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'Worst will come over couple of ensuing quarters'

Rajiv Bhuva | Print Edition: June 26, 2011

In Mumbai recently to attend Morgan Stanley's 13th India Annual Summit, Jonathan Garner, MD and Chief Asian and Emerging Market Strategist at Morgan Stanley, shared his views on problems afflicting emerging economies such as high inflation, rising interest rates and elevated oil prices, in an interview with Rajiv Bhuva. Edited excerpts:

Inflation will peak in the next three months. The process of taming inflation across emerging markets has been more problematic for growth than suspected… Oil prices are not likely to go up as quickly as they have in the past six months. But prices will continue to remain at elevated levels for a long time.

Input costs and interest rates are unlikely to increase at the same pace. The year-on-year growth will slow down. We have reached higher levels of input costs for base metals, as compared to historical prices, broadly due to structural demand across Asia and emerging markets.

India has higher growth among the emerging markets, but it also has structurally higher inflation… Policy actions alone do not drive growth. It is about real variables adjusting to fundamental changes. Growth expectation of nine per cent last year was too bullish. Hopefully, the worst will come over the couple of ensuing quarters before growth stabilises and accelerates again.

Indian equities, relative to emerging markets, will underperform in 2011. While this year other emerging markets have been more or less flat, India has underperformed by close to 10 per cent in relative terms. We expect other markets to rally by 10 per cent in the remainder of the year.

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