Allocations of foreign money will be affected

Q&A: Pradip Shah

Pradip Shah, chairman of IndAsia Fund Advisors, pioneers in private equity, is an authority on financial markets. Shah tells Rajesh Bhayani that volatile currencies, the danger of US economic slowdown and inflation are factors that could curb international growth in 2007.

What are the growth prospects of 2007?

I feel that the new year will not be better then 2006. We have seen a consistent increase in international growth, specially in the last two years. Despite an increase in crude oil prices, international economies were sustained as interest rates and inflation were low and demand was picking up.

All three segments "" the US, Euro zone and Asia "" were growing together. The Gulf countries, which were not buying any unproductive assets from oil revenues and were developing their infrastructure and investing money abroad, also helped the world to digest the high oil prices. All these factors are changing now.

Which are the key factors that can change trends in the international markets?

The US currency has started showing weakness and the euro and Japanese yen are rising. We have been talking of the dollar falling since the last couple of years but now some countries have started converting their reserves from dollar to other currencies such as euro.

This will be inflationary for an import dependent country such as the US and will also affect the export-oriented Eurozone, as their currency is rising. The good sign is Japan is growing.

These changes in currencies and with that the possible build-up of inflationary pressures in the US and that on interest rates can change the scenario. Falling value of the dollar is putting pressure on the Chinese currency also.

Will it have any impact on Indian markets?

May not be immediately, but allocations of foreign money will be affected if interest rates go up in India and other parts of the world as the allocations get divided between equities and fixed income securities.

How should India respond to the threat of rising inflation?

In my view monetary measures to control inflation is not the preferred choice. Any rise in interest rates can alter views on return on investments and even consumers' decision eventually will take into account the cost of money. Fiscal measures can be the answer to the control inflation. I believe excise duties should come down to help reduce the cost.

What are the positives for India and what is biggest risk?

Recently huge quantities of crude oil was found in the KG basin by Reliance; in Rajasthan by Cairn Energy; and even GSPL has found oil. It has given signals to the world that India's self sufficiency in crude oil is improving though demand is also increasing fast.

This is seen as improvement in the fundamentals. On the risk side, politicians should not do anything that can derail the train. They should not take wrong decisions.

How is the private equity market in India?

Private equities have huge money and India is one of the important destinations for them. Money is not a problem for them but price is the issue. Money can come at the right price only.