


What should equity investors do?

Equity investors should adopt calm and compose approach by staying invested and also investing further as, valuations in the Indian equity markets look fairly attractive and there is potential for robust future growth.

However, as fear of downbeat economic data being disseminated from the Euro zone still remains, staggering your investments would be an appropriate approach. We recommend that you invest in diversified equity funds as this will help reduce risk. However one should stay away from U.S. or Euro oriented offshore funds in such a scenario, and instead look at investing in domestic value style equity funds. Ideally you should opt for the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding .

Remember, while investing select only those 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?

Well, we think that the current situation is attractive to take exposure to debt mutual fund instruments as interest rates are likely to consolidate at these higher levels before they start going down.

You can now gradually take exposure to pure income and short-term Government securities funds. Since longer tenor papers will become attractive, longer duration funds (preferably through dynamic bond / flexi-debt funds) can be also considered, if one has a longer 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 the longer maturity instruments.

With liquidity in the system being tight, yield on the short term instruments is expected to remain high thus making short-term papers attractive. Hence investors with a 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 medium term investment horizon (of over 6 months), may allocate their investments to floating rate funds. Short term income funds should be held strictly with a 1 year time horizon.

Fixed Maturity Plans (FMPs) of upto 1 year would continue to 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; at present 1 year FDs are offering interest in the range of 7.25% - 9.25% p.a.


What should investors in gold do?

With the global economy being on an edge with the debt-overhang situation in the Euro zone, the risk of a contagion spreading still remains. This we think would make the precious yellow metal continue its northward journey, with sideways movement as well, if some intermediate positive news is disseminated from the Euro zone. Moreover, as long as WPI inflation continues to remains stubborn we think that smart investors would prefer to take refuge under the precious yellow metal, thus hedging themselves against volatility of equity markets.

Hence, nothing has changed for gold and we believe it will continue to maintain its upward trend in the long-term.

Add Comments

Mar 24, 2012

that and i don't believe it. some iedustd his brain, but physicists know mainly because his achievements, not how he got them. we'd separate physicist einstein and celebrity einstein. will you waste time to check if newton really sat under an apple tree, or galileo threw iron balls from tower during their great discoveries? einstein was jobless for a year after college. for 4-5 years, he got married, had to work as a patent clerk to support wife and son, and worked alone on physics part time. he had to lit up firewood in stove, sometimes very smoky. you only look at his fame, but his personal life is miserable. the thing is : eistein is a lonely man, both in science and personal life, and he enjoyed the loneliness. i don't think today's students, professors can enjoy that kind of life. even woit and smolin have better personal lives.
Mar 24, 2012

A mutual fund is a bakest of stocks, bonds, options, or commodities that spreads your risk around so that you don't lose all your money on one particular investment vehicle.The money is pooled together and a firm runs the fund. The upsides are that you don't have just one stock that will break you. So diversification and professional management are your positives.The downside is that mutual funds are sorta slow to make money from. They go up very little over the year in my opinion. If you do want a fund, make sure it is a NO LOAD fund. Another downside is that if a mutual fund goes down in a year, it takes so much time for it to turn around and actually make you money. Check out the Vice Fund (VICEX). They invest in companies that sell vices, such as cigaretts, gambling, alcohol. An easier investment would be a Certificate of Deposit (CD) from a bank. They yield 6% a year right now. Go to your local bank and set one up. You'll be glad you did because it is guaranteed money.

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