Indian mkt, currency to hold even if Fed tightens: Deutsche

“Our house call remains that they can potentially hike as early as June, it might get pushed out till September,” he told CNBC-TV18’s Latha Venkatesh and Reema Tendulkar.

Asian bond and stock markets should continue to get overseas flows, Goel said, pointing out that while the Fed may tighten liquidity, other leading central banks such as the ECB and Bank of Japan were still in easing mode.

The Indian currency, too, would cope with the dollar strength better than peers thanks to the improving macro conditions here, he added.

Below is the transcript of the interview on CNBC-TV18.

Latha: What is the sense you are getting, how should we read the job numbers, when are you sensing the rate hike and what is in it for India?

A: Yes, almost certainly the jobs numbers yet again reinforces the point that the labour market momentum is indeed very strong in the US. Though, there is other side of the coin as well which is that while the US economy is generating jobs at a level, which it hasn’t done in many years but equally there seems to be very little wage growth.

So if you look at average yearly earnings for example which came in, it is at about 2 percent year-on-year (Y-o-Y) clearly are more subdued than where the Fed would want it to be. So to some extent, the calculation for the Fed is still in a way mixed in terms of both when it would start to hike rates but I think more importantly what will be the pace at which it will tighten rates.

Our house call remains that they can potentially hike as early as June but it might get pushed out in this dichotomy of the factors they faced might be pushed out till September.

Latha: What is in it for India -- should we expect that bond flows will taper off, what about equity flows?

A: I don’t think so. I will make two points -- this is more general and not necessarily to do just with India -- it is true that there has been a lot of capital flows out to emerging markets last several years as a result of the very easy liquidity policy which global central banks have been following but we must remember though that one -- we have already been prepared for the end to quantitative easing in the US.

We have already seen that taper tantrum play out a couple of years ago. So we are much better prepared and secondly, the US has stopped growing its balance sheet and would not be hiking the price of liquidity, there are other parts of the world which are adding to balance sheet and particular the Europeans, which are starting QE this week and of course the Japanese, which are also printing balance sheets. So it is not like the global pool of liquidity is necessarily shrinking in any significant form immediately. That would be my first point.

Second most specifically on India, I would see India fixed income in light of not just in terms of demand from a growing global liquidity perspective but also in terms of access to India as a market. If you look about -- I would still argue global investment portfolios are significantly under exposed to India if you consider India’s share in global gross domestic product (GDP), India’s share in global market capitalisation.

So from that perspective, I would argue that there is a lot about global flows into India which are about access rather than just a pure yield game.

Reema: What would be the key levels that you will watch on the rupee and are we likely to breach even 63/USD mark versus the dollar?

A: What is happening in the currency market at the moment is more generally a bigger dollar play as the shift in Fed expectations if it might take place. So I think it is not impossible that we do try and test the 63/USD mark as well.

However, I would argue that by and large dollar/rupee should remain sort of more in check versus a lot of other currencies in the region. So I would still be looking very broadly at 61.50-63/USD kind of range for dollar/rupee to hold but again we are -- I would say a bigger picture point, we are still maybe only about half way through the broader dollar cycle. So as we firm up expectations about Fed hike, you are bound to see the dollar come under more upward pressure.

Latha: What are your yield levels in India that you are watching out for in this quarter for instance?

A: I think the yield issue is much more of a game with the RBI’s policy easing. We have seen that again last week and I would still argue that if one can believe in terminal policy rates of 7 percent or below in the RBI policy then the 10-year yields in my opinion can go down to 7.20-7.25 kind of a levels. That might not happen immediately, we might have to wait for the further reductions to take place but almost certainly we are on that direction.