Rupee may weaken but no vicious sell-off seen: Citi's Vaish

"I think that pressure just means that the nominal prices that we watch will see dollar-rupee slightly higher but I don't see any vicious sell-off," he says, adding "I don't think they have a choice but to buy if rupee were to slide towards 67-68. So I think the plateau will keep rising higher but I don't see any panicky move." Below is the transcript of Pankaj Vaish’s interview with CNBC-TV18's Udayan Mukherjee.Q: How does it feel leaving the Nifty at around 7000? After the election result would you have thought that by this time the market would be a whole lot higher?A: I would have thought it would be a whole lot higher and when I came here in April 2007 since then in rupee terms we are 90 percent higher or something but in dollar terms we are barely higher and that to me sums up a lot of stuff that is going on. Nominal stuff is growing okay, but in terms of where we stand for the world and for global investors it has been a little bit underwhelming. We all wanted it to have done much better.The last government obviously came with a lot of excitement and it is just unfortunate that it has not translated into permanent gains across the boards. And there obviously you just can't fault the government. Frankly if another sort of big picture lesson I can take away is that the political process is extremely important. Politician has become a bad world but actually you need good politicians and one regret is that in India there is still the sense of my party and my positions rather than what is really best for the overall economy and that logjam really has to be cleared.I really keep feeling seasoned people across all political parties have to come together. That is being nationalist to say, let us do something for the economy overall rather than just my narrow case and that is very disheartening. I laugh with my friends in New York that I don't know which system is worse, the acrimony and the political system in the US with Donald Trump and the likes going around or the kind of noises you hear here. It should have been a lot more cohesive but that has really taken away the shine. Given what China is doing it should have been a slam dunk for us to be the undisputed economy in the world. But unfortunately we have not seized that opportunity that very easily came to our place.Q: Do you sense any disenchantment creeping in because India was seen as a jewel in an otherwise troubled environment but increasingly one hears a lot of voices of dissonance saying we feel a bit let down and a lot of old India watcher or India backers seems to be also liquidating some India positions. Do you see a sense of disenchantment creeping in?A: Yes, there is disenchantment creeping in. Some of these old India watchers as you said they have been long term friends of India and nothing would delight them more than India really go on and do extremely well and time after time they feel that the advice that they have given in terms of reform and in terms of progress it makes us proceed a little bit not really make the defining leap that we should be making. That has been disheartening because if not now, if not with such clear sort of Lok Sabha situation then when.Another minor footnote I will make in this is I know the constitutional experts, Rajya Sabha has a role to play and all of that is fair. It is the slow moving average of let us say the Indian populations feelings. But practically we know Rajya Sabha is also full of a lot of people who have been done favours to and just sort of get their seats. It is trading favours and that is not really reflective of where the Indian population or the states at large where they stand today and so again a big discussion topic that should go on rather than what is happening at JNU is to say what is the distribution of power here and should you really have a few unelected people being able to stall progress. That is really not been handled and I don't think you can just blame anyone party for it.It is also incumbent on the party that has the cards to find the floor management, sort of deal making for lack of better word, that is important, that part of governance. So, there is a lot of stuff that could have gone right. We just don't have any competition right now. This was ours for the taking. And unfortunately we have let that slip by. We hope there is still time for us to recover.Q: What is the general sense you get about emerging markets (EM) because you are moving from one to another in South America but would you go as far as to say that we are in an EM bear market the way things are panning out over the last few months?A: One thing that has become clear over the last few years is that to talk of EMs together doesn't help us too much because there is such divergence, diversity of prospects. The love affair of EMs is still very country specific. Like again if India had the right political legislative agenda moving forward you would see a lot of people come into it in tens of billions of dollars a year. Yes, the huge excitement that we had in 2007 and again in 2014 that may have been tempered but it will still be very country specific.Any country which can get its house in order can do very well. For example, Mexico the reforms have been quite dramatic. In a third rail kind of sector like labour reform and energy and telecommunications that is what energy is required and once their terms of trade turn around hopefully will do better. For example it would be a beneficiary. So, it is very country specific, it really depends on that.Q: Yet you see a lot of capital flowing out of emerging markets. Do you sense that people are getting disillusioned because currency adjusted returns in domestic currencies people have not really made a lot of money from emerging markets over the last 5-10 years. Do you think it is finally beginning to rankle?A: I always use to wonder why currency was