Growth in factory output as measured by Index of Industrial Production (IIP) has jumped 2.5% in the month of March. Although the growth appears to be mediocre; it is noteworthy that it has been in the positive territory for third consecutive month. Industries with considerably high weightage in the index, such as Chemical and Chemical Products and Basic Metals, have posted a positive growth of 2.0% and 2.5% respectively in March. This has helped the index register positive growth. Growth in Manufacturing and Capital Goods Sector has been better than that in the rest of industries. However, Consumer Durables and Intermediate Goods remained a drag on the IIP.
On the other hand, IIP for February has been revised downward by 10bps or 0.1% while that for December has undergone final revision whereby it is pegged down by 6bps or 0.6%.
IIP continues its 'see-saw' movement
(Source: CSO, PersonalFN Research)
In March, out of 22 industries considered for calculating IIP, 10 have registered positive growth. Cigarettes, Woollen Carpets, apparels, Conductor, Aluminium and Rubber Insulated Cables witnessed superlative growth in March while Sugar Machinery, Plastic Machinery, Ship Building and Repairs, Heat Exchangers, Razor and Safety Blades experienced sharp contraction. At broader Level, Electricity and Manufacturing posted positive growth while Mining activity remained subdued and stayed in negative.
Let's look at the performance of important constituent of IIP.
- Manufacturing index registered growth of 3.2% in March as against the growth of -3.6% recorded in March last year. The average growth in manufacturing has been 1.2% Between April 2012 and March 2013. This suggests that the growth number for March 2013 has been above average. In spite of higher base effect the manufacturing growth has managed to stay in positive. Moreover, on the Month-on- Month basis, the growth at 7.7% has been highest since December 2012.
- Consumer goods index has registered moderate growth of 1.6% in March. Despite deceleration in Consumer Durable segment, consumer goods index depicted positive growth as it was propped up by noticeable growth in Consumer Non-Durable Segment. It is noteworthy that the growth in Consumer Non-Durables has come at relatively low base and the index has been struggling to achieve higher growth on Month-on-Month basis Whereas, Consumer Durable Segment has shown Positive Month-on-Month growth.
- The Basic and Capital Goods have managed to record above average growth in March. Despite the relatively higher base effect Basic goods industry has registered growth of 2.6% while Capital Goods Industry has recorded growth of 6.9%.
- Intermediate goods index continued to remain under pressure even in March. It registered a below average growth number of -0.2%.
PersonalFN View:
The growth remained subdued in March and has been depicting a range-bound movement over last 1 year. It is important to note that frequency and quantum of negative observations is waning although the growth still doesn't look promising. Inflation measured by Wholesale Price Index (WPI) and Consumer Price Index (CPI) has cooled off in the recent times and IIP growth still remains weak. On this backdrop RBI is unlikely to take hawkish monetary stance, going forward. However, scope for further rate cut hinges upon improvement in other macro-economic indicators besides Inflation. RBI, time to time, has expressed its concerns over lack of development on the reform front. Such factors are likely to influence the view of RBI on further rate cuts.
What should equity investors do?
With the downbeat economic data and political uncertainty gripping the markets, thus far in the month of April 2013, we are down by about -2.2% on the S&P BSE Sensex. Concerns of early elections are overshadowing the reform measures taken by the Government and are dragging the markets down. Thus far in the last about a week, FII participation in Indian equities too has been quite dull with only Rs 639 crore worth Indian equities being net bought. Going forward too, we believe they would tread cautiously while buying into Indian equities as they seem wary of the aforementioned macroeconomic and political scenario in the country. The recently released Q3FY13 Current Account Deficit (CAD) data at 6.7% of GDP is worrisome as it is driven by heavy oil and gold imports and muted exports. Fortunately the Balance of Payment (BoP) figure has turned in surplus of $781 million, compared with a deficit of $158 million in the previous quarter (according to the RBI data), but nonetheless the Indian rupee yet continues to remain under pressure.
