The WPI inflation bug after being on a downward trend in the last four months, once again paved its ascending move. The data for July 2013 came in at 5.79%, thereby inching upwards from previous month and even breaching estimate of 5.00%. While the data for May 2013 was revised downwards, the inflationary pressures have now crept in, disturbing the moderation which was evident a couple of months ago.
WPI Inflation inches-up again!
Data as on July 2013
(Source: Office of the Economic Advisor, PersonalFN Research)
The ascending move inWPI inflation for July 2013was mainly account of:
Food inflation:
The data here revealed that food articles (which have a weightage of 14.34% in WPI) increased to 11.91% in July 2013 from 9.74% in June 2013, mainly attributed by increase in prices of onions, cereals and rice. It is noteworthy that inflation in onions shot up by alarming 145.00% in July 2013, from 114.00% in the previous month. Inflation in cereals and rice stood at 17.66% and 21.15%, as against 17.18% and 19.11%, respectively in the previous month. Overall vegetable prices went up by an alarming 46.59% in July 2013, from 16.47% in June 2013.
Fuel & Power inflation:
Similarly fuel and power inflation (which has weightage of 14.91% in WPI) after relaxing noticeable in the last four months (i.e. from March 2013 to June 2013) once again rose rather sharply to 11.31% in July 2013 from 7.12% in June 2013. The weakness in the India rupee also had a detrimental impact on this constituent of WPI as oil imports became costlier.
On the other hand, the following constituents of WPI saw a decrease and remained rather benign.
Non-Food article inflation:
Non-food articles (which have a weightage of 4.26% in WPI) which consist of fibre, oil seeds and minerals, eased noticeably further to 5.51% in July 2013 from 7.57% in June 2013.
Manufacturing products inflation:
The data here revealed that prices of manufactured products(which have a weightage of 64.97% in WPI), although it increased marginally to 2.81% in July 2013 from 2.75% in June 2013; it remained rather benign with manufacturing inflation overall since the last nine months being on a descending trend.
So, would RBI cut rates in its 2nd mid-quarter review of monetary policy2013-14?
In the outlook section (for inflation) of 1st quarter review of monetary policy 2013-14 (held on July 30, 2013) the Reserve Bank of India (RBI) had projected that stronger than expected monsoon has not yet softened food inflation as much as it should have and In particular, vegetable prices have been impacted by weather-driven supply disruptions. Also the central bank said, while the outlook for global non-oil commodity prices remains benign, international crude oil prices is firming up. And thus far, all these projections by the central bank, is reflecting in the WPI inflation data. The
In the last guidance to monetary policy (i.e. 1st quarter review of monetary policy 2013-14), the central bank mentioned that India is currently caught in a classic "impossible trinity" trilemma, where the risk emanates from:
- External sector concerns;
- Volatility in foreign exchange; and
- Current Account Deficit
While the Government has drawn a strategy, vide the following big moves intended to boost dollar flows, the success of the same remains to be seen.
Recently, the Government also increased import duty on gold in its endeavour to reduce India's Current Account Deficit (CAD), but weakness in the Indian rupee poses to be a challenge. The Government is vowing to restrict the current account deficit (CAD) to 3.7% of GDP, or U.S. $70 billion, in the current fiscal and ensure its "full and safe" financing to stem the rupee's slide.
Hence the aforesaid backdrop, it appears unlikely that the RBI would reduce policy rates in its 2nd mid-quarter review of monetary policy 2013-14 (scheduled on September 18, 2013), with rupee and CAD (along with the external environment) taking centre stage. In the last guidance the central bank has said that, it should be emphasised that the time available now should be used with alacrity to institute structural measures to bring the CAD down to sustainable levels and the central bank stands ready to use all available instruments and measures at its command to respond proactively and swiftly to any adverse development. It is noteworthy that, despite RBI increasing short-term rates and contracting liquidity, the rupee has yet remained under stress and at present is near the all-time low of Rs 61.81 against the U.S. dollar.
PersonalFN's View on inflation:
While monsoon has been above normal, it has done damage to vital kharif crops due to which we are witnessing price of food articles. International oil prices are also elevated which poses a risk to inflation and more so with weakness in rupee. Manufacturing inflation in our view would continue to look benign with lull in industrial activity.
