The Federal Open Market Committee (FOMC) meet on September 18 is unlikely to take any extreme measures in pulling back the monetary stimulus, says Arnab Das, MD, Market Research and Strategy, Roubini Global Economics.
According to him, the FOMC will have to balance the forces and continue to support recovery. The impact of that on fund flows in emerging markets including India will be about the balance of all those forces together with country fundamentals and policies, he adds.
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Speaking to CNBC-TV18 he says the longer-term picture is still of uncertainty in emerging markets. With regards to India, he adds that the upcoming elections and uncertainty of the reform process will further add to worries.
Below is the verbatim transcript of Arnab Das’ interview on CNBC-TV18
Q: Most of the people believe that tapering will be around USD 10-15 billion and that has been priced into the market, are you getting a sense that we could be in for a rude shock?
A: If we take a step back and review what has happened, we have gone from a pretty violent sell off in risky assets in emerging markets including India to a bit of relief rally because of a bunch of different things.
One, actions are taken in several countries to try and deal with the lot including India. Two, a reprieve on Syria and three, some mixed data from the US that suggested either the tapering will be delayed until December or it would be relatively modest and manageable in the short-term in this FOMC. Maybe more to come later if the economy in the US continues to recover and builds momentum.
As far as all these things go, that makes a lot of sense. What I would add is the global factor. Although India took some actions, it is global markets that have responded to the prospects of an improvement in global monetary conditions because the Fed tapering was going to be pushed back or if it was going to come down more than what people previously might have feared.
Q: What is the interest of FIIs in emerging markets? We have been hearing about anecdotal evidence of ETF money flowing in. Is there a certain amount of FII allocation now towards emerging markets which will not see that amount of retrieval if in case there is a surprise from FOMC?
A: First of all the FOMC is unlikely to do anything extreme. They will have to balance the forces, continue to support recovery which is decent but not great. The impact of that on fund flows from the retail sector or institutional sector into foreign institutional investors in emerging markets including India will be about the balance of all those forces together with country fundamentals and policies.
The bigger picture there is still not great. The good news is that the correction valuations have been fairly aggressive. We have a number of currencies including the rupee that looks cheap, we have a number of stock markets that have come under extreme pressure and at the end of the day we still have an environment of easy global liquidity conditions, easy monetary policy, very low interest rates in the risky assets although rising and somewhat more elevated interest rates in riskier assets including emerging markets. We are in this tug of war leading to some short term stbilisation.
The longer-term picture though is still one of uncertainty in emerging markets right now. We have election in India, we have the uncertainty of the reform process although there have been some good measures to stabilise things in the short term recently.
The longer term structural questions are still open. Further more, the US curve is still rising and then eventually tightening at least less easing and then eventually rising Fed fund rates if augurs well. So, we have lot of issues to get through in 2014.