The Indian equity markets (i.e. the S&P BSE Sensex) thus far in the month of August 2013 (i.e. as on August 27, 2013), has encountered vehement turbulence and is down with a glary loss of -7.0%.

It is noteworthy that, host of macroeconomic variableshave traced the movement of the Indian equity markets. The month began on a fretful mood with HSBC's Purchasing Managers' Index (PMI) data for India's manufacturing coming in at 50.1 in July 2013 (data released in August 2013) as against a marginal uptick seen in June 2013 to 50.3 from 50.1 for May 2013. Likewise, the services activity too slumped to the lowest in four years in July 2013 as the HSBC Services Business Activity Index fell to 47.9 in July from 51.7 in the previous month (the lowest reading since April 2009); thereby reflecting contraction in the activity. Moreover, with the HSBC Composite Index at 48.4, the overall situation in the economy appeared grim. The core sector data which comprises of eight core sector industries such as crude oil, natural gas, cement, coal, electricity, steel, petroleum refinery products and fertilisers; too came in flat for June 2013 (data released in August 2013) suggesting an detrimental impact on Index of Industrial Production (IIP). And indeed when the data for June 2013 IIP came in, it depicted a contraction in industrial activity. The WPI inflation for July 2013 (data released in August 2013) too once again inched-up to 5.79% (disturbing the moderation which was evident a sometime back) led mainly by food articles and fuel & power.

But the markets started reacting rather negatively when the Indian rupee continued to depreciate against the U.S. dollar, when to tame such a fall, the Reserve Bank of India (RBI) partially rolled back the currency's convertibility and imposed capital controls on resident Indians.Signs of economic vigour depicted by the U.S. economy, which in turn made the greenback stronger, was responsible for flight of capital from India and exertion on the rupee. It is noteworthy that the rupee has depreciated -6.4% thus far in August 2013 (i.e. as on August 26, 2013) and on year-to-date basis is down -18.4%. And in such a scenario where weakness in the Indian rupee yet persists, it is posing a risk to country's Current Account Deficit (CAD) and is a challenging situation althoughthe Government endeavours to restrict CAD to 3.7% of GDP, or U.S. $70 billion.

Warnings from a few rating agencies for a downgrade on India, also sent shivers to the market. Fitch at present, while has maintained a stable outlook with 'BBB-' sovereign credit rating; it has said that it was getting more challenging for India to meet its fiscal deficit target in the current fiscal year ending March 2014 with revenues slowing and the rating agency could act if the Government fails to calm financial market tensions.The Food Security Bill recently passed in the Lok Sabha, has a support of Rs 1,30,000 crore (the largest in the world) and that subsidy in itself has an effect of putting a burden on country's fiscal deficit, albeit Finance Minister Mr Chidambaram is confident that the fiscal deficit would be contained at 4.8% of GDP.

S&P BSE Sensex vs. FII inflows

Data as on August27, 2013
(Source: ACE MF, PersonalFN Research)

In the backdrop of the aforesaid macroeconomic variables in play, Foreign Institutional Investors (FIIs)continued to be net seller in the Indian equity markets to the tune of Rs 3,571 crore (as on August 27, 2013). Cumulatively in the June, July and August thus far, they have sold Indian equities net to tune of Rs 20,684 crore.

Apart from the aforementioned macroeconomic variables, FIIs seemed to be concerned about the following factors which are in play in the domestic economy:

• Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
• Lack of consensus on policies;
• Deteriorating state of governance ;
• Scam stories unveiling; and
• Structural bottlenecks
  
  

While the Securities and Exchange Board of India (SEBI) brought in reforms (towards June-end) aimed at including creation of an umbrella class of investors that will do away with the separate category for FIIs and approving doing away with the current practice of FIIs and their sub-accounts requiring a prior direct registration to operate in Indian markets; it hasn't enthused them to exude confidence in Indian equities.

And how are Indian equities and FII participation likely to be in the future?
Well, the Indian equity markets are likely to be turbulent in the near futurebecause of downbeat factors in play such as:

• Lull in industrial activity
• Intermediate inflationary pressures being evident
• Persistent weakness in the Indian rupee
• Pressure on CAD
• Pressure on fiscal deficit
• Tainted political canvas
• Scam stories unveiling
• Deteriorating state of governance
• Reform measures not translating too well
• Relatively high interest rate regime
• Risk of rating downgrade
• Global economic headwinds
  
  

Thus given the aforesaid factors, FII participation is likely to submissive. Moreover, with India heading for general elections next year, money seems to waiting on the side line.

So, what strategy should equity investors adopt?
The descending move of the Indian equity markets has made valuations appear relatively attractive. But in the aforesaid backdrop, the risk remains and therefore volatility would persist. Thus PersonalFN is of the view thatinvestorsshould stagger their investments to mitigate risk, since volatility could persist. While investing in equity mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. Also PersonalFN believes that your investment discipline and asset allocation would decide your success in investing.

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