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October 2013

The benchmark equity indices CNX Nifty and S&P BSE Sensex gained 4.82% and 4.08%, respectively, in the month of September 2013. With this the Indian equity market was able to halt its three-month slide. The indices recovered largely due to positive domestic and global cues. Strengthening of the rupee against the dollar due to RBI actions also helped the domestic market. Measures announced by the new RBI Governor, Raghuram Rajan included: 1) new banking licenses likely to be declared around January 2014, 2) a fixed-rate swap for FCNR (B) deposits (which are dollar-denominated deposits for expat Indians), 3) to reduce the pre-emption of deposits via the statutory liquidity ratio or SLR, 4) increasing the current overseas borrowing limit for banks from 50% of the unimpaired Tier I capital to 100%, 5) to launch Inflation Indexed Savings Certificates linked to the CPI New Index, 6) form a new committee  to suggest reform of financial inclusion targets for banks and 7) address the non-performing loans (NPL) situation and a promise to review debt recovery processes. Strong buying by the foreign institutional investors (FIIs) also aided the markets. FIIs were net buyers of Indian equities in September after selling for the previous three months. FIIs net bought Rs 12,633 cr in September compared to selling of Rs 6,200 cr in August.

In its Mid-Quarter Monetary Policy Review, RBI has announced a hike in the repo rate by 25bps - first time in the current fiscal year. This reversal was against market expectations, especially after the US Federal Reserve had decided not to start its tapering programme. However the Federal Reserve’s decision to continue with its bond buying program boosted the Indian market.  The US central bank said that while the US economy appears to be improving it will “await more evidence that progress will be sustained" before deciding to reduce the bond purchases. Upbeat economic data from China and easing concerns over a likely US-led military strike in Syria also propped up the indices.

However the inflation rate, based on the wholesale price index (WPI), was disappointing as it rose to a six-month high of 6.10% in August from 5.79% a month ago mainly on account of a sharp increase in prices of food articles. India's current account deficit also widened to $21.8 bn, or 4.9% of GDP, in the June quarter from $18.2 bn in the previous quarter. RBI’s unexpected hiking of the repo rate by 25 basis points to 7.5% in its mid-quarter monetary policy review also dragged down the market. Though the RBI reduced the marginal standing facility (MSF) rate and minimum daily maintenance of the cash reserve ratio (CRR) at its policy review, the measures failed to cheer the market. Persistent worries about a possible US government shutdown also dented sentiments. Markets also reacted negatively after the Prime Minister's economic panel said it would be a challenge for the government to meet its fiscal deficit target in the current year.  

To contain the deficit worries, Finance Minister Mr P. Chidambaram met financial advisers of various ministries and asked them to keep spending under check this financial year ending March to contain the fiscal deficit at 4.8% of the GDP.  Further, the government announced a series of measures to reduce its spending in non-critical areas such as cuts in non-plan expenditure and restrictions on domestic and foreign travel.

Among economic indicators in the month, India's industrial growth rose to a four-month high of 2.6% in July after having seeing de-growth of 1.8% in June and 2.8% in May; growth in the July was mainly driven by improvement in manufacturing and power sectors. India's key core infrastructure industries’ growth rose to a seven-month high of 3.7% in August from 3.1% a month ago. India's merchandise exports jumped 13% y-o-y in August to $26.14 bn, the fastest growth in 22 months, while imports declined 0.7% y-o-y to $37.05 bn in August, thereby reducing the trade deficit to $10.92 bn, compared with $14.17 bn a year ago. Indian government's tax collections in April-August rose 8.7% on year to Rs 3.091 lakh cr. 

A disciplined approach to investment can help as a hedge against inflation. Mutual Funds offer opportunities for multi asset diversification thus balancing the overall portfolio. Irrespective of the market and economic scenario, we recommend investors to maintain the discipline of asset allocation and invest in equity funds through systematic planning as long term fundamentals remain intact. Systematic Investment Plan (SIP) is the ideal way to go about in any market, as it is a smart financial planning tool that helps you build wealth, step by step, over a period of time. 

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