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October 2012

September turned out to be a good month for Indian equity markets and the economy as a whole. The Indian indices S&P CNX Nifty and SENSEX recorded gains of 8.46 % and 7.65 % respectively in the month of September 2012. YTD, India is the 5th best performing market in its Emerging markets peer set.

In the global front, despite stimulus measures initiated by major central banks across the globe, economic sentiments remained gloomy. The International Monetary Fund (IMF) stated that the financial crisis, which began in 2007-2008 and had shaken the global financial system, has still not subsided despite reform measures taken by global policy makers. In the past couple of months, major central banks have come out with a slew of measures to ward off recessionary woes but the outlook is still bleak. Fitch Ratings said that global growth outlook has been weak despite monetary policy stimulus provided by various global central banks. Forecasts for the global economy continued to fall. The World Trade Organization (WTO) cut 2012 global trade growth forecast to 2.5% from 3.7% and lowered its forecast for 2013 to 4.5% growth from 5.6%

On domestic side, the Indian government finally kick-started the slowing economy with a round of reforms which is expected to rejuvenate the investment climate, promote growth and reduce the widening fiscal gap. The government increased diesel price by Rs 5 a litre, the first such hike in 15 months, and also reduced the excise duty on petrol by Rs 5.30 a litre. It capped the supply of subsidised domestic liquefied petroleum gas (LPG) cylinder to six per year per consumer. The government approved and notified foreign direct investment (FDI) to the tune of 51% in multi-brand retail, and 49% in local airlines and power trading exchanges, and raised the FDI cap to 74% in broadcast services. It also notified a cut in withholding tax on interest payment for external commercial borrowings (ECBs) by Indian companies to 5% from 20%. These may not be far reaching reforms measures, especially since they do not touch upon the imperative need for reforms in governance, yet they are good indicators of the times to come. 

Moody’s Investor Services maintained its stable outlook for India following the government’s announcements about the recent reform measures. India's headline inflation rate based on the Wholesale Price Index (WPI) rose to 7.55% in August from 6.87% in July. A bailout plan of nearly Rs 2 lakh cr for cash-strapped power distributors was approved by the government. 

The government has also speeded up the disinvestment process which had been stagnating for the better part of this year; it expects to meet its divestment target of Rs 30,000 cr for the current fiscal. It started by approving the sale of its minority stakes in Hindustan Copper, Oil India, MMTC and NALCO,  to raise up to Rs 15,000 cr. The finance ministry has invited bids from advisors for setting up an exchanges traded fund (ETF) for selling stakes in state run companies. It also suggested that state-run companies should allocate up to 5% shares of the disinvestment offer size to their employees. The Disinvestment Department called in bids from merchant bankers and brokers to sell its stake in public sector companies like Nalco and NMDC and Neyveli Lignite Corp. Separately, the government decided to sell Specified Undertaking of the Unit Trust of India's nearly Rs 38,000 cr stake in Axis Bank, ITC Ltd, and L&T to LIC.

Despite the government’s efforts, the Indian economy continued to be weighed down by the prevailing uncertainty in the global economy. Global ratings agency Standard & Poor’s (S&P's) also cut the country’s growth forecast to 5.5% from 6.5% for the current financial year. Meanwhile, Moody’s Investor Services retained its stable outlook for India following the government’s announcements about the recent reform measures, especially the move towards paring the subsidy bill.

Retail investors with long term investment horizon would do well to continue to invest in equity funds with good track record 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 above mentioned scenario as we expect the rates to cool off gradually. The ultra short 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. Retail investors should also look at FMPs of different maturities as they are tax efficient. SBI Mutual Fund has launched several FMPs and will continue to do so to fulfill investors’ requirements.

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