Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Here’s What Nilesh Shah Thinks Will Aid Earnings Growth

The rupee and wage normalisation will aid earnings growth in the next financial year starting April as the economy finally starts benefiting from disrupting reforms like demonetisation and the Goods and Services Tax.

At least that’s what Nilesh Shah, head of India’s seventh-largest mutual fund, thinks. Capacity utilisation in India is lower because an overvalued rupee, the managing director of Kotak Asset Management Company, told BloombergQuint in an interview.

That allows dumping by Chinese companies. “Our trade deficit with China is $5 billion a month and $60 billion a year, 2.5 percent of our GDP. There is no other country in the world which runs trade deficit as high as India runs with China.”

A weaker currency will discourage dumping and help contain trade deficit. “If from April 1, suddenly our trade deficit with China disappears, markets will have a lot of earnings,” Shah said.

The second thing, he said, is the burden of high real interest rates. Inflation was running in double digits and the Reserve Bank of India “worked hard to bring it down” but inflationary expectations have remained high. That’s why the central bank is pursuing high real interest rates, Shah said. “But that’s hurting the corporate profitability.”

Subdued demand also meant that salaries and wages moved in the corridor of 8-9 percent of sales to 11.5 percent. If volumes pick up either because of demand, either because of a weaker currency, or a normalization of high real interest rates, salaries and wages will start normalising.

“A combination of these factors are required, apart from other variables like oil prices or monsoon, to create accelerated earnings growth in FY19,” Shah said. The market has priced in that from here onwards, GDP growth will be stronger, earnings momentum will be back despite some of the constraints, he said.