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'Inflation is like the temperature of a patient; we have to bring it down'

Krishnamurthy Vijayan is the CEO of JPMorgan Asset Management India. Prior to this, he was the CEO of JM Financial Mutual Fund. He is a member of a number of industry committees, including the Sebi committee on investor education. In an exclusive interview with Sai Prasan and Chirag Madia of The Financial Express, he spoke on issues ranging from the impact of RBI's recent rate hike on the capital market, inflationary trends in the global market due to oil and food prices to the alternative investment destinations for the investor. Excerpts:

The Reserve Bank of India (RBI) has hiked the repo and CRR rate once again. This trend is contrary to the US and other developed financial markets, where interest rates are either stable or reduced. How do you think this hike would impact the Indian financial market?

The Reserve Bank of India (RBI) is a very conservative regulator and its policy has always been ultra cautious. The regulator has very clearly expressed that inflation is a serious issue. Hence, in line with expectations, it has increased interest rates. Globally, the reason for reducing interest rates is to infuse liquidity in the system and give a boost to the economy. It will impact those sectors that are over leveraged, for instance real estate. This sector could suffer from this hike in the CRR and repo rate. Our view is that this could be the last of the hikes and it should be positive for the bond market.

Will the hike in repo and CRR rate impact margins of the corporate sector? How will it impact the capital market?

Certainly, all the companies, which don't have a strong free cash flow are likely to be punished by the high interest rates. I think to a large extent it will be very stock specific. Overall the hike will not be a positive sign for the stock market in the short-term. However, it will give a great advantage to companies, which are extremely prudent. Like any period, it will separate the boys from the men in terms of quality of the management.

Do you think that at this particular juncture, inflation control is more important than interest rates? Do you think that there is political pressure on the regulator to tame inflation, as four state elections are round the corner and Lok Sabha elections are to be held later?

High inflation at a certain level will hurt economic growth. Inflation is like the temperature of a patient; we have to bring it down. I don't think it is purely political and to a large extent it is systemic. Inflationary pressures built up purely by increase in the money supply, which needs to be curbed. Therefore, I believe, RBI's decisions are good for the economy.

The US is facing a subprime crisis. How do you think it will impact the Indian capital market as well as global markets?

We believe that not only India but most Asian countries are going to depend on domestic consumption rather then export. It has been observed that export was the key theme driving the economy. But, in the last one year, we are increasingly looking at the companies, which have a strong domestic consumption model. Heroes of the stock market, which depended on the export market, could be punished. By and large, a good number of Indian companies will benefit from the shift of focus to domestic consumption.

In the last several days, we have seen crude oil prices easing down. Do you see any further increase in prices?

It is very difficult to predict anything on oil prices at this moment. People use derivative trading to earn profits. We do believe that the prices of oil were overvalued and should come down.

Recently, we have also seen food prices going up globally? How will it impact the market?

I think that food prices may go up globally. But, as far as India is concerned, we have adequate supply. The only problem is our poor distribution system, which is keeping the prices high. I think that by this year end, we may see some correction in food prices. Like inflation, this is very sentimental, and doesn't have any direct impact on the market.

In the present scenario, the mutual fund (MF) industry is finding it difficult to offer new equity-linked schemes. Moreover, it is facing redemption pressures. How will the industry cope when equity markets are down?

Not only the MF industry but in every industry, when markets are down, the cash flows are also down. It is not that long-term players have taken a backseat. In fact, this a time to promote debt funds, as in a bullish market no one looks at debt funds. It is also time to look at alternative assets like the ones we are now launching-Alpha funds.

These are the products, which would not find players in the boom time. This is the best time in the markets for investors to do a sanity check - from going at very risky asset allocation to bringing it down to real asset allocation. Because, generally during the boom, investors do take risks. My view is that the industry will keep growing with a better mix of assets for the next year or two.

A sluggish period in the capital markets have impacted the MF industry to a large extent. How will the industry overcome this situation?

This is the only time when one can launch alternate and debt products, as this would be the only way to deal with a bearish situation. We are also investing our time in trying to convince people to start investing in the Systematic Investment Plan (SIP) for their secure future.

How are global funds attractive compared to Indian funds?

The overseas markets, including Latin America , South Africa , Egypt , Russia, and the Middle East are doing well. At any point of time, diversification across the market is necessary to minimise the risk.

A few months ago, Securities and Exchange Board of India (Sebi) had come out with the Real Estate Mutual Fund (REMF). How attractive can this fund be?

The REMF is a good product for the long-term. We need to make distributors aware, who in turn will educate investors. It will be very difficult for us to reach out to investors for this fund.

Where do you see the capital market one year down the line?

It is very difficult to predict. Some people say it will go up. While there are others who think that it will go down. And, there are many, like me, who think it, will remain flat.