The growth in factory output measured by Index of Industrial Production (IIP) for the month of February came in at 0.6%. Although positive, the growth rate decelerated as compared to that in January 2013. Moreover, quick estimates for January have been revised downwards to -1.01% from -0.8% earlier.

In February, many of important constituting industries of index showed negative growth. However with decent performance of Manufacturing sector (growth of 2.2%); the index managed to post positive growth. Consumer Goods segment registered muted growth. Lower Mining activity has again disappointed by showing growth of -8.1% while Electricity sector decelerated by -3.2% in February.

Cumulative growth for the period April-February has been negative for Mining and Quarrying which stands at -2.5%. The growth in Manufacturing has been 1.0% over the similar time period. Performance of Electricity sector looks slightly better during the period April-February as it registered growth of 4.0%.
 

IIP continues its 'see-saw' movement

(IIP Data for February 2013 released on April 12, 2013.)
(Source: CSO, PersonalFN Research)  

Out of 22 industries considered for calculating IIP, 13 have registered positive growth but weightage of individual industries has affected the final number. Let's see how various industries have fared.
 

• Manufacturing index, which constitutes nearly 76% of the industrial production index, posted positive growth of 2.2%. Industries such as chemicals and chemical products and coke, refined petroleum products and nuclear fuel posted healthy growth of 5.1% and 3.5% respectively. Wearing apparel segment also registered good performance however, due to its lower weight in the index; its contribution in the index movement remained insignificant. Commercial Vehicles, Machine tools and Earth Moving machinery disappointed by showing sharp decline anywhere between 20.0% to 50.0%.
   
• Consumer goods index posted growth of 0.5%. Robust growth in Food products, beverages and Tobacco products helped consumer non-durable segment post decent growth. However, negative growth in consumer durables affected the performance of consumer goods segment as a whole.
   
• The Basic and intermediate goods index registered growth of -1.8% and -0.7% respectively. However, capital goods jumped 9.5% to register positive growth for the first since October 2012. Electrical machinery and apparatus industry posted the highest growth across all industries and all segment within industries. The growth rate was phenomenal 73.0%.
   
• Electricity sector after registering growth of 6.5% in January, Electricity sector once again faltered on growth and reported growth of -3.2% in February. However due to strong performance throughout the year helped the sector post cumulative growth of 4% in the period April 2012-February 2013.
   

Our View:
Although the overall growth momentum is still weak, manufacturing sector has fared reasonably well considering the downward pressure persisting on some other industries such as consumer non-durables, basic goods and mining. Manufacturing inflation, which is the main constituent of Wholesale Price Index (WPI) would be watched out closely by RBI. Whether RBI cuts policy rates at its annual monetary policy which is scheduled on May 3, 2013, would largely depend on WPI inflation number. Now that manufacturing has posted positive growth, there will be less pressure on RBI to honour strident demands of industry players and investors' community to cut rates further. RBI has already clarified in the past that high food prices at consumer level still remains a major risk.

What should equity investors do?
The IIP data has depicted a 'see-saw' trend yet again. 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 EPFR, 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.

What should debt investors do?
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. While investing in debt funds, avoid those with longer maturity profile and funds focused on government securities. To manage short term liquidity needs, you may consider investing in liquid and liquid plus funds.

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