The purpose of low interest rate policy is to support the real economy, but this has not happened yet, given the large output gaps and the lack of credit offtake, believes TRUST Mutual Fund Chief Executive Sandeep Bagla.
In an interview with Moneycontrol, he told Sunil Shankar Matkar that with inflation readings likely at 4-5 percent over the next two months, the RBI does not have a pressing need to guide the markets about normalisation.
Moody’s has changed India’s ratings outlook to stable from negative. Does it mean that risks for the financial sector are lower now along with visibility of sustained growth and gradual fiscal consolidation?
Ratings are mostly a result of past events and occurrences, and they do indicate increased confidence about the continuance of prevailing conditions. The change in ratings outlook from negative to stable should be viewed as acknowledgment of improvement of financial conditions in the past. Barring unseen developments which are destabilising, it could be expected that risks for the financial sector are somewhat lower.
US Treasury Secretary Janet Yellen recently warned that a US debt default could trigger another recession as an October 18 deadline approaches. Do you feel the same way?
We have seen before US debt default scenarios arising out of negotiations for raising the debt ceiling being resolved in the last minute. While there could be a few days of uncertainty over the issue, we do not think it would cause any serious volatility in global financial markets.
Is the RBI coming closer to the exit policy? Will the policy provide adequate cues on the likely glided path of normalisation?
Inflation readings are likely to hover at 4-5 percent over the next two months. Such a scenario would not create a pressing need for the RBI to guide the markets about normalisation. Low interest rate policies are meant to support the real economy, which has not happened yet because of the large output gaps and a lack of credit offtake.
Under super-easy monetary conditions, all asset prices tend to go up. ‘A rising tide raises all boats’ is an old adage in the stock markets.
What do you think are the major risks at the moment for different market segments?
Globally, central banks are infusing liquidity into the system. This is pushing asset prices up. The biggest risk – both globally and locally – is this overvaluation of assets triggered by low interest rates and high liquidity. If inflation were to go up and remain up, the central banks would be forced to withdraw monetary accommodation, which could put a spanner in the asset valuations.
Do you expect a strong economic growth in the second half of FY22?
It is quite possible that the economic recovery will become more widespread in the second half of FY22. There is outside chance of a double-digit growth for the year.
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