Warning on inflation

MONETARY POLICY 2007-08/ OPINION

Rajat Jain,
CIO, Principal PNB AMC

The RBI, by its past pronouncements and actions, has made the markets aware of the inflationary risks in the economy. Higher inflation is both a result of supply side constraints and higher global commodity prices as well as strong demand pressures. While the RBI has alluded to the supply side constraints in its statement, its main lever is to contain inflationary expectations using monetary instruments.

While the RBI has not taken any interest rate action in this policy, I presume that it will closely watch data, and take action if necessary so that inflationary expectations are contained.

Given the current scenario, and the medium term inflation target of 4-4.5 per cent I think the chances are policy rates will continue to have a hawkish bias going forward.

In other steps, we are enthused by the proposals on innovations in the financial markets, in particular on the development of the interest rate futures market.

The corporate bond market needs to be more deep and liquid and the reporting of trades and the ticker are very welcome as a first step in this regard.

As one of the fund houses investing in overseas equity assets, we are enthused by the hike in the ceiling of such investments to $4 billion from the existing limit of $3 billion. This increase in overseas investment limit for the mutual fund industry is a very welcome move.

We look forward to Sebi providing increased limits at the Fund House level. The increased investment limit will make overseas investing a more attractive proposition for fund houses as the scale of operations improves. With more fund houses trying to address this opportunity, diversification of investments through overseas investing will provide a more rightful place for this in the investing landscape for Indian investors.

This will help increase awareness of the benefits of diversifying overseas. At the same time it also provides an opportunity for fund houses like ourselves to explore newer product structures too.