'Economy's sound enough to bear short-term oil shock'

livemint.com:

Edited excerpts: The economy has been prudently managed and is well placed cyclically, i.e. demand is picking up and there is spare capacity available to meet that demand. This means output (gross domestic product) and, consequently earnings growth, is likely to be healthy over the next 2-3 years.

So, we are fairly confident about the economy over the medium term. Since we are not experts in politics, we do not have any unique insights on what the electoral outcomes will be. But our approach is that if the economy is healthy and even if the markets were to turn volatile (for whatever reason), then one should use that as an opportunity to increase investment levels.

Having said this, we are concerned about the valuations in the small and midcap space, where we believe the risk-return trade-off is adverse. If one were to consider the economic impact, the current account is in very good shape—it might even be in surplus in Q4. Also, we hold significant reserves.

Given this scenario, on a temporary basis, shocks can be easily managed from an economic perspective. However, if high oil prices persist for a prolonged period, then currency should be allowed to depreciate as part of the adjustment process to high oil prices. There is a fundamental difference between the economy from the 90s and today.

In the 90s, oil was our predominant import item and we did not export much, relying mostly on remittances to keep the current account in equilibrium. At such times when oil prices shot up, the only option was to cut oil purchases, translating into a sharp economic slowdown as less oil meant less output. Our import basket is more diversified today.