inflation as investors preferred to park money in these assets to hedge against inflation. Bank deposit growth has also dropped in line with financial savings — it accounted for 56% of gross financial savings in FY13, down from 57.4% in FY12.
Equities account for a miniscule 3% of overall financial savings and, given the volatility in the stock markets, retail investors have stayed away from the market. They still have some preference for stocks of public sector (PSU) companies. But most PSU stocks have fallen because of political interference, a rising subsidy bill and sub-optimal business decisions. No longer value-creators, their dismal performance can be gauged from the fact that while the Sensex has given annualised returns of over 17% in the past five years, the BSE PSU index has yielded 2% between February 2009 and 2014. However, analysts say since the valuations are cheap and most of the negatives are already priced in, the dividend yield of PSU stocks will be a cushion for investors. With elections due in May and a new government likely to come to power by June, there could be some positive policy initiation, which could result in re-rating of PSU stocks.
The continued disinflation in food prices moderated CPI to a two-year low of 8.8% in January, and the WPI moderated to 5% year on year in the same month. Since the key driver of inflation is food, the sharp fall would come as a relief to the RBI. Deutsche Bank forecast shows that headline CPI is likely to moderate to 8% in the coming months although core inflation is likely to remain sticky, around 8%.
“The RBI will remain on the sideline for the rest of first half of 2014 under this scenario,” a recent research note from the bank underlines. Even the central bank’s latest communication indicated it is in the neutral zone as far as policy rates are concerned. However, with headline CPI now emerging as the nominal anchor, it could be difficult for the RBI to reduce policy interest rates yet. The communication points out that demand-side parameters are still strong and, unless aggregate demand in the economy comes off, the risks to inflation are on the higher side.
Invest for the long term
The general elections are likely to lend direction to the markets. In case of a positive mandate, cyclical stocks will get some momentum. Positive policy initiatives, such as structural reforms,