After peaking out in November 2011 wherein the inflation was at 9.46%, the inflation for the succeeding months receded before consolidating at around 7% levels. The Wholesale Price Index (WPI) inflation for the month of March 2012 came in at 6.89% as against 6.95% in the previous month. Moreover, the WPI inflation for the month of January 2012 was revised upwards to 6.89% from 6.55% estimated earlier. This shows that the stickiness in the inflation remains.

The main reason for the stickiness in the inflation can be attributed to the food inflation which came in at 9.94% for the month of March 2012 as against 6.07% in the previous month. The weightage of food articles in the overall WPI is 14.34%.
 

Inflation cools down further!

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

 

The drop in the Brent crude oil prices from $125 to around $120 brought in some respite to the fuel & power inflation. For the month of March 2012, the fuel & power inflation came in at 10.41% as against 12.83% in the previous month. However, considering the under recoveries of the Oil Marketing Companies (OMCs) we may see a further hike in fuel prices which may prove a dent to the prospects of inflation cooling down in the coming months.

 

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

Taking cues from consolidation in the WPI inflation and sluggish IIP growth, the Reserve Bank of India (RBI) may reduce the policy rates marginally at its upcoming annual monetary policy review scheduled on April 17, 2012. If the policy rates are reduced by the RBI then this may give an impetus to the slowdown in the economy (as reflected in the subdued GDP growth of 6.1% in Q3 FY12) as the borrowing costs will reduce which will further help in bringing down the input costs as well. However, the supply side constraints need to be looked into as even though interest rates are reduced, the input costs may not be affected immediately due to lack of supply.
 

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	(100 bps)	4.75%
Statutory Liquidity Ratio	(100 bps)	24.00%
Bank Rate	Unchanged	6.00%

(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 hovering around $120 mark and with a further fuel price hike the overall inflation numbers may not cool down soon.

 

What should equity investors do?

The Indian equity markets are resilient in nature and have potential for a robust future growth. Investors in equity should adopt calm and compose approach and stay invested from a long term point of view.

Though of late the fears about the debt contagion in the Euro zone subsided due to the infusion through the Long Term Refinancing Operations (LTRO), renewed fears of high borrowing costs in Spain and upcoming elections in Greece have left the investors nervous. Any negative news might create a rippling and crippling effect on the Indian equity markets as an immediate effect. However, robust growth prospects will eventually attract foreign investments in the country as compared to the developed nations, as India offers robust growth. But we are of the view that India’s tax policies need to be more predictable and should not throw wrong signals (as they have done at present with the Government trying to override the judgment of the Supreme Court, in Vodafone’s tax suit)

We recommend that you invest in diversified equity funds as this will help reduce risk. And while investing in mutual funds it is vital to select only those equity mutual 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.

But it is not going to be an easy task for the RBI to reduce policy rates as it would have a challenge of keeping WPI inflation within its comfort zone. This is because Brent crude oil prices are hovering around the $120 per barrel, and if oil marketing companies do increase fuel prices (after obtaining consent from the Government) to correct their under-recoveries we may once again see pressures building into WPI inflation due to increase in fuel inflation

Hence at present while taking exposure to debt mutual funds and fixed income instruments, one should clearly know their investment time horizon. 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 a part of their investments to floating rate funds. Short-term income funds should be held strictly with a 1 year time horizon. If one has a longer investment horizon (of say 2 to 3 years) dynamic bond / flexi-debt funds can also be considered. However, one may witness some volatility in the near term as there is always an interest rate risk associated with the longer maturity instruments, and yield of long-term papers are likely to bump-up before they start falling.

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?

We may further witness volatility in the equity markets if the paining Euro nations like Greece, Italy and Spain do not come with some concrete solutions to get their finances in place. Any negative news may send a wave of shock and apprehension across the globe dampening the investment environment. Under such situation, investors are bound to take refuge to this precious yellow metal - gold.

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

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tdmpatou@galilee.fr May 10, 2012 es138: if you think about it, almost all great dicievorses (good or bad ones alike, as long as it had longstanding consequences) were committed by loners. not just science. in religion it is the same.no one can bloat too much of these things nowadays, either a beer blows it away or it's time to look for the next project, grant, job but there's no need for that loft loneliness really, we're all very lonely anyway. underneath the busy roles we play everyday (I like the TV series : 6 feet under, twisted stuff)at least my life is quite miserable. as it's always been. no need to aim for worse btw, I think woit is a whiner and doesn't do anything worthy.

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