With inflation surging to a two month high the monetary tightening will continue for the next couple of months. Sashi Krishnan, CIO, Bajaj Allianz Life Insurance, tells Krishna Merchant that there is very little that the government can do to control it. Edited Excerpts:
The markets have been subdued for the past few weeks. How long would this continue?
The fourth quarter GDP dropped to 7.8 per cent against 8.3 per cent in the previous quarter. The industrial and service’s growth has been flat.
The GDP numbers reflect that investment cycle is slowing down. There was a 40 bps drop in gross capital formation quarter-on-quarter.
From the BSE 30 stocks, there was a lot of pressure seen on the margins due to high borrowing and input costs. If there are more rate rises, the margins will get compressed further. The revenue growth of 14-15 per cent was seen across the broad market, but due to margin pressure, earnings before interest and tax (Ebit) were flat or lower than estimates. Hence, the markets may remain range-bound in the short-term.
Growth in the consumer durables space contracted 3.8 per cent in April. Do you see consumption driven sectors getting affected?
The demand in the domestic market is being affected by rising prices. This is in line with what the Reserve Bank of India (RBI) had said during the recent policy review.
However, secular domestic demand story in India will not get affected because it has a population of over 1 billion people, and the per capita income is rising. From a long-term perspective, domestic demand will drive the economy. Therefore, these corrections are a good time to accumulate consumer-driven stocks.
More From This Section
Should retail investors accumulate stocks from the capital goods sector?
Investors should be cautious in their investments in capital goods and infrastructure sector. There are huge execution challenges in terms of environmental clearances and mining sanctions. Funding has also become difficult for companies.
Inflation also surged to a two-month high of 9.1 per cent this week. Do you expect RBI to rise rates in the upcoming policy review?
Inflation is not under control and has slipped into the manufacturing segment, which is function of high commodity prices. There is very little that the government can do to control it.
As a result, the monetary tightening will continue for the next couple of months. The markets may view this positively because interest rates are at 2008 high levels.
Given the slow down and reports of drop in tax collections this financial year, do you expect fiscal deficit to widen?
There are concerns regarding the fiscal deficit and it may expand more than budgeted 4.6 per cent of GDP in the current financial year. This was based on certain revenue assumption of expected economic growth of between 8 per cent and 9 per cent. If the economy slows down, it will affect the revenue buoyancy.
The subsidy burden may also go up as the government is not moving to market driven prices for petroleum products. Last year, the government was lucky as it got revenue from the sale of 3G spectrum. This time, the government may get money from divestment. However, the divestment process has not yet taken off as some of the follow-on public offers (FPOs) such as SAIL and ONGC got deferred.