India's challenges to come from outside in 2018: Uday Kotak

MUMBAI: The Indian economy will face renewed challenges from external developments like higher oil prices and rising interest rates which could worsen both the current account and fiscal deficits, Kotak Mahindra Bank vice chairman Uday Kotak said in his new year message to Kotak Group employees.

“India will not be insulated from external developments. Oil prices have firmed up and the end of soft interest rate regime will change the comfortable environment that we witnessed in 2017. The new normal for Brent oil is expected to be $60 - $70 per barrel. Oil above $70 is not good for India’s health. The common man will also get impacted if oil prices rise. He will have to bear the brunt of (imported) inflation,” Kotak said in an email message to the over 48,000 employees of the financial conglomerate he shepherds.

India’s challenges will shift from the local economy to global issues as domestic growth picks ups, a reversal from the situation in the last three years. “Over the last three years, we saw a good macro and a tough micro. In 2018, we are likely to see a tough macro and a better micro,” Kotak said.

However, rising rates in the US could also force other regions like the European Union to reverse their soft rate stance. Local interest rates are also likely to be on the uptrend as Reserve Bank of India (RBI) shifts its focus to keep inflation below 4%, Kotak said.

He expects US rates to go further up by another 150 to 200 basis points to be in the region of around 3% from the current 1.25% to 1.50%.

Kotak also cautioned investors against the euphoria in the stock market. “With stocks reaching new highs every day, the current bull run of the capital market looks extremely tempting. I would advise investors to exercise caution as stock prices are moving up. Organised savings are chasing limited supply of stocks. Keeping aside the valuations and earnings argument, the factor that worries me is debt instruments are being perceived as high risk (in view of hardening of interest rates and the resulting erosion in value of the instrument) and that investors are shifting from debt to equity which is being perceived safer in comparison. Fundamentally, something is amiss here. What appears to be too good to be true, usually is!,” he said.

India has a long way to go before it can catch up with China, Kotak said. “As of 2016 (latest available update), India’s per capita GDP is around $1,800 while that of China is around $8,123 and that of developed nations is in the $30,000 range. We will take 20 years of per capita GDP growth of 8% p.a. and, assuming a 1% growth rate in population, 9% p.a. absolute real GDP growth to reach where China is today! Our excitement needs to be moderated by this reality,” he said.