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Strong Prospects

Print Edition: July 2011

Looking at the May inflation, which stood at 9.06%, it wasn't hard guessing what the RBI would pronounce in its mid-quarter policy review on June 16. As expected, there was a rise in interest rates by 25 basis points to 7.5 percent. This was the 10th repo rate hike by the central bank since March 2010 to rein in skyrocketing inflation.

However, RBI's efforts don't seem to be having their desired effect. Experts anticipate a further hike of interest rates by at least 50 basis point during the financial year.

As per the latest index for industrial production data, the April industrial growth stood at 6.3%, down from 11.3% during the corresponding month last year. This is a clear indication of how the rising cost of credit and inflation are slowing down the economy.

However, the advance tax numbers somewhat refute these fears. India's top 100 firms paid 14% higher advance tax in April-June compared to a year ago.

 FUTURE TRIGGERS

The pending announcement on third round of quantitative easing by US Federal Reserve can give direction to the markets.

A normal monsoon will be positive for the farm and FMCG se tors; can ease inflation as well.

A slowdown in foreign institutional investments (FIIs) may prove to be detrimental for the domestic market.
On the global front, Greek debt woes continues. The US markets also don't seem to be picking up. One silverlining is the correction in the crude oil prices.

On 27 April, the Multi Commodity Exchange crude was at Rs 5,003 per barrel. It came down to Rs 4,449 per barrel on 15 June. All-in-all, the present situation looks a little shaky and investors are being advised to tie their safety-belts for some rough patches in the near-term.

The stable growth portfolio has earned a return of 1.9%. The lowrisk portfolio has 63.88% of its funds parked in debt which may be effected by future rate hikes. If we look at the equity portfolio, which has been allocated 30.32% of the total investments, the highest holdings are in the financial sector (25.11% of the equity holdings).

According to a recent article published by Standard and Poor's Ratings Services, the sector's growth is likely to be high in the next two to three years. But high inflation, increased competition, and evolving risk management processes will be key challenges.

The article stated that rising funding costs could put Indian banks' margins under pressure, though lower provisioning costs could offset the impact. A stable retail deposit base and a prudent regulatory environment will also support the industry's creditworthiness.

With 12.78% of the equity holdings, energy is another important sector for the portfolio. The high crude oil prices have widened the under-recoveries, which are expected to be around US$ 28 billion in the present financial year. Also, the expectation that the oil subsidy burden of the upstream companies may increase from the present 33% share to 38%, is a potential negative for companies operating in this segment.

In a report, Kotak Mutual Fund stated that while the recent price hikes in the hydrocarbon sector may mollify some of those concerns, the uncertainty of event based changes necessitates discretion. They maintain a neutral view on the sector. The growth unlocking in this sector sector is directly aligned with the regulatory deregulation in pricing.

Looking at the falling markets, the other three portfolios also fared well. This time, the ultra-safe Income Generator gave the highest return of 5.5%. We will analyse this portfolio in our next issue.

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