The Index of Industrial Production (IIP), after showing some signs of improvement in the month of August 2012, contracted in the month of September 2012 as data was reported at -0.4%. Moreover, the figure for August 2012 (of 2.7%) was also revised downward to 2.3%, although the start of the festive season did help in gaining momentum. It is noteworthy that for the same month last year, IIP grew at 2.4%, but overall since the beginning of this calendar year the average growth in industrial production has been petite +0.3%. Hence if we observe, the IIP continued with its see-saw movement and made the trend seem volatile. In fact expectations of a decent figure of 3.0% or so, due to a strong core sector growth (which comprises of eight core industries viz. coal, cement, crude oil, natural gas, petroleum products, fertilizers, steel and electricity) of 5.1% and positive impact of policy measures taken by the Government were also defied on account of the slowdown clubbed with yet a high interest rate scenario.
 

IIP slumps once again

(Source: CSO, PersonalFN Research)  

So what led to the contraction in the IIP for September 2012? Well, the following factors had their bearing on the IIP data for the month of September 2012:
 

• Manufacturing index, which constitutes about 76% of the industrial production index, fell sharply to -1.5% from a growth of 2.4% in the previous month. Out of the 22 industry groups in the manufacturing sector, 12 industry groups displayed positive growth while the rest (10 industry groups) were in the negative terrain.
   
• Consumer goods index too underwent a contraction at -0.3% in September 2012 and failed to maintain its green turf as seen in August 2012, where it grew by 3.3%. Most beating was taken by consumer durable sector which contracted at -1.7%, as against a growth of 0.58% reported in the previous month. Consumer non-durable goods too, managed to grow at only 1.1% as against a healthy 5.8% in the last month. Thus there also a lull in the consumer goods sector, wherein the fervour seen in August 2012 seemed lacking.
   
• The capital goods index continued with its descending performance since the month of March 2012, and registered a negative growth of -12.2% in the month of September 2012, as against -3.4% in the previous month. But going forward, with the Government unleashing fresh reforms, business confidence could pick up, which in turn may aid capex plans by business houses to unfold. However the interest environment needs to be conducive for this to indeed take place. At present a stiff interest rate scenario, is deterring capex plans to reinvigorate.
   

Our View:

We believe that the slew of reforms undertaken by the Government will reflect in the industrial growth albeit with a lag. However, the winter session of the parliament would be very crucial this year, because there are several important bills which are awaiting clearance (such as the Pension Bill, Insurance Bill, Real Estate (regulation & development) Bill), which can put India on the growth path. With an uncertain political environment and the tainted political canvas with graft charges on the Government in power and the opposition, risk does persist when every political party is trying to flag their ideologies over critical reforms. So reforms can put India once again on a growth path, but what’s vital is sanctity and consensus in doing so.

The slump in IIP for the month of September 2012 reflects that manufacturing index is depicting a wobbly growth along with capital goods sector remaining volatile (due to derailment of capex plans of business houses due to stiff interest rate regime). However, we expect the IIP for the ensuing couple of months to improve, supported by festive demand.

As far as RBI’s stance over policy rates is concerned, we do not see RBI reducing policy rates merely because IIP has slumped. The central bank would be watchful of the WPI inflation data, and if it indeed mellows down, we could see rate cut only in the first quarter of new calendar year. It is noteworthy that with diesel and LPG prices increased in the recent past, the detrimental impact could be seen in the intermediate. This is because diesel is an essential transport and industrial fuel, and the rise in the same may have a broader impact on WPI inflation. However with subsidies in LPG being controlled, it may provide some relief for achieving fiscal deficit target, which in turn may infuse positivity. But the RBI perceives inflationary pressures persists along with risk from twin deficits i.e. current account deficit and fiscal deficit. Thus assessing host of macro-economic factors, the RBI’s stance of policy will be conditioned by careful and continuous monitoring of:
 

• Evolving growth-inflation dynamics;
• Management of liquidity conditions (to ensure adequate flows of credit to productive sectors); and /li>
• Appropriate responses to shocks emanating from external developments.
   

What should equity investors do?

As mentioned earlier, political sanctity and consensus remains the key for reforms to be implemented and put India in growth trajectory. Given the political backlash, the political environment remains uncertain and therefore needs to be monitored carefully. Likewise, while Finance Minister - Mr P. Chidambaram, has asked his ministerial colleagues to take belt tightening measures to stave off a fiscal crisis, how it indeed transpires need to be seen.

The global economy is filled with gloom. While Mr Barack Obama has been victorious and re-elected as the U.S. President, his success in managing the fiscal situation will guide the equity markets, as the economic data of world’s largest economy would have a rippling effect. In the Euro zone, the debt-overhang situation is now causing even Germany to sputter, as their industrial output too fell by a hefty 1.8% in September 2012, more than the consensus forecast of 0.5% in Reuter’s poll. The economist forecast (of 0.8% for this year and next) from their Government’s economic advisor have also dampened the spirit , and is giving indication that even the stronger nations in the Euro zone are now reeling under pressure.

Thus in the backdrop of the global economic and political environment we flag concerns of risk inducement, and therefore recommend investors to stagger their investments to mitigate risk. 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?

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 1½ 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 further. At present 1 year FDs are offering interest in the range of 7.50% - 8.90% p.a.

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