What strategy should debt investors should adopt?
Liquidity position and path for interest rates
In the backdrop of the guidance in the 1st quarter review of monetary policy 2013-14, longer maturity papers would remain under pressure until the aforesaid macroeconomic risks are in play. Although the RBI has taken measures to contain the rupee, it has not yielded the desired results and thus the RBI may take more measures to contain the rupee where, they may further lower the cap for bank's borrowing under LAF. Already the measures taken by RBI to contain the Indian rupee have brought in volatility in the Indian debt markets; where duration funds and gilt funds have witnessed rather a violent fall in their NAVs thereby impacting their returns as a result of ascending yields. Short-term CD yields have climbed up as much over 300 basis points since June-end, while the 10 year 7.16% 2023 G-sec yield too is placed at 8.20% as a result of a classic 'impossible trinity' trilemma as cited by RBI. Moreover, the investment climate remains weak and risk aversion continues.
So given the aforesaid backdrop, PersonalFN is of the view that, it would be best to refrain investing in longer maturity debt papers in the aforesaid backdrop, and instead prefer shorter maturity debt papers. If permitted by your time horizon and risk appetite if you still want to invest in long-term debt funds, it would be wise to take exposure via dynamic bond funds (as enabled by their mandate they hold debt instruments across maturities). But PersonalFN thinks that given the aforementioned interest scenario and macroeconomic variables thereto, one should not hold more than 20% of their debt portfolio in longer tenure funds. Avoid investing in G-sec funds, as they may see high volatility and may not be an ideal instrument to yield fruitful returns. Fixed Maturity Plans (FMPs) of 3 months to 1 year period can also be considered as an option to bank FDs only if you are willing to hold it till maturity. Alternatively you can also invest in 1 year Fixed Deposits (FDs), as banks are offering interest on 1 year FDs in the range of 7.50% - 8.75% p.a. In the present scenario, it would be ideal to invest in shorter duration instruments vide debt mutual fund schemes having shorter maturity profile. 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.
What strategy should equity investors adopt?
The downbeat domestic macroeconomic variables and global economic headwinds very much in play. The HSBC's Purchasing Managers' Index (PMI) data for manufacturing once again came in at 50.1 in July 2013 (data released in August 2013) as against a marginal uptick seen in June 2013 to 50.3 from 50.1 for May 2013. Likewise, the services activity too slumped to the lowest in four years in July 2013 as the HSBC Services Business Activity Index fell to 47.9 in July from 51.7 in the previous month (the lowest reading since April 2009), thereby reflecting contraction in the activity. Moreover, with the HSBC Composite Index at 48.4; the situation in the economy appears a bit grim as the composite data suggests an overall contraction in the output of manufacturing and services companies in the country in July 2013. Thus taking a sense of the overall activity and the global headwinds, where growth has been rather tepid with some signs of loss of momentum in the U.S. and in Emerging and Developing Economies (EDEs) on top of the on-going contraction in the euro zone; the RBI in its 1st quarter review of monetary policy 2013-14 too has also revised downwards growth estimates from 5.7% to 5.5%. Moreover, many Indian companies are having high debt on their balance sheet and low margins, due to a high interest rate scenario. The interest rate sensitive sector, specifically is feeling the pressure of the high interest rate scenario. Overall too, companies are refraining from making large investments in new projects due to a vulnerable scenario.
While CAD has reduced has been reduced at present for March-quarter to 3.6% of GDP (at U.S. $18.1 billion), for the complete fiscal year 2012-13,it is at a record high of 4.5% (at U.S. $87.8 billion), which is much above the central bank's comfort level of 2.5% of GDP. And the persistent weakness in the Indian rupee is posing a risk to country's CAD. Although the Government is vowing to restrict the current account deficit (CAD) to 3.7% of GDP, or U.S. $70 billion, in the current fiscal and ensure its "full and safe" financing to stem the rupee's slide.
