Kotak Mutual Fund CEO Sandesh Kirkire
The modest rally in equity markets, which seemed to have been propelled by the rising expectation of a benign monetary policy going forward, faced some headwinds by the end of May. Market correction in Japan, transient pessimism regarding the future of the domestic monetary policy and pressure on the rupee were some of the reasons for the late volatility.
For the market, the
slowdown in the economy is increasingly becoming a cause for concern. The 4.8% growth rate in fourth quarter of 2012-13 has come far below the actual potential of the economy. The impact of high capital cost has begun to get apparent across the sectors now. The growth rate in the relatively insulated 'services' segment is also moderating.
We continue to believe that the benign monetary policy is expected to stay on course due to moderating inflation. Going forward, the Reserve Bank of India (RBI) is expected to adopt a more proactive approach to ensure transmission in interest rates. Towards that end, we may see a gradual improvement in liquidity situation. As a consequence, the economy is expected to pick up its growth rate and may grow around 6% in 2013-14.
For the time being,
equity markets would remain reactive to FII inflows. The spot equities market attracted a net inflow of around $4 billion in May.
In the debt market, the compression in the yields is likely to continue, though with possibility of intermittent volatility. Monsoon is also going to be a major factor in determining the future course. However, the strengthening dollar has led to decline in other emerging market currencies, including rupee. As a result, asset prices may see some volatility. However, the RBI may intervene to not only support the domestic currency (by selling dollar and buying rupee), but also support the liquidity situation through open market operations.
The economy may be approaching a sweet spot of low inflation and low-interest rate environment, and may as such be preparing for next phase of growth.
From a long-term perspective, it is the productivity of capital and labour as a factor of production that needs policy focus. Policy delays, stretched clearances, long turnaround times and high entry barriers are leading to excessive cost overrun in very many projects. On the other hand, the relatively insulated nature of the labour market is also proving to be prohibitive in providing a sustainable growth environment.
SANDESH KIRKIRE
CEO, Kotak Mutual Fund(This is a sponsored article)
