The markets’ loss of confidence in the rupee is largely due to structural problems with the Indian economy. Also, if the global markets continue to suffer from risk aversion, it’s not unreasonable to expect the rupee to weaken by another five per cent or more, says Stuart Oakley, MD & Head (Emerging Markets FX Trading Asia), RBS Markets & International Banking, in a conversation with Puneet Wadhwa. Edited excerpts:
Do you think the risk-off trade in the global equity markets is partly due to what is happening to currencies in the emerging markets, especially Asia? Do you expect more pressure on Asian currencies as we head further into FY13? Why/why not?
I do not think the risk-off trade in global equity markets is due to the emerging market (EM) currencies trading weaker. It is more a function of the perilous state of the European asset markets and the uncertainty surrounding the future of the European Monetary Union (EMU).
A Greek exit from the EMU and more funding stresses for European banks and sovereigns, especially Spain, will continue to weigh on global growth forecasts, and hence, global equity markets. Unless we get a more concerted policy response from Europe, risk aversion will persist and continue to weigh on Asian currencies.
Do you think Greece’s exit from the euro zone could worsen things for the global equity and currency markets? Is the world economy on the brink of being pushed into a full-blown crisis?
The exit of Greece will certainly result in global equity markets falling. Many emerging market currencies, like those in Asia, will follow. The world’s economies are vastly interconnected in this global age – the European crisis that will follow a Greek exit will certainly weigh on global growth and the rest of the world’s economies.
In the Indian context, the central bank’s measures to stem the rupee’s fall have proved futile. Why do you think this is happening and what levels can one expect in the near-to-medium term?
The markets’ loss of confidence in the rupee is largely due to structural problems with the Indian economy. These problems centre around poor balance of payments dynamics, fiscal deficits, poor infrastructure, supply bottlenecks and a lack of confidence around the effectiveness of the political system.
Until these structural issues are addressed, which they haven’t been so far, one can expect the market to lack confidence in the rupee. If the global markets continue to suffer from risk aversion, it’s not unreasonable to expect the rupee to weaken by another five per cent or more.
Do you think India’s sovereign rating downgrade can be a reality given all the macro-economic headwinds and policy inaction? How much of an elbow room does the RBI (Reserve Bank of India) now have to tinker with key rates?
It is unlikely that we will see a sovereign downgrade over the next 12 months. With oil prices stabilising, the current account deficit should also stabilise and some increase in domestic diesel prices will alleviate the subsidy bill and, at least, contain the fiscal deficit. Higher fuel prices will push up inflation but core inflation is subsiding, reflecting the inability of producers to pass on higher input prices. We think the RBI can reduce policy rates by another 50 basis points (bps).
What is your strategy at RBS given these developments and economic scenario? What are you advising your clients at the current juncture?
We are advising clients to lighten up on long USD/INR positions in view of the likely improvement in the current account deficit. However, should the European situation deteriorate, the INR would come under pressure and then we can re-establish positions.
Given this assessment, how do you see fund flows to the Indian equity markets panning out? Do you think we are staring at an imminent correction since the market rally in 2012 was largely fuelled by the gush of liquidity?
Fund flows into Indian equity markets will primarily be governed by the global risk environment. The scenario of poor risk appetite (characterised by soft US equity markets) coupled with ongoing structural issues in India is not unlikely in the next few months. In this scenario, fund flows into the Indian equity markets will not be good and there is a high chance Indian equities trade lower into the summer months.