Worst over for market, rupee to recover now: Mark Mobius

Mark Mobius, executive chairman, Templeton Emerging Markets Group expects the Indian rupee to pullback from its current levels shortly.

He says the worst is now over for Indian equity market. "The currency has moved probably too far and we have a situation where there could be a pullback on the currency. It’s been a combination of all kinds of hedge funds and other derivative instruments that have played a big role in this dramatic decline of the rupee and that is probably over," he highlights.

Speaking to CNBC-TV18, Mobius says the government needs to step into an active zone and start focusing on boosting the economic sentiment and strengthening the rupee. Mobius’ statement comes at a time when most macros, including the GDP growth, are not in favour of the country.

Despite the massive crash seen in emerging markets (EMs) and their respective currencies recently, Mobius believes that they have discounted the Fed's moves to taper its bond buying programme. 

Additionally, Mobius says the investments into the country, or foreign institutional investments (FIIs) flows, could pick up once the general elections are over and a new government is announced.

Below is the edited transcript of Mobius' interview to CNBC-TV18.

Q: September 18 is the big day to decide which way the global liquidity heads. If the Fed decides to taper the bond buying programme by more than 15 percent, what could the bull and the bear case scenario look like for emerging markets like India?

A: I do not think there will be much change because a lot of this has been discounted. The big story would be of course to take shoulder from Bernanke and if funds do come in there could be quite a dramatic shift towards direct financing and very rapid increase in money supply, which will be quite bullish for markets around the world. But at this stage it is not clear if that will happen.

Q: If a lot of the Fed talk has been discounted for markets like ours as you just pointed out, do you think the worst is over for the Indian market or because of our own local issues we could perhaps head lower?

A: I think the worst is over. The currency has moved probably too far and we have a situation where there could be a pullback on the currency. It’s been a combination of all kinds of hedge funds and other derivative instruments that have played a big role in this dramatic decline of the rupee and that is probably over. Now, it’s a matter of the government getting its act together and making a change for much longer churned investments in India.

Q: One of the reasons why rupee has been hurting is this fear that FIIs could actually pullout when tapering begins. You think that is largely discounted fear or will it actually plays out when the tapering happens?

A: I think it has been largely discounted. The initial reaction was too extreme because a lot of people failed to recognise the fact that QE programmes are cumulative. There was money that was pumped into the system, it has not gone away; it is still there. It reached a bull market. Now in the US, for over a year, that money has been flown into the market and this will be continuing as we go forward.

What happens with the emerging markets (EMs) situation is that many of the investors and typically large hedge funds went into pick income instruments in EMs. So, they were too far and then when the announcement came that the trade might be pulled back, there was panic to get out of these instruments. So, what has moved data in the EMs are not the equities but its really fixed income instruments.

Q: This past quarter have you been a buyer or seller in India and more importantly in the next quarter what are you likely to be, a buyer or a seller?

A: We are sitting tight. We are not moving in any direction; in other words, we are keeping what we have in India, which are primarily the export oriented companies like Tata Consultancy Services (TCS) that take advantage of the weak rupee. But we are not adding or subtracting in any direction. In other industrial areas, we do not see the kind of growth and inexpensive stock that we would like to see.

Q: The last time we checked with you, you had indicated that clients that you have interacted with are still not ready to invest into a market like India because of the twin deficit problem and the apathy from the government’s end. Has the mood changed at all and when do you think the investment cycle will pick up?

A: I think the investment will certainly pickup as the elections begin and it becomes clear as to what kind of administration India has next year then there will be a change in mood. But until and unless something dramatic happens, there probably will be no change because there are quite a lot of concerns regarding the reform in India.

Q: You are unlikely to buy unless the elections are over; won’t cheap share prices and cheap currency lull you into buying earlier?

A: Of course, if the prices come down to really low levels of companies that are attractive to us over long-term. However, we have not seen that yet. Prices will not be able to come down to the point where it will make compelling attractive opportunities.