not more talked about. I have had these discussions at the highest levels of Indian government that the currency situation is very important to foreign institutional investors. Nifty on a dollar basis has really returned very little may be two percent a year over the last 9 years. That is why focusing on the currency, the strength of the currency is extremely important. Latin America went through a lot of currency runs so they have a lot of experience in it. India is not in that sense because we did not really have  huge amount of FII inflows until about 20 years ago. Yet when you keep hearing these sounds about let the rupee devalue and it will help our exports - I wrote a piece in Financial Express saying that our analysts have done some work, this is quite misleading - the kind of exports we have they are not that sensitive to the exchange rate. For the whole system, for the importers you will create problems as well as for investors because then they start saying dollar adjusted I am not really making any headway.So, this is something that they have to worry about. However as soon as you get the Fed situation in terms of what was initially thought many hikes, that is scaled back, I think you will see dollar EM also stabilise. I don't think the Fed is out to do anything irresponsible at all. It probably made sense that we need to hike and I think they did the right thing. However they will do it at a pace not to at least add any additional destabilisation to the market which was already wobbly from so many other issues.I think once that comes to the fore carry trades and seeing whichever emerging market there are some reasonable fundamentals, people will come back to it because for hedge funds the trade opportunities are very thin. 10 years ago currency carry trades used to be a very profitable trades, Brazilian Real, South African Rand and the likes were very popular currencies to go long.Right now people have stepped away because the fundamentals are bad, the terms of trade are bad and there is a global risk off. Global risk off based on what China and Fed do I think can stabilise and then you will see some of those currencies do better.I don't think long  term investors have signed off of emerging markets completely. I think they are sensibly taking a breather and they will come back to selective ones when they see risk on.Q: Do you think 68-70 is it for the rupee then or could there be more pain in the light also of what China is trying to do with its currency?A: There is so much pressure from so many sources on RBI that they should let the rupee weaken more which I disagree with. I think that pressure just means at least the nominal prices that we watch you probably will see dollar rupee most likely higher.However I don't see any vicious sell-off, I hope there is not going to be any panicky kind of a situation. You know that they are constantly there to come back and build more reserves. They have taken so much criticism from so many sectors including the commerce ministry and the chief economic advisor. So, I don't think they have a choice but to at least steadily buy it if it were to slide towards 67-68. So, that plateau will keep rising higher. However I don't see any panicky sort of move unless China is doing something crazy and that is a separate topic in itself.Q: What is your view on Indian fixed income because that has also been in a very tight range given the kind of deficit numbers we are looking at, where do you think fixed income returns could be over the next 12 months?A: Indian fixed income has been a tale of two different parts of the curve. The short end has done quite well because inflation came off and RBI got a chance to cut rates whereas the long end because of the deficit that you just mentioned has lagged.It is not a good statement when you have bond yields still hovering where they were before the easing campaign started. That just means people are voting that it has not been managed properly, fiscal situation has not been managed properly. The supply situation has not been managed properly, the auction schedules, the liquidity. There are people who say that it is also because US 10-years have sold of  but that depends on what your frame of window is. If you go sufficiently far enough US 10 year yields are far below where they were two year ago.I don't really buy that argument but that gets thrown out quite often. So, this is definitely a statement that things have not really worked out well for the long end. It will still meander. My rates team tells me that the supply situation is not good. FII investors are also kind of picking up from our prior conversations. They have got a bit tired of chasing this, of hearing that there will be stability and there will be predictability. This morning  there is some story about Euro clear but that also again is going to be a very small section USD 3 billion for just the sovereign wealth funds.So, it has not been a very easy ride for them and I think they are tired. It is just fatigue that has set in into this and that may continue for a while longer. I don't see anything on the horizon that is going to change that. Rate cuts will be very slow to come and that is understandable but the supply situation and the liquidity situation, people have dug in their heels on that and I just don't see that helping out.Q: Let me ask you to wear your banking hat for a bit because the crux of this India problem over the last couple of months most of this debate is centred around what is happening with the banks. We are running into a Budget. What would the markets be calmed by with regard to the asset problem with banks. Because there have been lots of theories, bad banks, maybe put a band aid for now and see how it goes. What is the solution in your eyes?A: The mission is actually a good one, it is commendable. Somebody had to come and tame this. It is again another sin that people have walked