Mahesh Vyas, MD and CEO of Centre for Monitoring Indian Economy (CMIE) sees no collateral damage of rate hikes on GDP growth, saying we are structurally set for 8.5 per cent - 9 per cent GDP growth in 2007.

CNBC-TV18 shares with domain-b its exclusive interview with Vyas:

How did you read the move last week Friday and what is your call really on how the RBI might move on rates from here?
I would not like to speculate what Reserve Bank of India does in the next few days. I can speak about the impact of a possible rise in interest rates or on inflation.

The economy is doing quite well and RBI's concern regarding inflation is well in place, although, I am a little sceptical on those efforts helping in controlling inflation, in the short-term, I think inflation will come in control as supply improves and it is important to take a balanced view of inflation and growth trade offs.

Is it that headline WPI number that is being targeted at this point or is it what is happening in the broader economy?
No, I think there cannot be a target of inflation. Inflation is the result of demand-supply balances and you cannot exactly predict how these two will work out. You can do this to an extent but not beyond a point.

So what is important to take into cognizance is the fact that the economy is growing at a rapid pace and this rapid pace is leading to some overheating. But that is within the acceptable band, given that this growth is giving us fantastic employment growth, is leading to a greater infrastructure development, larger exports potential and so on. So, the plus side of this growth is extremely high compared to the downside of a little high inflation. I think 6 per cent - 6.5 per cent or even 7 per cent inflation is only the average of the last 15 years inflation. So I do not think it is exceptionally high. It is good that we are concerned about controlling it but I do not think we should take it beyond a point.

The aggression with which CRRs have been hiked over the last four months, do you think they meted the control that needs to be brought about at this point of time and do you see a reaction in terms of a cool off in inflation very immediately?
No, I do not see immediate reaction to inflation because of the CRR and other hikes. But I think this is an opportunity to work at least more aggressively on the supply side.

We should take this opportunity to bring about some long-term changes in improving supply through imports in times when there are shortages.

Inflation is there in the manufacturing sector but you do not see shortages of the manufacturing sector items whereas on the primary articles and particularly in agricultural items there are shortages, for example of wheat, and there are problems of speculation because of shortages.

Now all these problems can be resolved if we improve the supply side problems, on a structural basis, to ensure that inflation is only a reflection of the business cycles and not a reflection of supply controls and bottlenecks arising from there.

The concern seems to be that there might be collateral damage on the broader GDP numbers; a couple of analysts have actually downgraded their estimates. What is CMIE's your estimate for the GDP?
I do not think that there is any collateral damage on the GDP growth rate. The GDP growth rate is well set, it is based on the optimism of the near future, it is based on investments, which are mostly of long-term.

Capital good sector is growing very well and so are fresh investment proposals. I do not think that these things are going to get affected by these interest rate hikes that we see.

Interest hikes have only a marginal impact upon corporate profitability when net profit margins are close to 10 per cent. I also don't see this having an impact upon consumer demand because employment is growing because investment is growing.

You do not expect to see segments like auto as auto has actually witnessed a slowdown because managements of those companies have come out and said quite candidly that volumes are slackening and might slacken some more in the next few months?
It is expected that the automobile manufacturers and then a few more consumer goods companies will also say that demand is slackening because of interest rates going high.

On the margin, obviously, a person who was going to buy a car may not go to buy a car today, or someone who was going to buy a house may not go to buy a house today. But that is on the margin.

On an average, the growth rates are robust and we should not get worried by one-month sales of automobiles or car loans or housing loans coming down.

Structurally, we are well set for aggressive growth rates close to 8.5-9%, even for the next year.

Structurally, are we set well for the credit growth on the banking side also to be maintained at current levels or do you see an immediate cool off coming in?
I do not see any significant change happening on credit off take. There can be some small structural shifts; for example, it is quit likely that the growth in credit for retail or for housing purposes may slow down a bit but there is tremendous demand still for corporate lending, investments are really robust.

So on an aggregate, I do not see the credit growth slowing down because of the interest rate hike that we have seen in the recent past, so that is perfectly in place.

What is your expectation on how things will pan out for the cement sector in the light of what the government has announced?
The demand for cement continues to be extremely robust. I see new capacities of cement coming up only after about six-eight months maybe even nine months and therefore the demand for cement is going to be far higher than the supplies of cement independent of what we do for import opening up.

Are you saying that there is no serious concern in terms of what might happen to GDP and that demand can live with high interest rates are at this point and inflation will eventually peak off, after which the RBI might not get so aggressive with its moves either?
I think that inflation will cool off in the coming one-and-a-half months or so. I see that these interest rates are unlikely to hurt the growth process.

But if the interest rates keep on rising, then there is a danger that it can start hurting growth.

So, we have done enough posturing to control inflation on the demand side. It is more important now to shift the attention aggressively on the supply side but interest rates at these levels will not hurt GDP growth in 2007-2008.

Is there a tipping point where interest rates can actually start hurting growth because many banks have hiked their rates from 9 per cent to almost 13 per cent from the last financial year to now.
One cannot say what the tipping point is going to be, there are too many factors that play a role and sometimes just a small little change can have dramatic effects.

Right now, the situation is well balanced with high interest rates not actually hurting the growth process. What I am more concerned about is the fallout of the SEZ policy being hanging in a delicate balance for far too long and that is hurting the investment proposals in these SEZs.

That can actually have a bigger impact upon growth than the current interest rates. If interest rates do rise high and we do not know how high, we will have to go before it starts hurting but at the current levels it does not seem to be a problem.

What is your expectation with the way the rupee has been moving over the last few sessions and from hereon where do you see the rupee stabilising?
I cannot speculate on where the rupee will stabilise. The movements that I have seen in the past couple of weeks or so are not significant enough to have an impact upon the corporate sector earnings.

They are too small and these small changes are usually factored in as short-term changes that do happen but in a structural sense.

There is nothing, which is really changing dramatically right now. So I see no impact of these things right now at these levels.

Purely as someone who has been watching these trends for a long time, how have you read the cuts that have come in terms of import duties for cement and is this a viable option in terms of tempering prices or expect to rush in imports on a particular commodity?
I do not think so; cement is not something that can be imported so easily. It is a bulk item and it is a more complex exercise to actually import cement and make the import of cement a viable option for somebody in the short-term.

By around nine months or so, we will have a lot of new capacities coming up, which will make these imports not necessary also. So, the duty cuts on cement is good but it will not have an impact immediately on cement prices.