Mumbai: Early company results for the quarter ended September show that the economic recovery is back on track. Other indicators such as the purchasing managers index and factory output growth also support this thesis. As the focus shifts to the monetary policy review by the Reserve Bank of India (RBI) scheduled for 27 October, A. Balasubramanian, chief executive officer of Birla Sun Life Asset Management Co. Ltd, in an interview speaks on the possible risks to the growth story, inflation and interest rates. Edited excerpts:
What are the key risks you see to the growth story?
The overall medium term outlook is buoyant and the risks are nothing unusual.
One is how long it will take to see a clear pick up of economic recovery and second is inflation, which I think will come and is a risk factor.
Third is how quickly the government is able to raise resources.
By inflation, do you mean high interest rates?
If inflation remains high that is a bit of a problem and we might expect some bit of a reversal. At a higher level for a longer period, it will make commodities unaffordable for the consumers and industry. Manufacturing goods are not at an unaffordable level. Commodities prices are rising and in some sense it’s a balance since it helps rural income. How the exact equation in the system will pan out in the future is something only time will tell. Second risk from inflation is the fiscal link. The government has to initiate reform exercises.
In spite of a low WPI, consumer prices are still rising and the consensus view is that RBI will not hike interest rates. Do you agree with that?
Monetary policy cannot be used to correct prices going up among agri commodities. It has to be corrected only by adjusting the demand supply scenario—through the public procurement system, imports etc. It can only be corrected through fiscal measures.
One has to keep the high costs of rates (if they go up) in mind from the point of view of growth. So our view is that till the time we see a decisive trend emerging in the overall growth momentum from the economy point of view as well as a sustained pick up in sales, RBI may not look at hiking rates. But the market is targeting interest rate hikes happening next year.
What kind of hikes do you see?
I am not expecting a high interest rate regime to come back. If the economy has to come back to a good growth rate, if you have to achieve 7.5-8% growth rate, it has to be supported by low interest rates.
So far the monetary policy has been accommodative, keeping in mind the need of industry and consumers and having said that, keeping in the mind the shock that hit the global economy last year, in our view, anything that will happen will be a gradual process.