away with so much of tax payer money. So, it is right that this problem at least has to come to the surface and frankly some people should go to jail for it, quite honestly. And I don't mean just the defaulters, but anybody who facilitated it should go to jail for it. So, the governor is right that the problem should be acknowledged and tackled. It is unfortunate that it was synchronous with the global risk off scenario and thus you remember for your high school physics that amplitude gets much higher when you get these two cycles coinciding at the same time.To stop the bloodletting to answer your question firstly everybody has to stop cheerleading and giving unrealistic numbers. People may even come out and say we don't know the true numbers of capitalisation that is required, it is a moving target. We will see because some of it is a circular problem. We will see what it is but we assure you we will provide capital and lay out some rough timetable. If the shortfall is let us say, USD 30 billion, we will give a sixth at the end of this quarter, just lay out something and then at least know that there is a problem and there is a solution in a time bound way. You need the owners of these banks to come up with a plan, a time bound plan to say this is how the capital will be allocated rather than just saying we are on the same page with the RBI and all nice stuff but we need some more clarity. If not necessarily in the budget then soon after that. Do your homework and come out with a clear press conference where this is laid out. That will give people confidence.For a Punjab National Bank (PNB) to be USD 2 billion in market cap, it is a big bank. The owners need to come out and give us a clear roadmap on that. Bank of Baroda (BoB) and State Bank of India (SBI) are saying very clearly they don't have a capital issue and so, BoB did a little bit of this kitchen sinking thing and you saw its stock at least for the time being recover. As long as you put in a bottom in these, acknowledge the problem things move on.Q: How bad is this global cycle because here it started very badly, nobody quite knows how big the problem is. Is it looking like the foothills of a global recession, global bear market kind of a situation or you just don't know yet?A: That is the big question. December 31 we all went home thinking things are okay, and it is like as if the lights went out in January and globally everything has come off. And the way the bank stocks are trading, obviously not just Indian banks, European banks. European banks just never took the bitter pill. They had to take this medicine and they didn't do it and now they are going to have to dilute themselves or shed cumulatively hundreds or billions of dollars of assets. But for most banks to trade so far below price to book, non Indian banks, just means that there is this fear, people start drawing analogies to 2008. We don't think it is 2008 from many different angles. Most importantly the leverage in this system is so much smaller, it is probably a full order of magnitude lower than what it was in 2008.If you look at the leverage of all financial institutions it is very small. Households it is very low. It is really just the US corporate sector that is still a bit stretched. So, we don't think it is that. We think there is a general - at sometimes you get this - you get a synchronous sort of risk off environment that took place. The oil price collapse definitely was a catalyst because energy sector loans, in terms of billions of dollars are large. Although they are about three percent only of US banks' balance sheet and about 70 percent of that we are told are investment grade. But the amount of market capital loss that has taken place is already in excess of that.So, we think this is an overreaction, this is more like a 2011, rather than 2008. We don't see from any major angle why this should be an '08 kind of crisis. Whether US goes into a minus 0.2 versus a 1.1 GDP that is hard to say, but again I don't think that requires this kind of a sell-off in all banks. Again this should be a more EM like very bank specific. There are certain European banks that definitely need to dilute themselves. But there are many others who don't.So, our global chief economist still doesn't think that recession is a high likelihood and we don't think this is anything like an '08 crisis. Few things have come together which have made these stocks go down a lot but if you look at the index overall also S&P is not really down that much. You are talking of maybe 7-8 percent. If it was a global recession kind of a thing this thing would have already been down 20 percent and that has not happened.Q: But with what kind of accuracy in the past have economists been able to predict the event before it happened?A: You are right. All we can do is look at these gurus and then use our own common sense to see what is the likelihood because for me a very big factor tends to be leverage in the system because then you know people are just forced to dump assets regardless of price and management and US and now hopefully in Europe it tends to be ruthless. Then you see it comes in and says I want to clean balance sheet. Get rid of it, mark it to the last guy and move on.The leverage in the system is not that bad right now. It is actually quite low if you chart if over many years it is very low and households this time in US is also in pretty good shape. Jobs growth is still okay, wage growth actually has picked up in the US. The strong dollar is a problem and that become much stronger. Our chief economist Willem Buiter thinks that that could be one tipping reason. But the real ingredient that goes into tipping something over in a shocking way tends to be leverage and right now we are very clean from that point of view, at least in the US. So, that is what makes me feel hopefully the probability is low but yes, nobody has a very good track record in this.