Speaking about the fiscal deficit number, the Government has run up fiscal deficit of 33% of the total budgeted for the entire 2013-14 fiscal in the first two months of the current fiscal. The fiscal deficit data released by the Controller General of Accounts (CGA) revealed a figure of Rs 1.8 lakh crore. This has happened as the Government has made attempt to spur economic growth by loosening it purse strings by instructing ministries and department to front load spending. "We will continue to urge ministries and departments to spend money allocated to them. In fact, I will be happy if they spend it early rather than put it to the second half of the year... Public spending, government spending will help the growth process...," Finance Minister, Mr P. Chidambaram had said earlier. It is noteworthy that in the earlier fiscal, sharp reduction in expenditure had helped the Government to contain the fiscal deficit target to 4.89% of GDP, but with general election scheduled next year (i.e. 2014), the Government seems to be all out to increase expenditures in attempt to reinvigorate economic growth, albeit the fiscal deficit target may not be met at this rate.
In the monsoon session of the Parliament, while the Government endeavours to pass progressive and regulatory Bills such the Pension Fund Regulatory and Development Bill 2011, the Companies Bill, the Competition Amendment, Public Procurement Bill 2012, Multi-state Co-operative Societies Bill 2010, the Consumer Protection (Amendment) Bill 2011, National Judicial Commission Bill, National Food Security Ordinance 2013, Securities Law Amendment Ordinance 2013 SEBI Amendment Ordinance 2013, amongst host of others; it looks unlikely that the Parliament proceeding would go smoothly because of:
- Lack of consensus on policies;
- Scam stories unveiling and;
- Deteriorating state of governance
Also apart from the domestic economic factor as cited above, in recent times, as many of you may be aware, the global growth has been rather uneven and slower than expected. In the Advanced Economies (AEs), activity has weakened and even the Emerging and Developing Economies (EDEs) are experiencing a slowdown. After the Federal Reserve Chairman, Mr Ben Bernanke hinted at winding down its bond-buying programme nervousness has gripped the global economy, although a statement was issued later by Federal Reserve Chairman saying that the U.S. central bank might not roll back its stimulus programme earlier than expected. This made the U.S. dollar strong vis-à-vis the Indian rupee and also other currencies in EDEs. In the Euro zone, while U.K. has depicted some recovering backed by gathering of momentum on the back of consumer spending, the Euro zone as whole is grappling with recession and double-digit unemployment rates. Speaking about China, although it maintained momentum in the recent months, the HSBC Purchasing Manager Index (PMI) numbers and industrial production aren't depicting any virtuous picture. Likewise with Brazil, Russia and South Africa, growth has clearly lost momentum. Japan's economy though, is returning to positive growth supported by their industrial production numbers and retail sales. So, the global economic headwinds are very much in play.
Hence In the background of the above and the risk emanating there from, PersonalFN is of the view that investor should stagger their investments to mitigate risk, since volatility could persist. While investing in equity mutual funds, PersonalFN recommends 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. Also PersonalFN believes that your investment discipline and asset allocation would decide your success in investing.
What strategy should investors in gold adopt?
Well, going forward too, demand is going to build-up as we approach the festive season. In fact, stockists are already piling up their inventory to meet demand ahead of the festive season (which runs from August to November). It is noteworthy that according to the World Gold Council (WCG) shipment of gold to India is expected to reach at around 900 tonnes level in calendar year 2013 due to rise in demand following lower prices.
At present the acquisition cost of gold has shot up with hike in import duty and weak Indian rupee. In such a scenario, PersonalFN is of the view that this would further buoy-up smuggling activity for 'tola' bars (or unnumbered gold bars) in the country. Smuggling activity in gold has been resurrected recognising the fact that India has an insatiable appetite and flair to own the precious yellow metal, due to various emotional and financial reasons.
With economic uncertainty surrounding the global economy, PersonalFN thinks that smart investors could view gold as a monetary asset rather than mere commodity and that would keep the long-term trend for gold intact until economic uncertainty recedes. Moreover, as long as the U.S. Federal Reserve continues with it bond-buying programme at its current pace, it would be supportive for gold.
One can take refuge under the precious yellow metal and add it to your portfolio from diversification point of view. At PersonalFN, we believe that, you should consider your investment time horizon and accordingly allocate 10% to 15% of your total portfolio towards gold (via gold ETFs). Gold is not an instrument to make quick money but a solid long term asset and hence you should ideally invest in gold with a longer investment horizon.
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