Rupee can be last man standing amid EM currency mayhem: ANZ

Despite opening slightly higher than Wednesday's close, rupee collapsed midway and and traded in the 65.47 and 65.12 range on heavy capital outflows amid weak dollar overseas. Most other emerging market currencies to0 witnessed similar down-move.  Khoon Goh, ANZ Research, Singapore explains a large part of the currency slippage can be attributed to oil price fall. He said the rupee could not withstand the peer pressure despite being a major benficiary of lower oil prices. However, rupee can be a relative outperformer in the emerging market landscape though it can go down a bit more on dollar strength.He also defended yuan devaluation decision and disagreed that it wanted to wage a currency war. Since it is the second largest economy, the world is experiencing collateral damage, but the main intention of devaluation is to get yuan admitted to the SDR basket. Below is the transcript of Khoon Goh’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18. Sonia: What is the reason for this collapse that we have seen in emerging market currencies? A: Sentiment remains very poor against the emerging market (EM) assets generally. There was no particular catalyst. In fact, it is quite interesting that despite the slightly weaker US dollar against the major currencies, earlier with the release of the Federal Open Market Committee (FOMC) minutes, things seem to have turned around. A large part of that is due to the fall in oil prices due to supply concerns. We have seen Brent falling below USD 47 a barrel and typically that is negative for those emerging markets that are commodity producers such as Malaysia which is why the ringgit was the worst performing currency today. And generally that continues to spook markets. And equity markets also had a pretty bad day. Chinese equity is down around three percent and that is really been taken by investors as a barometer of sentiment towards the region. Even the Indian rupee, despite it being a beneficiary of lower oil prices could not withstand the overall negative sentiment towards the region. Anuj: Let us take that point forward because having said all of this, the Indian currency has still outperformed today compared to the kind of fall that we had in other emerging markets. Could you expect that to continue or do you think there is a risk of it going back to those lows of 67-68? A: The Indian rupee will be vulnerable to further declines against the US dollar, principally because this is a broad dollar strength story. But I do expect the rupee to be an outperformer amongst the EM landscape. Again, India is quite fortunate in the sense that it is not a commodity exporter. In fact, it is a commodity importer, so it is actually going to benefit from lower oil and commodity prices. And on top of that, there are a lot of concerns around the yuan depreciation that happened last week. We have seen that flow into the Asian currencies last weekend again. Fortunately for India. India actually has the lowest exposure to the Chinese market amongst the Asian region. So on the two things that are on most concerns by investors, India is the one that ranks the least in terms of its sensitivity which is why I expect it to continue to outperform the rest of the EM world. Sonia: So far we have been spared, but we do not know what the future holds. All of this started with the devaluation of the yuan. Do you think that there is a currency war that is underway or do you think that those fears are overstated. A: I do not think that the Chinese have intentionally tried to enter a currency war by devaluating last week. Their main intent is to make the currency more flexible to continue to liberalise the exchange rate and more importantly to improve their chances of getting their currency included in the special drawing rights (SDR) basket; the decision is due in November. That is the main policy priority for what they did last week. Unfortunately, the spill-over or collateral damage is the impact that we have seen across the other Asian currencies and it is not really just in Asia. We are seeing for example, Kazakhstan abandoning their currency regime and floating their currency which resulted in the instant 20 percent devaluation in the currency. So, what China did is part of what they have been wanting to do to internationalise their currency. Unfortunately, being the second largest economy in the world, it does have knock-on effects and we are seeing that quite clearly.