EM currencies to remain under pressure: Jayesh Mehta

Asian currencies, including India, have been depreciating in last 1-2 years. As long as the dollar strengthens, weakness in emerging markets currency will continue, Jayesh Mehta, MD & Country Treasurer of Bank of America. “The volatility would remain till you get clarity on US, maybe by mid-February, 2017,” he told CNBC-TV18’s Latha Venkatesh.Mehta said that it is equities one need to keep an eye on. He doesn’t not expect more FPIs selling in fixed income.Below is the transcript of Jayesh Mehta’s interview to Surabhi Upadhyay and Latha Venkatesh on CNBC-TV18.Surabhi: What did you think of the weakness and as Latha is pointing out, once this Foreign Currency Non-Resident (FCNR) deposit issue is out of the system, would you be expecting some stability to return?A: Not really. This is nothing to do with the flows. On the FCNR, we are more or less covered. It is just the dollar strengthening which is what the thing. And as you pointed out, if you look from November 8, every emerging market, because dollar has been strengthening, every emerging market has been hampered and I would just add up a little bit more. Since media likes to flash all-time low and the last low which was on August, 2013, if you compare from that point of time, 6,882 at that time to now, we are almost flat. If you compare all other Asian market currencies, we can say we are flat whereas everything else has depreciated from August, 2013. You look at Malaysian ringgit which is almost 33 percent down from August, 2013. You look at Indonesian rupiah, look at Chinese yuan, you look at Korean won, you look at developed economy kind of, all of them are down and there is nothing we can do about it. So, as long as the dollar strengthens, the weakness in the emerging market currency will continue. Definitely, India has been an outperformer in that emerging market unlike 2013 where we were the weakest player, maybe this time, we will be strongest player. But that all depends on how dollar strengthening is happening. So, maybe I would say the volatility would remain till you get clarity on US, maybe by mid-February, 2017.Latha: You also speak with a lot of foreign investors and domestic institutional investors. Was the rupee’s minor fall at all instrumental in making the Foreign institutional investors (FII) sell more?A: Not really, but as I said, they have been withdrawing from emerging markets and if you look at the debt markets in India, particularly government bonds what was the foreigners holding, not more than 3.5 percent. So, that is really immaterial. So, it is mostly the equity market that we need to watch out because the foreign portfolio investors (FPI) in Indian market is more in equities rather than in fixed income. Fixed income, more or less, whatever they had to reduce, they have reduced it. So, I do not see any more selling by FPIs coming in fixed income. Maybe they will look for a timing where to re-enter. And as I said, not only the Fed rate hike, it is about the sentiment. It is about the US ten-year where the sentiment is actually driving it higher. The sentiment today is looking at 3-3.5 percent for US yields next year. But as I said that fundamentally nothing has changed. It is the sentiment because of the new government there which people will come to know only when he swears in, in January and then as and when the new government’s thought process comes out. So maybe till February 15, we will be more trading on sentiments and sentiments can go anywhere, so very difficult to predict.Surabhi: Allow me to ask you a simple question. It is a very different world compared to 2013. That time, we were running a high current account deficit. There was a lot of commentary on whether the RBI is unnecessarily throwing away a lot of its Forex fire power. Today our reserves position is much stronger at USD 360 billion odd. While it is a big screaming headline for sure, for the media, all-time low, should one really be worried? There is going to be an argument that is good for exporters, but overall, if you are looking at the Indian macros right now, how worried should be, if at all, looking at these record levels for the currency?A: I do not think we should be worried. If you look at Indian macro in all fronts, particularly your currency reserves, current account deficit, in all that front, we are pretty stronger than what we were in 2013. And amongst emerging market, we are pretty strong in that situation. But when a big storm comes, which is like the dollar strengthening, you cannot really escape that. So, maybe one can think okay, do you want to put your ammunition now or maybe because if the thought is like, if US 10-year goes to 2.75-3 percent, who knows? If that kind of situation happens, there will be blow. Of course, it will not be as bad as what happened in 2013 for all emerging markets because 2013 was more sudden. If you look at it now, this time around, people have been preparing for that higher move. And it could actually surprise you on the lower side also like February onwards when you see that new government is not going to spend that much, You are seeing that instead of going to 3 percent may come lower. So, that only clarity you will get only in February. And if that happens, all emerging markets will appreciate and India will appreciate much faster. Latha: Net-net have the foreigners bought in the demonetisation or are they upset by it? Are we facing a double whammy with Trump and demonetisation?A: I can talk about the FPI in that. A lot of them actually sold out was more of emerging market exit and moving to the strengthening story. On the equity side, there is a mixed reaction. That is what I keep on hearing is also a little bit of a slowdown in demonetisation, but also dollar strengthening. So, both together.