The Index of Industrial Production continued its 'see-saw' movement, as the data for April 2013 once again dipped to 2.3%, below expectation of 2.5% - 2.7%. Having said that, the industrial output for April 2012 is higher than reported in corresponding month of the previous year.It is noteworthy that the data for March 2013 underwent an upward revision placing it at 3.4% versus 2.5% reported in the quick estimates.

  IIP continues its 'see-saw' movement

Data as on April 2013
(Source: CSO, PersonalFN Research)  

Evaluation of some of the important components of IIP for April 2013 reveals the following:

 

• Manufacturing index registered a growth of 2.8% in April 2013 as against a contraction of -1.8% recorded in April last year. But the drop is evident on a month-on-month basis with 4.2% growth reported in March 2013. In terms of industries 13 out of the 22 industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown positive growth during the month of April 2013 as compared to the corresponding month of the previous year. The average growth in manufacturing for the fiscal year 2012-13 has been mere 1.2%. This reflects that contraction in earlier month in manufacturing index has had a bearing on the average data of the manufacturing index.



 
• Consumer goods index registered a growth of 2.8% in April 2013. But if we segment it as consumer durable goods and consumer non-durables, contraction of -8.3% was seen in the former in April 2013, while the latter continued to expand at 12.3% in April 2013.The statistical effect of high and low base effect applied to consumer durable goods and consumer non-durable goods respectively.



 
• Similarly Basic and Capital Goods, limped yet again by reporting a dismal growth of 1.3% and 1.0% respectively, after managing to record anabove average growth in March 2013.However,Intermediate goods index reported an uptick with April 2013 data at 2.4% and also an upward revision for March 2013, which in quick estimates had depicted a contraction.
   

So would RBI cut policy rates now?

PersonalFN is of the view that, fall in IIP for April 2013 has added to the dilemma of Reserve Bank of India (RBI). While slowdown in economic growth rate and lull in industrial activity are compelling factors for easing policy rates further with aid of fall and moderation in WPI inflation; the slower than expected decline in Consumer Price Index (CPI) for May 2013 – which came in at 9.31% versus 9.39% in April 2013, may dither RBI from cutting policy rates in its 1st mid-quarter review of monetary policy 2013-14. Also the weakness in the Indian rupee and yawning CAD may preclude the central bank from cutting policy rates, although the favourable news of progress of monsoon is in play.

 

So what strategy equity investors should adopt?

Plagued by slowdown in economic growth, lull in industrial activity and uncertain political environment in the domestic economy, markets thus far in the month of June 2013 have treaded downwards. Concerns that global liquidity – especially the quantitative easing in the U.S. - may not last for too long (as signs of economic vigour are seen) is also worrying the Indian equity markets. It is noteworthy that earlier in May 2013, the U.S. Federal Reserve had said that they may wind down the monthly $85-billion bond-buying programme and are mapping out a strategy thereto; had spooked investors and rattled Indian equities. And if this indeed happens, central banks in other economies too would follow suit. But in order to ensure adequate credit to productive sectors and to ensure intermediate liquidity, the central bank would consider all options available including Cash Reserve Ratio (CRR), Open Market Operations (OMOs) or any other for that matter.

At present, decent QFY13 earnings of certain companies and expectations of normal monsoon are illustrating an upward bias in selective stocks, but it is noteworthy that apart from the aforementioned downbeat economic factors, the markets are also concerned about the following factors amongst others:
 

• Political uncertainty;
• Scam stories unveiling;
• Policy logjam;
• Structural bottlenecks;
• Reform measures not translating too well;and
• Risk of rating downgrade
   

 

Hence in the background of the above and specifically the risk emanating, we recommend investor to stagger their investments to mitigate risk, since volatility could persist, although markets may tread upwards on expectation and progress of normal monsoon. 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.

To read our full view on how equities are likely to perform in year 2013, please click here
 

What strategy debt investors should adopt?

The liquidity situation seems to have been getting tight since yields of shorter maturity papers are inching up. It is noteworthy that since the end of May 2013, 1-month and 3-month CD yields have moved up by 42 bps and 6 bps respectively, placing them at 8.06% and 8.15% respectively as on June 11, 2013. While the RBI has refrained from reducing CRR in the last monetary policy review, the RBI Governor, Dr. D. Subbarao is expected to handle the liquidity situation by considering all options available including Cash Reserve Ratio (CRR), Open Market Operations (OMOs) or any other, to manage liquidity in the system and ensure adequate credit to productive sectors. In fact expecting liquidity to get tight ahead of advance tax obligations of corporates in June, the RBI announced an OMO worth Rs 70 billion on June 7, 2013. In the 1st mid-quarter of monetary policy 2013-14 (scheduled on June 17, 2013), while there are expectations of 25 bps rate cut looming; yawning CAD and weak Indian rupee pose to be challenge for the RBI despite WPI inflation having dropped further and moderated and fiscal deficit for fiscal year 2012-13 having positively surprised by coming in at 4.9% vs. 5.2% of GDP – the revised estimates. So going forward, it remains to be seen whether policy rates are indeed reduced, although WPI inflation is at a 41-month low. Moreover, to address to growth concerns the RBI has put onus on the Government by saying that growth needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation. The RBI in its report on currency and finance 2009-12, has pressed on need to design credible fiscal consolidation plans and coordination strategies to ensure an appropriate fiscal-monetary mix. This according to the central bank will facilitate attainment of the growth target and more headroom for monetary policy to address macroeconomic goals. Thus the report has noted that careful calibration towards reverting to fiscal consolidation and proper assessment of any likely institutional changes in public debt management constituted key imperatives for the outlook of fiscal-monetary debt management coordination.

It is noteworthy that debt fund managers are significantly lowering their exposure of G-Secs from bond and income funds after the central bank introduced the new 10-year bond maturing in 2023 at a coupon rate of 7.16%. Moreover, now that yields therein have almost remained flat since its launch there seems to be cautiousness ahead of the 1st mid-quarter review of monetary policy 2013-14. Thus ascertaining the risk-reward relationship in the present interest rate scenario, debt fund managers are preferring shorter maturity papers as the yields therein haven't fallen much in the recent rally as well. On the other hand, the rally in G-Secs – the old 8.15% 10-Yr G-Sec has been rather strong with a 75 bps reduction in policy rates thus far in calendar year 2013.

PersonalFN is of the view that, it would be best to refrain investing in longer maturity debt papers in the aforesaid backdrop, and instead prefer shorter maturity debt papers.In case if one wishes to take exposure to longer duration instruments or debt mutual fund schemes holding longer maturity papers (as permitted by their high risk appetite), PersonalFN recommends that you do so by investing in dynamic bond funds, since there would always be intermediate interest rate risk involved.

In the current scenario while investing in debt instrument, it would be ideal to invest in shorter duration instruments vide debt mutual fund schemes having shorter maturity profile. Investors with an extreme short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next 1½ months, or liquid plus funds for next 3 to 6 months horizon. If you as an investor have a short to medium term investment horizon (of 1 to 2 years), you may allocate a part of your investment to short-term income funds, provided that you are willing to take some interest rate risk. Avoid investing in G-sec funds , as they may see high volatility and may not be an ideal instrument to yield fruitful returns. Fixed Maturity Plans (FMPs) of 3 months to 1 year period can also be considered as an option to bank FDs only if you are willing to hold it till maturity. Alternatively you can also invest in 1 year Fixed Deposits (FDs), as banks are offering interest on 1 year FDs in the range of 7.50% - 9.00% p.a.

To read if bond markets are poised for another rally in 2013, please click here

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