See volatility; compromise on debt ceiling: Roubini Global

India is still looking at a period of great uncertainty and reasonably high volatility compared to what markets had become used to during the period of no tapering, says Arnab Das, Roubini Global Economics. Despite the pressure on the rupee easing and markets doing reasonably well compared to August end, fundamentally nothing has changed - India continues to have high current account deficit, Fed will eventually begin tapering, among others, he says.

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He feels a compromise will be reached in the debt ceiling negotiations in the US. He doesn't expect it to go to the brink of default and most certainly not a 'technical' default. But the risk of a shut down of the government or other kinds of challenges that is there and may rise before it subsides, he adds. Below is the verbatim transcript of Arnab Das' interview on CNBC-TV18 Q: Do you think the worst is over on the rupee, it has been a relative outperformer?
A: Yes, I think what is going on more generally is that immediately after the lack of Fed tapering, there was a vicious kind of short squeeze. Many people who had expected the Fed to at least begin tapering by anywhere between USD 10 billion and USD 15 billion a month had been sellers of risky assets. The environment turned more dovish of risky assets in general. Now that short squeeze is tapering, there are mix signals from the US data, the debt ceiling issue is coming up so the short-term environment has become less favourable for risky assets than in the immediate aftermath of the no tapering decision.
In the case of India, what has happened is that Raghram Rajan had pointed out that this is going to be a temporary reprieve at best and had already taken measures in effect to shore up the rupee. So that is in the short-term why the rupee is outperforming as risky assets settled back down after the short squeeze.
Looking forward, I think the underlying issues are still are there in all parts of the world, nothing has changed in the fundamental sense. India still has a large current account deficit (CAD) to finance and number of other high beta risky asset classes and risky emerging markets in particular with large CAD still are exposed to the kind of the volatility that likely lies ahead in short-term capital flows as the Fed eventually does begin to taper. At a minimum, there will be uncertainty about the timing of that tapering. So I think we are still looking at a period of great uncertainty and reasonably high volatility compared to what markets had become used to during the period of no tapering, just continued money printing. Q: What about the debt ceiling negotiations in the US, is it possibly going to be a big game changer at all for equities and currencies?
A: I think in the end, our assessment is that there will be another compromise. The issue continues to overhang the markets or resumes overhang in the markets because this is going to be another complex negotiation and maybe we will not go back to the brink of defaulters we did in 2011, it might be less easy to get through this hurdle than at the beginning of this year around the sequester and the budget negotiations because the underlying dysfunctionalities in US politics still exist - the Right and the house don’t want to give too much of weight to the Left and to the debtors and of course importantly the debtors and the central Left doesn’t want to have too much of the bargain.
So there will be a complex negotiation, it probably will not go to the brink of default and we almost certainly won’t have a ‘technical’ default. But the risk of a shut down of the government or other kinds of challenges that is there and may rise before it subsides. Q: Coming back to emerging markets and to India, this surprise lack of tapering conversation from the Fed, do you think that continues for a quarter and more importantly this tactical pullback that you saw in emerging markets, does it have more legs given the Fed's unusually or unexpectedly dovish talk?
A: If and when we do get to the point of more talk and then actual tapering, there would still need to be another correction in emerging markets.