Central banks realising easy money alone cannot lift growth: Khemani

Markets are again gaining on hope the US Federal Reserve is unlikely to raise rates in September, and as other central banks like the European Central Bank and Bank of Japan continue their ultra-easy money policies.

Speaking to BTVi, Vikas Khemani, Edelweiss Capital’s President and Head of Wholesale Capital Markets, says the easy money policies of central banks have found their way to a large extent into assets like equities, gold and fixed income. That’s the reason we have seen asset price inflation despite no growth in the global economy.

But he says that situation is about to change, going by the commentary from G20 and central banks. Excerpts:

We are in an amazingly complex market where central banks continue with the ultra-easy money policies. So if I have to put up valuation on one side and the central bank on the other side then my thought would be not so difficult to guess that valuation is driven by the liquidity. In that situation, are we in a market where there is just too much money?

I think clearly in the last couple of years that has been in a trend. The liquidity, which is coming into the market, has found way to a large extent into assets like equities and gold, liquid assets and obviously fixed income. That’s the reason we have seen asset price inflation despite no growth in the global economy.

But I think that situation is about to change and if you hear the commentary of G20 or other commentaries, I think incrementally central bankers are realising or saying that monetary policy alone cannot work to revive growth. And the pendulum will shift and it is beginning to shift. The debate has started taking place that we need to move towards fiscal side, we need to boost growth, we need to spend money on productive purpose, and we need to spend money to build infrastructure assets, which will lead to productivity improvement, to revive the growth.

Pumping in cheap money into the market can only lead to asset price inflation, which has happened over the last many years. So I think in this context, global situation is going to change. But if you come back to India, we are slightly different. We have not had very liberal monetary policy. We have been on a fiscal consolidation path.

We have been on our path to improve our GDP growth. The situation right now is only that we are on a contrary global environment. The good part is that may be it looks good and solid. The bad part is that when things go bad around the globe we will be impacted.

If you take the short term noise away, India will continue to do well because whatever is happening around the globe is also in some sense fundamentally very good for India.

Good liquidity in some situations is good for India. Poor global growth in some sense drives the commodity prices down, which is sort of positive for India.

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