The Gross Domestic Product (GDP) for the second quarter (Q2) of FY 2012-13 (FY 13) stood at 5.3%, a tad below the GDP growth rate posted in the previous quarter. It is noteworthy that such a data placed economic growth rate at a 3 year low and was far more muted as compared to GDP growth rate clocked for the same quarter last year (Q2FY12 GDP growth rate was 6.7%). The consumer sentiment in the country too was subdued as reflected by just 5.5% growth in the trade, hotels, transport & communications sector as against 9.5% growth for the same period last year. On the other hand services sector growth (including insurance and real estate) was close to the Q2FY12 level (of 9.9%), although it too was reported a tad lower at 9.4% for Q2FY13.
 

(Source: CSO, PersonalFN Research)
The downtick in the Q1 GDP growth over the previous quarter can be attributed to:
 

• Agriculture, forestry & fishing: This component of GDP grew at mere 1.2% as against 2.9% in the previous quarter; although there were expectations that it would clock appealing growth supported by a normal monsoon.
   
• Electricity, gas and water supply: Likewise electricity, gas and water supply too dwindled sharply to 3.4% as compared to 6.3% in the previous quarter, which also pulled down the GDP growth rate. Also when compared to Q2 FY12 (wherein the growth in this component was 9.8%) the growth was far more muted.
   
• Construction: The construction sector too felt the brunt of a high interest rate regime which led to a slowdown in sales, and thus reported a growth of 6.7% as compared to 10.9% in the previous quarter. However, when compared to Q2FY12 data, there was a marginal increase of 40 basis points (bps).
   

It is noteworthy that reduction in economic growth in Q2FY13 was shortened by an increase in manufacturing sector and mining & quarrying which grew at 0.8% and 1.9% respectively (as compared to 0.2% and 0.1% growth respectively in the previous quarter). When compared to Q2FY12 manufacturing sector indeed felt the impact of a high interest rate regime and policy logjam, but mining & quarrying revived from a negative growth with progress in coal block allocation.

We are of the view that, the Quarter-on-Quarter GDP growth rate has been under pressure and so far since the last fiscal year has depicted a descending trend. A see-saw movement in Index of Industrial Production (IIP) has been indicative of this movement in the Q-O-Q GDP growth rate as well. A high interest rate scenario has been an impediment for the construction and manufacturing sector, although it has not affected the broader consumption story of India. There have been pressures on the Reserve Bank of India (RBI) to reduce policy rates, but sticky WPI inflation has precluded reduction in policy rates. So until the RBI refrains from reducing policy rates, we may see the interest sensitive sector limiting the uptick in GDP growth rate.

Although at present the Government has given emphasis on reforms, it remains to see how these are indeed implemented; because so far the proceedings of the winter session of the Parliament have been interrupted, due to the opposition flagging their own ideologies onto several important bills. So an improvement in the GDP growth going forward, depends would depend upon the how important policy decisions take course in the winter session of the Parliament.

In the 3rd quarter mid-review of monetary policy 2012-13 (scheduled on December 18, 2012), we do not see the RBI cutting rates, however in beginning Q1 2013, in the 3rd quarter review of monetary policy we may see the central bank reducing policy rates by 25 bps, if the WPI inflation bug mellows down and depicts signs of moderation. At present the RBI is using the Cash Reserve Ratio (CRR) and (Open Market Operation) OMO transactions to manage the intermediate liquidity requirements.

What should equity investors do?

Given the uncertainty looming around in the global economy (with situation of debt-overhang in the Euro zone, sovereign rating downgrade and fiscal cliff confronted by the U.S.) and worries in the domestic economy as explained above, we recommend that investors should stagger their investments and not get carried away by intermediate exuberant impulses of the Indian equity markets. 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 .

It would be wise to stay away from investing in offshore equity oriented funds focusing on the U.S. or the Euro zone given the uncertainty looming around in the developed economies. Prefer domestic diversified equity oriented funds and prudently select only those 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?

Given a scenario, where it looks unlikely that the RBI would reduce policy rates in its 3rd quarter mid-review of monetary policy 2012-13 (due stickiness in WPI inflation), we think that the current situation is still attractive to take exposure to debt mutual fund instruments, but one should clearly know his investment horizon to invest prudently.

Investors with an extreme short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next couple of months, 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% - 9.00% p.a.

What should investors in gold do?

The overall trend for gold, we believe seems to be intact with the global economy surrounded with downbeat economic situation and the risk event phase. The easy monetary policy adopted by the developed economies in order to aid growth, will be supportive for gold. Also the festive and wedding season in the ensuing month(s) will facilitate gold to look bold. Also traditionally, the demand for gold in India (world's top consumer of gold) rises in the last quarter of the calendar year, and this cyclicality could push gold prices further northwards.

However, for investing in gold we recommend that you opt for the smart way of investing i.e. Gold ETFs for the host of advantages it offers over holding gold in a physical form. At PersonalFN, we recommend that you should have a minimum of 10% -20% allocation towards gold and invest in it with a long term perspective with a time horizon of 10 to 20 years.

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