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Rate difference between two countries shows currency disparity: Paul Schulte

Paul Schulte, founder and editor, Schulte Research, talks about the rupee fall, global sell-off, Indian markets, and the dollar index in a special interaction with CNBC-TV18.

September 27, 2022 / 04:02 PM IST
Paul Schulte

Paul Schulte

The BSE Sensex and NSE Nifty 50 tanked on September 27 amid global growth concerns and weak cues. BSE Sensex crashed 954 points or 1.6 percent to settle at 57145, while NSE Nifty 50 index plunged 311 points or 1.8 percent to finish trade at 17016. Tracking the currency fall versus the dollar globally.

For the Indian markets, both equity as well as currency, the correction seems to be more of catch-up as compared to global peers.

“The basic math is that the difference in interest rates between two countries is reflected in the difference in the currency,” said Paul Schulte, founder and editor, Schulte Research.

"The countries that are not raising interest rates fast enough to counter inflation, while the US is doing it, has to go through the pain of not wanting to control inflation. So the currency absorbs the pain," Schulte said.

“The problem is you avoid pain now but you get more pain later. When you import inflation, you're going to import more inflation as the currency gets weaker,” he said.

"India, Japan, the UK, South Africa and Latin America are not raising interest rates fast enough because they want to avoid the pain of slowing down their economies. So their currencies are getting pounded," Schulte explained.

"Banks in the UK are getting killed right now. They're down by 5- 7 percent. This is Liz Truss's initial days on the job, or really the first week after the Queen’s funeral, and it was a total flop. So, this is a political question as well. There's a big crisis of confidence in the new PM's plan," he added.

Citing the rumour about the detention of Xi Jinping and its impact on the markets, Schulte said that political elements are causing these fluctuations in the global economy.

"There's a cross-asset disruption in credit curves, government bond curves, equities and in other fixed- income instruments,” he said.

“The last week in September, up until the first two weeks to October, is expected to be notorious for crashes. This is the best time for Ground Zero Minefield for Equity crashes, and I am not a fan of bottom fishing. I think we have to get past this very treacherous seasonality as we move into the fourth quarter,” he said.

Global sell-off hitting India

India has managed to keep its act together, compared with Russia, China, South Africa and Brazil. They are all big messes. However, when looked at from the perspective of a global recession, there is a global reduction in money. This is where India is hurting right now with the global sell-off, making India vulnerable.

Russia has gone from being the king on the chess board to becoming a pawn.

China is going to be dealing with probably a $400 billion - $500 billion real- estate maps for the next couple of years. There is going to be a "massive securitisation in China." They're going to try and build a domestic yield curve, a pension and an insurance market," Schulte said.

"This is really bad for equities because it means huge dilution, and so I think India will certainly outperform China because of this tremendous amount of securitisation," he said.
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