See breathing space for EM currencies: Deutsche Bank

In an interview to CNBC-TV18 Sameer Goel of Deutsche Bank shared his reading and outlook on the markets.

Below is the edited transcript of Sameer Goel's interview with CNBC-TV18 Q: What are you expecting from the Reserve Bank of India (RBI) if you are expecting the marginal standing facility (MSF) to be cut to 9.75 or to 9.25 percent, how will gilds behave? A: It is a pretty close call for RBI. There is a balance here, which needs to be struck between maintaining and furthering credibility, which Central Banks and emerging markets (EMs) at this point require to assure investors that they are keeping on track with monetary and fiscal discipline. However, on the other hand, there is also a case to be made for giving a little bit more hope and support to growth given the part of the cycle India is in. Given there are other surprising decisions from the Fed, it makes it even closer to call on whether RBI would choose to go part of the way and unwind some of its tightening. I would argue that whether RBI chooses to do that or not, it would probably give some adequate guidance to the extent that if it is not doing so already, the sort of time horizon over which it would want to do so while emphasizing that it would want to keep with its discipline on the monetary and fiscal side. Q: It is very important that you are saying that there is a need to prove credibility, therefore if the RBI governor were to speak hawkishly that would be taken positively by foreign institutional investors (FIIs) you are saying? A: We need to be a little bit more nuanced at this stage where more than just emphasizing on whether one is hawkish, it is the need to emphasize that there is indeed a risk to the growth inflation outlook that there are indeed imbalances in the economy which do need to be corrected and that policy making is very sensitive to those imbalances. That is what will assure offshore investors. The move in itself to try and unwind some of the liquidity tightening or not do so is probably secondary to the message which has given across. Q: Since inflation is the top priority of the new RBI governor as was suggested in his inaugural speech, do you get a sense that post the disappointing consumer price index (CPI) and wholesale price index (WPI) data we got, it would be difficult for him to ease rates not just in this policy but in the subsequent policies as well both on the short as well as the long end? A: There are two points here. One is that it does make his case even more difficult in context of all other circumstances we have at the moment. Secondly, I would say we need to differentiate here between the key benchmark policy rates and the signaling benchmark policy rates. Certainly, I would argue it makes it very difficult for RBI to be able to argue that there is scope to cut rates immediately. However, there is an additional and more immediate policy point in question, which is whether one should unwind the liquidity tightness, which arguably was done with an immediate focus on trying to stabilise the currency. So there could be a way to drive a little bit of a wedge between these two policy choices.