Rupee trend reversal dodgy; EM currencies in a pickle: CLSA

Emerging markets currencies find themselves in a pickle after the Fed decision to start tapering its bond buying programme, says senior economists Rajeev Malik of CLSA.  He says the prolonged period of exceptionally easy global liquidity made countries let some of their underlying parameters out of whack.

Meanwhile, the rupee fell to a record low of 59.93 to the dollar today, breaching past its all-time low of 58.98 on June 11. The only incremental positive in India is that its capital account is not all that open, says Malik. "We have already been hearing about increasing foreign direct investment (FDI) limits etc, but bear in mind all this is happening in a far less conducive global liquidity environment. So it is not going to necessarily be a trend reversing event as far as the rupee s concerned," he told CNBC-TV18 in an interview. Below is the edited transcript of Rajeev Malik’s interview with CNBC-TV18. Q: System shock for global markets and currencies this morning, we have talked in the past about that 60/USD target that you have got but it looks like it is coming in quite a rush? A: It certainly is. These things depending on how some of the global parameters play out can certainly get exaggerated, but bear in mind, the trickier bit is always how resilient is the domestic macro policy making to be able to absorb it. So for example, rupee’s move today won't be necessarily out of line with what we have seen for example overnight with the Brazilian real, Mexican Peso to 2.5 percent kind of a thing. I do not think this is yet over. We could get a bit of a near-term snap back depending on how good the take up for example with the foreign institutional investors (FIIs) debt option is and what some of the capital inflow related to the Hindustan Unilever Ltd (HUL) deal as and when they come through are. The rupee continues to be in a broader adjustment towards weaker levels and we have not seen the end of that story as yet irrespective of what policymakers might choose to say. Q: How do you see India doing in this new world now where it seems that the infinite tap of global liquidity may not be around for much longer beyond the next few months given our deficits, what ramifications could it have on our macro? A: This I was thinking at the start of the year when we were talking about rupee weakness despite an improving current account deficit (CAD). Unfortunately, a lot of the focus in terms of thinking about rupee in India is only targeted at the current account. People forget balance of payments has a capital account side as well. It is the same story that gets repeated in emerging markets (EMs) after a prolonged period of exceptionally easy global liquidity that countries let some of the underlying parameters out of whack and then suddenly that global liquidity tap reverses and they find themselves in a pickle. The only incremental positive in India is that its capital account is not all that open. So for example, they still have scope of coming up with some measures. We have already been hearing about increasing foreign direct investment (FDI) limits etc. But bear in mind all this is happening in a far less conducive global liquidity environment. So it is not going to necessarily be a trend reversing event as far as the rupee s concerned. At the end of the day, the broader adjustment just has to be with the currency weakness. The one way to limit that is to go in for an aggressive dose of structural changes but that is something we haven’t seen much of. There has been a lot more talk, far less action that and does not mean the government does not get credit for some of the moves it has made, but relative to the kind of challenges it is facing, the actual showing is being far less.