Plagued by deceleration in new orders and frequent power outages, India's manufacturing Purchasing Managers Index (PMI) has dropped to 52.0 in March 2013 (from 54.2 in February 2013), being the slowest in 16 months, which depicts that manufacturing activity is losing momentum. Thus even the IIP data has depicted a 'see-saw' trend with a meek data thereto. Likewise even the services PMI for India has slipped further to 51.4 in March 2013 (from 54.2 in February 2013) – a 17 months low, since order books filled at a slower pace. Thus overall there's been slowdown in the economic growth and therefore the economic growth estimates for the current fiscal year have been revised downwards assessing the economic scenario. In order to provide impetus to growth, the RBI has reduced policy rates twice (by 25 bps each) thus far in the calendar year 2013, but now with intermediate inflationary pressures yet evident due to hike in price of diesel and freight charges and WPI inflation yet remaining high over the RBI's perceived comfort level of 5.0%, the central bank has warned that prospects of further monetary policy easing is limited and has now put the onus on the Government to reinvigorate growth. At present while the Government in power seems committed on reform measures and fiscal consolidation, the threat of early election seem to be worrying the markets.
Global cues too would be a driving force for the market. While the U.S. markets have done well over the last one month, the drop in labour participation rate there is not very encouraging, albeit there's been a marginal drop in unemployment rate to 7.6% in March 2013 (from 7.7% in February 2013). Having said that money managers are evincing interest in the developed economies and according to EPF , the agency which tracks fund flows into markets worldwide; global funds have invested nearly U.S. $66 billion in developed equity markets (sending the American and Japanese indices to record highs in recent weeks), while they have pulled out U.S. $951 million from India in the quarter and about U.S. $777 million overall from BRIC (Brazil, Russia, India and China) economies. Speaking about the the Euro zone, while the bailout package provided to Cyprus has been brought the crisis to rest for the time being, one should not forget that the entire Euro zone is under the situation of debt-overhang.
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.
To read our full view on how equities are likely to perform in year 2013, please click here
What should debt investors do?
The ascending trend in retail inflation with it yet continuing to be in double-digit at 10.91% for the month of February 2013 (led by sustained price pressures from food items, especially cereals and proteins), is infusing concerns. The divergence between WPI Inflation and retail inflation has continued to widen and now since prices of diesel (which is an essential transport fuel) and freight being increased inflationary pressures seem evident. Thus notwithstanding moderation in non-food manufactured products inflation, the RBI expects the headline inflation to be range-bound around current levels over 2013-14. In addition, elevated food prices, including pressures stemming from Minimum Support Price (MSP) increases, and the wedge between wholesale and retail inflation may have adverse implications for inflation expectations. Likewise the risk persists on account of widening CAD.
The RBI in its last monetary policy review meet has signalled that while policy stance emphasizes on addressing to growth risk, the headroom for further monetary easing remains quite limited and believes that Government has to play a key role in reinvigorating growth for which it has to:
We believe that taking a view from the aforementioned; we believe that it looks unlikely that the RBI would reduce policy rates once again in its annual monetary policy 2013-14 (scheduled on May 03, 2013). In order to tide over the tight liquidity situation and preclude slide in investments, while bankers are pressing for a 50 bps reduction in CRR (which could help in could help in increasing deposit growth rate); we do not see indeed RBI reducing CRR as it has already being reduced by 200 bps since January 2012, and instead they would manage the liquidity situation actively through various instruments including OMOs. Going forward, with banks discharging funds back in the system, the markets are expected to see some ease in liquidity, which may be short lived. These funds will find their way towards newly issued bonds and fund the government borrowing, which in turn would put pressure on liquidity, and push rates of shorter maturity instruments up. It is noteworthy that, the Government has already announced a gross borrowing of Rs 3,49,000 crores (59% of the full year's budgeted borrowing) in the first half of 2013-14 and is expected to start with its borrowing for this fiscal.
At present while taking exposure to debt mutual fund schemes 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 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 1 year may be considered 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 7.50% - 9.00% p.a.
To read if bond markets are poised for another rally in 2013, please click here
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