The WPI inflation bug for March 2013 mellowed down much beyond expectations (of 6.4% - 6.6%) to 5.96%, it being the lowest in more than three years. Thus there appeared a descending trend in the last three months, after plateauing above the 7.0% plus mark for over a year.
 

WPI Inflation mellowed down

Data as on March 2013
(Source: Office of the Economic Advisor, PersonalFN Research)  

The drop in WPI inflation for March 2013can mainly be attributed to:

Food inflation:
The data here revealed that prices of food articles(which have a weightage of 14.34% in WPI) eased and thus inflation in this segment decreases to 8.73% in March 2013 from 11.38% reported in the previous month.The reduction was on account of decrease in prices of milk, cereals, rice, wheat, pulses, vegetables, fruits and protein based items (such as egg, meat and fish).

Manufacturing inflation:
Likewise inflation inmanufactured products(which has a weightage of 64.97% in WPI) continued to mellow to 4.07% for March 2013 from 4.51% in the previous month. Moreover an interesting observation in manufacturing inflation was the ease in prices seemed evident in the last six months.

Fuel & Power inflation:
Fuel and power inflation (which has weightage of 14.91% in WPI) also relaxed marginally to 10.18% for March 2013 from 10.47% reported in the previous month.But segment seemed more vulnerable with not much reduction shown by prices of LPG and petrol. High speed diesel exhibited an ascending trend in the month gone, due to partial decontrol of diesel prices by the Government. It is noteworthy that the data for the month of January 2013 in this group too was revised upwards to 9.27%.

So, would RBI cut rates in its annual monetary policy2013-14?

The drop in WPI inflation has hardened expectation of a policy rate cut from the Reserve Bank of India (RBI) in order to reinvigorate economic growth rate – which has been slowest in a decade. But frequent upward revisions in WPI inflation and vulnerability from fuel & power inflation (due to increase in prices of diesel), may preclude RBI from cutting rates. Moreover, we think the Current Account Deficit (CAD) data at 6.7% for Q3FY13 may hold back the central bank from reducing policy rates in the annual monetary policy 2013-14 (scheduled on May 03, 2013). Thus far in the calendar year 2013 in order to provide impetus to growth, RBI has already reduced policy rates twice by 25 bps each, but now with intermediate inflationary pressures yet evident, WPI inflation remaining over RBI’s perceived comfort level of 5.0% and Consume Price Index (CPI) inflation yet in double-digit; it may resist the RBI from policy rates the annual monetary policy 2013-14. It is noteworthy that for the fiscal year 2012-13, the average inflation is at 7.36% which is much over RBI’s comfort level.

The RBI in its last monetary policy review meet has already signalled that while policy stance emphasizes on addressing to growth risk, the headroom for further monetary easing remains quite limited and believes that Government has to play a key role in reinvigorating growth for which it has to:

 

• Remain committed on the path of fiscal consolidation;
• Easy supply bottlenecks; and
• Improve governance surrounding project implementation

We believe that taking a view from the aforementioned; we believe that it looks unlikely that the RBI would reduce policy rates once again in its annual monetary policy 2013-14. 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 Open Market Operations OMOs.

Policy Rate Tracker

	Increase / (Decrease) in FY12-13	At present
Repo Rate	(100 bps)	7.50%
Reverse Repo Rate	(100 bps)	6.50%
Cash Reserve Ratio	(75 bps)	4.00%
Statutory Liquidity Ratio	(100 bps)	23.00%
Bank Rate	(100 bps)	8.50%

Data as on April 15, 2013
(Source: RBI website, PersonalFN Research)

Hence given the aforementioned backdrop, if RBI indeed keeps rates unchanged, there are unlikely chances that interest rates on Fixed Deposits from banks would reduce and therefore even interest rates on home loans and car loans. It is noteworthy that some banks have already reduces rates, but going forward it would also depend upon cost of funds to banks.

 

Our View on inflation::

WPI inflation as enunciated above in our view would continue to remain under pressure on account of:

• Vulnerability in fuel & power inflation (due to partial decontrol of diesel price, which would have a pass-through effect)
• Food inflation; and
• Weakness in the Indian rupee (leading to imported inflation)

What strategy debt investors should adopt?

At present while taking exposure to debt mutual fund schemes and fixed income instruments, one should clearly know their investment time horizon. Avoid debt mutual fund schemes investing in longer maturity papers and those focused on Government securities.To manage short term liquidity needsyou may consider investing in liquid funds (if the investment horizon is less than 3 months) and liquid plus funds (if the investment horizon is 3 to 6 months).

What should equity investors do?

We are of the view that for the Indian equity markets, concerns of early elections are overshadowing the reform measures taken by the Government and are dragging the markets down. The recently released Q3FY13 Current Account Deficit (CAD) data at 6.7% of GDP is worrisome as it is driven by heavy oil and gold imports and muted exports. Fortunately the Balance of Payment (BoP) figure has turned in surplus of $781 million, compared with a deficit of $158 million in the previous quarter (according to the RBI data). Likewise, the Index of Industrial Production (IIP) data is exhibiting a 'see-saw' trend with a meek data thereto, and overall the economic growth rate has slowed down and therefore the economic growth estimates for the current fiscal year have also been revised downwards assessing the economic scenario.Plagued by deceleration in new orders and frequent power outages, India’s manufacturing Purchasing Managers Index (PMI) has dropped to 52.0 in March 2013 (from 54.2 in February 2013), being the slowest in 16 months, which depicts that manufacturing activity is losing momentum.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.

Global cues too would be a driving force for the markets, and they would be wary of the debt-overhang situation in the Euro zone. In such a scenario, it could be possible that Foreign Institutional Investors (FIIs) could look at other Emerging Market Economies (EMEs) for host fundamental reasons, which could thus lead to reduction of India's share of foreign flows.

Hence nervous sentiments would persist in the Indian equity markets due to the aforementioned factors, and markets may get volatile with downward bias in the near-term.
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 investors in gold do?

Many of you may have witnessedthe sudden drop in gold prices in last couple of days and may be perturbed about your investments in the precious yellow metal or may be wondering, is gold losing it trait of being a safe haven. The drop in prices of gold has occurred due to some signs of economic revival in the U.S. But has the gold lost is sheen for ever now?

Well, you’ll be able to discover an answer that if one evaluatesthe macroeconomic scenario in the global economy. The Euro zone as you may be aware is in situation of debt-overhang with dismal growth reported and gloomy clouds surrounded despite bailout packages being doled out. And even as mentioned earlier the domestic economic data isn’t very encouraging.In fact central banks themselves are heaping up gold as a move to diversify their foreign exchange reserves and that itself tells us that not all's well with the dominant reserve currencies and many are looking at gold as safe haven. In fact such a gloomy scenario would act scenario would act as catalyst for gold and corrective phases would encourage smart investors to buy more gold, thereby leading to increase in demand. Thus demand would not deter and therefore we think the ascending move for gold is intact over the long-term as many would view gold as a monetary asset rather than mere commodity.

At PersonalFN, we recommend that you should have a minimum of 10%-15% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.

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