The Index of Industrial Production (IIP) has been showing stagnated movement for last 3 quarters. In August 2013, index registered a marginal uptick of 0.6%. Mining and manufacturing activities continued to remain lacklustre. Together they form about 4/5 of the index but recorded have growth of -0.2% and -0.1% respectively. This has resulted in poor performance of the index. However, electricity sector which delivered a growth number of 7.2% growth helped index stay in positive. IIP for the month of July 2013 has undergone an upward revision. From 2.6% earlier, the growth number has been revised to 2.8%.
 

IIP on a roller coaster

Data For upto August 2013, extracted on October 12, 2013
(Source: CSO, PersonalFN Research)  

Evaluation of some of the important components of IIP for August 2013 reveals the following:
 

• Manufacturing index performed poorly. Industries such as electrical machinery, wearing apparel and tobacco registered higher growth but this couldn’t translate in to good performance of IIP index due to their lower weightage in the index. On the other hand, industries such as base metals and food products which have a considerably higher weightage in the index registered negative growth numbers. Consequentially manufacturing index showed negative growth despite 14 out of its 22 constituting industries witnessed positive growth. Manufacturing index for the month of July has been marginally revised upwards.
   
• Basic goods, Capital Goods, Intermediate goods index depicted mixed performance. While basic goods and intermediate goods industries grew at 1.5% and 3.6% respectively; capital goods industry recorded negative growth of 2.0%. Basic goods index and capital goods index, for the month of July 2013, have been revised downwards while there has been an upward revision in the intermediate goods index for July.
   
• Consumer goods index recorded negative growth of 0.8% in August 2013. This time too, the performance of the index was affected by poor performance of consumer durable segment. While consumer non-durables recorded a positive growth of 5% in August, growth in consumer durables remained negative and came in at -7.6% in August.
   

So would RBI cut policy rates now?
Inflation measured by CPI for the month of August has been 9.52%, which is still high. This may affect decision making of RBI. Further, the monetary policy stance of RBI may also be influenced by the decision of Federal Reserve (U.S.) regarding continuation of monetary stimulus in the U.S. Being concerned about currency stability and persistently high retail inflation RBI may not take a softer stance and reduce rates or maintain status quo in spite of poor industrial growth. Rather RBI may hike rates by another 25bps 0.25% if it sees upside risk to retail inflation.

So what strategy equity investors should adopt?
Economic and industrial growth may remain subdued going forward, even after taking into consideration possibility of spur in demand ahead of festive season. If RBI goes for another rate hike, borrowing cost, which is already high due to higher short term borrowing rates and liquidity crunch, may go even higher. Higher borrowing costs may affect profitability of companies negatively. This may keep markets range-bound. Moreover, performance of Indian equities would also be impacted with global developments.

PersonalFN believes that investors would be better off staying away from speculation and taking exposure to equities through Systematic Investment plans offered by diversified mutual funds.

What strategy debt investors should adopt?
In the recent times, RBI has reduced rates on Marginal Standing Facility (MSF) twice. PersonalFN is of the view that, RBI may further lower MSF rates but may consider repo hikes again, if needed. Lower MSF rates would help ease pressure on short term yields. Liquidity worth Rs 40,000 crore - Rs 45,000 crore injected by way of government spending would help liquidity crunch. Moreover, the RBI may allow banks to borrow upto 0.25% of their Net Demand and Time Liabilities (NDTL) through term repos having maturity of 7 and 14 days. Also, cash management bills which were issued to suck out liquidity from the system a few weeks ago are maturing in the near term. This would release another Rs 52,000 crore in the system and would have a positive impact on yields of short term instrument. On the other hand, long end of the yield curve would be affected with several factors such as inflation and fiscal deficit to name a few.

PersonalFN believes that current market conditions are uncertain and it would be extremely risky to speculate on the movement of interest rates, going forward. Short end of the yield curve still appears attractive as compared to the long end. PersonalFN is of the view that, you should consider your financial circumstances and time horizon before investing in debt funds as they are not risk free. Moreover, long term debt funds should not account for more than 20% of your debt portfolio. Selecting a debt fund is as crucial as selecting an equity fund.

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Comments
mail@paulandsheilaray.com Oct 15, 2013 You are so awesome for helping me solve this myetrsy.
kidsandmusic@integrity.com Oct 15, 2013 Short, sweet, to the point, FRlEcexa-tEy as information should be!

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