Less pain for EM currencies if dollar rises gradually: Deutsche

On the other hand, if the dollar strengthens due to risk conditions triggered by concerns regarding trade that will spell bad news for the currencies in the emerging markets.

Consumer price index (CPI) or retail inflation cooled to 3.17 percent from December's 3.41 percent. Goel says the inflation numbers were not surprising. He said Reserve Bank of India’s signal to not cut rates and the change in outlook to neutral was fairly unequivocal. He maintains a neutral stance on Indian market at the moment.Below is the verbatim transcript of Sameer Goel's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: Will these inflation numbers nudge you into buying Indian bonds after they have fallen so much?A: While inflation numbers weren’t terribly surprising and to some extent, still make us surprised about why the Reserve Bank of India (RBI) had decided to go neutral quite at this stage but their signal was fairly unequivocal.In that they wanted to signal an end to the rate easing cycle at this point. So I think it would take a while for the next thematic, if you might, to develop in the Indian fixed income. So we stay fairly neutral on Indian fixed income at the moment.Sonia: What are your thoughts on how the dollar index has once again gone back above that 101 mark? Do you expect it to continue to trade upwards and what is the impact it could have on emerging market currencies?A: The dollar index has been fairly choppy off late and it is very subject to all the various bids of headlines and news which is coming out around as we get to know more about what are the policy intentions of the Trump administration.We definitely remain quite committed dollar woes and do think the dollar index will in general a trend higher. I think it is the pace and whether it gets that support from that real interest rate divergence and when it gets that is the key question for this time. I say pace because if it were to happen at a modest rate then I think emerging market currencies don’t necessarily come under undue pressure. We do think most of the emerging market universe and in fact bulk of G-10 as well will probably end the year weaker versus the dollar but not necessarily come under undue pressure if the pace was to be gradual.Latha: That is what I was also going to ask you that the dollar index is recent strength even the rate moved up from 99 to 101 has not been accompanied by sell-off in emerging markets. Where do you see the dollar headed over the next quarter, are we seeing 105 and 108 anytime and what happens to EMs in the first three-four months of the year?A: I think while the dollar index I do think is headed higher, I don’t think we will quite see that scale of move in the very near-term and I think it will require support from that real policy rate divergence story, which is what will be the good if you might strength in the dollar.I think in that instance and were that to happen at a gradual pace and it doesn’t look like the market at the moment is recalibrating beyond the two rate hikes for the year, which are already priced in then in that instance I think while EM currencies will generally weaken but not necessarily come under particularly acute pressure.On the other hand, however, if the dollar was to strengthen because of much bigger risk off conditions, which were triggered either because of concerns about trade or maybe political risk more generally globally and then in that instance EM could come under more acute pressure.