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Last Updated : Aug 16, 2013 05:12 PM IST | Source: CNBC-TV18

Market facing onslaught of QE tapering: Roubini

The Indian rupee on Friday extended losses to touch a record low of 62 per dollar after RBI took further steps to curb rupee volatility on Wednesday.


While the street is blaming the Reserve Bank of India’s ‘regressive measures’ which led the rupee to all-time low of 62 against the dollar, one foreign investor is supportive of the measures taken by the central bank to stem rupee volatility.


Arnab Das, Roubini Global Economics believes the Indian currency would have been weaker had the RBI not intervened. According to him, the Indian market is experiencing the carnage due to the fear from the US quantitative easing tapering.


Below is the verbatim transcript of Arnab Das's interview on CNBC-TV18


Q: Are you surprised by the fall in the Indian market considering that India was already a big underperformer and today we have seen a 500 point fall on the Sensex?


A: The issue in particular for India is that the signals from the US recovery and the western recovery generally points to the tightening in combination with a still large current account deficit (CAD) and still unresolved issues no matter what attempts are being made to address those issues.


Changes of personnel for very good people, despite all the very positive signals the Indian government is trying to send those decisions are not going to have a short-term effect on the size of the CAD or on the trajectory of growth in the short-term. India is going to face the onslaught of tapering.


If they are implemented after the election bear fruit, if reforms and other kinds of improvements take place other than the short-term macroeconomic stabilisation policies the government is engaged in and indeed those stabilisation policies reveal that India in a bit of a trap.


It needs to keep liquidity tight. It has joined the slew of countries in emerging markets (EM) that are tightening monetary policy in order to defend their currencies and prevent importing inflation, even credit growth and economic growth  are slowing quite sharply. Although things have improved quite a bit in India and other EM countries and seem to take off after the global financial crisis, the reality on the ground is not as good as people have been led to believe.


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Q: If tapering takes place in September, is it priced in? We have seen the Indian markets underperform and even today it has fallen close to about 500 points. Is it priced in already or is there more weakness in store?


A: It is a trillion-dollar question for India and many other countries and indeed for various asset classes. If you step back from the particularities of the scale, of the recent moves in the Indian market and just think about what quantitative easing (QE) accomplished, QE drove up bonds and equities in United States and elsewhere in the world. So risky assets, risk free assets, high yielding assets, low yielding assets, everything went up because the Fed created a lot of money.


The logic of doing this was to reflate assets to make the liability overhang problem easier to deal with until the economy could sustain that liability overhang. If we are reaching that point and the money creation will slow down, that implies that asset classes across the board will go down.


Part of the Fed strategy in this asset reflation was to get everybody to buy everything, mainly in the domestic market, but there are spillovers into rest of the world.


If everybody realises this in their guts, if not in their minds they are going to pullback to some degree, if not quite a lot to see where the dust settles. So to me it feels like the Fed strategy was indeed to create a kind of 'technical condition' in the market where the market was overbought and now the market will have to go through some considerable adjustment and digestion and gyration in order to accept the fact that it is all going to be about fundamentals now rather than about money.


The countries and the asset classes that are relatively weak, where there are relatively large exposures that would built up whether by domestic investors, foreign investors or maybe both. Those countries will be and continue to be in problem for a while, particularly if the things that they can do to respond to this issue cannot bear fruit in the short-term. So if the things that India, Indonesia, Turkey, Brazil, South Africa and various other countries have to do to stabilise their currencies and prevent a big inflation problem is to slowdown their economy that will hit their equity markets and part of the correction will be weaker equity prices and weaker currencies. So to me it does not feel as if this is completed yet.


The temporary reprieve will come if there is a signal that the tapering will slowdown and then after we know about the scale and pace of tapering, because there will be rounds of tapering and then eventually there will be a stop in the increase of money and then there will be a tightening in money if all goes well.


Q: Many measures have been undertaken by the RBI as well as the government, but have not yielded any result and the rupee opened at a record low versus the dollar. So do you see the possibility of more measures to defend the currency, to tighten the liquidity which again is going to result and exacerbate the problem on the Indian equity market?


A: That could well happen. The way to think about this is that if the RBI had not intervened defensively to support the currency it would have been even weaker.


The inflation problem imported through the weaker exchange rate might then have been worse and indeed if the RBI is moving from the current framework under Subbarao towards Rajan's tenure towards something that is closer to a single mandate of closer to inflation targeting that only suggests that the direction of travel is towards more measures to deal with the potential inflation problem regardless of their effects on growth or on equity markets at least in the first round.


The second round effect, the knock-on effect of a weaker equity market over tightening credit condition on growth would imply lower inflation in the future, but the central bank has to act to prevent inflation expectations from getting out of control. So, many EM countries have been wrong-footed by the evolution of the crisis and the policy response to the crisis.


What we are witnessing here is the come up and too much hubris in the immediate aftermath of the crisis, the kind of aha moment where everybody thought the US model was broken and the US economy was broken and it would not really be fixed and here was a chance to grow really fast and catch up really quickly.


Short cuts usually do not work or create other problems of their own and that is what we are witnessing. So policy was too loose in many EM countries immediately after the crisis and since the crisis and that has led to a problem of imbalances that are excessive and now we are going to have a problem of policies that need to be too tight in order to address those imbalances.



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First Published on Aug 16, 2013 02:21 pm
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