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November 2012

Breaking previous month’s momentum Indian equity markets recorded loses. The Indian indices S&P CNX Nifty and SENSEX recorded a loss of 1.73% and 1.69 % respectively in the month of October 2012. Considering the hope for further reforms and policy action by the govt. markets are expected to do well in the long run. Growth forecasts for the Indian economy continued to decline in line with the slowdown in the global economy. The International Monetary Fund (IMF) now expects the economy to grow 4.9% in 2012, down from the July forecast of 6.1%, and grow 6% in 2013 compared with 6.5% previously projected. The World Bank also lowered India’s growth projection for the current fiscal ending March 2013 to 6% from 6.9% estimated in June, and warned that the possibilities of a worse performance are high. On the domestic front, the Reserve Bank of India (RBI) cut FY13 GDP growth forecast to 5.8% from 6.5% projected earlier while the Prime Minister's Economic Advisory Council (PMEAC) Chairman Dr. C Rangarajan lowered the growth projection for the current fiscal to 6% from 6.7% estimated earlier. 

In continuation with the reforms announced in September, the government announced more reforms in October. Among these, the Union Cabinet cleared 49% foreign direct investment (FDI) in the insurance and pension sectors; currently, no foreign investment is allowed in the pension sector and only 26% FDI is allowed in insurance. Further, Finance Minister Mr. P Chidambaram unveiled a five-year road map for fiscal consolidation to promote investments, contain inflation and take India to a high growth trajectory. Meanwhile, Prime Minister Dr. Manmohan Singh asked state-owned firms to invest their surplus funds of about 3 lakh cr in capital expenditure plans or pay it back to the government as special dividend. He also announced a high-powered committee will be set up to oversee the government’s cash transfer plan whereby the amounts are credited directly to beneficiaries’ accounts. The Ministry of Finance asked all central ministries to strictly stick to the budgeted allocation as it would not be possible to provide additional funds because of tight fiscal situation in the current fiscal. It also asked public sector banks to help smaller counterparts to improve their functioning.

The domestic economy continued to be plagued by rising inflation. The latest Wholesale Price Index (WPI) inflation rate surged to a 10-month high of 7.81% in September from 7.55% in August. The rise in the latest inflation numbers was primarily prompted by the recent hike in fuel prices by the government. The RBI, in its latest policy review, hiked its March 2013 WPI inflation forecast to 7.5% from 7% expected earlier.

Meanwhile, the Indian government continued with steps to meet its disinvestment target of 30,000 cr for the fiscal year. Among the steps taken, the Cabinet Committee on Economic Affairs approved a 10% stake sale in NMDC. The government was also planning to sell 9.5% in NTPC. Meanwhile, the Department of Disinvestment decided to appoint Citigroup, HSBC and Kotak Mahindra as merchant bankers for the proposed 10% stake sale in Oil India Ltd. The Govt.is moving forward on following the ETF route for future disinvestment.

Among economic indicators in the month, India’s Index of Industrial production (IIP) for August grew at a robust 2.7%, the highest growth rate in six months, versus a meagre growth of 0.2% in July, while key infrastructure industries growth rose to a seven-month high in September to 5.1% from 2.3% a month ago. India's exports contracted 10.78% to USD 23.69 bn in September while imports grew by 5% to USD 41.77 bn, resulting in a trade  deficit of USD 18 bn for the month. The Indian government's fiscal deficit rose 20% on year to 3.369 lakh cr in April-September 2012, accounting for 65.6% of the budget target of 5.136 lakh cr. The government's tax collections in April-September rose 15.0% on year to 4.25 lakh cr; in September, tax mop-up was 1.41 lakh cr versus 1.29 lakh cr year ago. The Indian government's debt in the July-September period in this financial year grew by 3.6% to 39 lakh cr from 37.63 lakh cr in the previous quarter.

In the global front recessionary fears continue to plague the global economy with its growth forecast weakening further. The International Monetary Fund (IMF) expects global output to grow 3.3% in 2012, down from its July estimate of 3.5%, and has said that “risks of a serious global slowdown are alarmingly high”. The Organisation for Economic Co-operation and Development (OECD) said that its leading economic index declined 0.07% month-on-month to 100.1 in August after falling 0.08% each in the previous two months. Meanwhile, the IMF urged advanced economies to continue fiscal consolidation to reduce long-term debt and asked emerging economies to ease their fiscal and monetary policies to prop up slowing growth.

Retail investors with long term investment horizon would do well to continue to invest in equity funds with good track record with more reform measures around the corner and hopes on revival of the economy, and those with short term horizon can continue to park their short term surplus funds in income / ultra short term schemes and optimize their portfolio to benefit from the prevailing high interest rate scenario. SBI Magnum Income Fund and SBI Dynamic Bond Fund are well positioned to gain from the likely interest rate scenario moving forward. Retail investors should also look at FMPs of different maturities as they are most tax efficient. SBI Mutual Fund has launched several FMPs and will continue to do so to fulfill investors’ requirements. These schemes are typically suited for parking unutilized lazy money, and the investments can be for as low as three days, without any exit load, or for as long as one wants.

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