The Oil Marketing Companies (OMCs) have been reeling under pressure due to losses on account of fuel prices which has been a major concern for the Government as well as the Reserve Bank of India (RBI). As a result of this the fuel prices have been raised 12 times in the last 15 months (the last time fuel prices were hiked was on September 16, 2011 by 3.14). Adding to this misery is the crude oil price staying above the $100 mark which makes it all the more difficult for the import bill of crude oil to cool down. Thus, as a direct impact on the headline inflation (due to its weightage being 14.91%) the WPI inflation for the month of September 2011 stood at 9.72%. Though the current month inflation subdued marginally it is still very high as regards the comfort level of the RBI is concerned.

 

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

 

This is the tenth consecutive month when headline inflation has been above the 9% mark. Moreover, on an annual basis the food inflation became 9.32% more expensive and similarly inflation in the fuel and power segment stood at 15.10% in September 2011.

RBI's stance in taming inflation:

Battling hard with the inflation monster, the Reserve Bank of India (RBI) has been obstinately increasing the key interest rates consecutively for 12 times now. And with this September 2011 reading (9.72%), the RBI may be tempted once again to increase the interest rates for the 13th time. The Index of Industrial Production (IIP) for the month of August 2011 stood at 4.1% showing a marginal increase from 3.8% in the previous month.

  Policy rate tracker

	Increase / (Decrease) since March 2010	At present
Repo Rate	350 bps	8.25%
Reverse Repo Rate	400 bps	7.25%
Cash Reserve Ratio	100 bps	6.00%
Statutory Liquidity Ratio	(100 bps)	24.00%
Bank Rate	Unchanged	6.00%

(Source: RBI website, PersonalFN Research)

 

Thus, it will be interesting to see how the country's central bank reacts to these numbers at its second quarter review of monetary policy scheduled on October 25, 2011.

 

Our View:

In our opinion though the headline inflation is ticking towards the double digit mark, the RBI may take a cue from the dismal growth put up by the IIP at 4.1% in August 2011 and refrain from taking any hawkish stance. Further the following factors would also weigh on the RBI's mind before making any attempt to increase the policy rates again:

 

• Elevated borrowing cost
• Elevated input cost
• Chances of slowdown in consumer spending
• Downward revision in GDP targets (from 8.2% to 8.0% by PMEAC)
• Nervous sentiment in the capital markets
• Manufacturing Purchasing Manager's Index (PMI) at 50.4 points in September 2011, nearing the contraction mark (which is 50)




 

At PersonalFN we expect RBI to raise repo and reverse repo rates by 25 basis points in its second quarter review of monetary policy 2011-12 scheduled on October 25, 2011.

What should equity investors do

Equity investors should adopt calm and compose approach by staying invested and also investing further as soon as valuations look attractive and there is potential for robust future growth.

However, you need to be wary of the news dissemination from the developed economies – especially Euro zone and the U.S. as this may show a rippling and crippling effect on the Indian equity markets. Hence one needs to be cautious while investing in equities and rather have a staggered approach.

Therefore while investing in equities we think diversification benefit provided by mutual funds can help to reduce risk (however one needs to stay away from U.S. or Euro oriented offshore funds in such a scenario). While investing in equity mutual funds we recommend that you opt for value styled funds and adopt 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 investors in gold do?

In our opinion the downbeat global economic headwinds make the case for gold becoming bolder. Moreover inflationary pressures are likely to haunt most emerging nations including India; and central banks across the world are likely to be vigilant on raising policy rates, which in turn would lead to smart investors taking refuge under the precious metal.

It is noteworthy that gold has displayed a secular uptrend since a long time now. In 1971, the price of gold was about $32 an ounce and today (i.e. on October 13, 2011) it is $1,673.0 an ounce – which indicates that price of gold has gone up by 51 times over the last 40 years. Hence, nothing has changed for gold and we believe it will continue to maintain its upward trend in the long-term. Moreover if the Euro zone crisis accentuates and the US goes into recession again, the precious yellow metal is bound to accelerate its northward journey. At PersonalFN, we recommend that you should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.

 

What should debt investors do?

Well, we are almost nearing the peaks as far as the interest rates are concerned. We recommend investors to take gradual 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 considered, provided one has a longer investment horizon (of say 2 to 3 years). Short term income funds should be held strictly with a 1 year time horizon. Fixed Maturity Plans (FMPs) of 3 months to 1 year can also be considered as an option to bank FDs only if you are willing to hold it till maturity, but you may not have a very attractive post tax benefit as indexation benefit will not be available on FMPs maturing within 5 months. One may also consider investing their money in Fixed Deposits (FDs). At present 1 yr FDs are offering interest in the range of 7.25% - 9.40% p.a.

 

Disclaimer: This note / article is for information purposes and Quantum Information Services Limited (PersonalFN) is not providing any professional / investment advice through it. The recommendation service, views, articles and other contents are provided on an "As Is" basis by PersonalFN. The facts mentioned in the note are believed to be true and from a public source. The Service should not be construed to be an advertisement for solicitation for buying or selling of any scheme / financial product. PersonalFN disclaims warrants of any kind, whether express or implied, as to any matter/content contained in this note, including without limitation the implied warranties of merchantability and fitness for a particular purpose. PersonalFN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this note. Use of this note is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. PersonalFN does not warrant completeness or accuracy of any information published in this note. All intellectual property rights emerging from this note are and shall remain with PersonalFN. This note is for your personal use and you shall not resell, copy, or redistribute this note, or use it for any commercial purpose. Please read the terms of use.

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Comments
jasonjallen@hotmail.com Nov 03, 2011 It's wonderful to have you on our side, ha ha!
info@pilates-studio-koeln.de Nov 04, 2011 I'm quite pleased with the information in this one. TY!

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