After the US Federal Reserve went in for the second round of tapering, most emerging markets and their currencies have been under pressure. John Woods, Citi Private Bank says there is a possibility that this trend would continue.
He says tapering is likely to continue to impact emerging market currencies. "There is a broad sense that the US dollar is likely to strengthen as term yields rise and expectations for interest rates perhaps move forward. Obviously this will start putting impact or start having an impact on valuations of emerging market currencies, including India," he adds.
Also Read: India will need to keep raising policy interest rate: IMF
Below is the verbatim transcript of John Woods' interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: How is the setup looking now across the globe? We have seen a couple of days of trepidation but would you be concerned or do you think that the US markets are well on to cross their all time highs?
A: The Purchasing Managers’ Index (PMI) that we saw from the United States last night, gave us some indication that the weather conditions impacting data are beginning to diminish and that is leading to assume a slightly more positive appetite for risk as we saw. The idea being that the soft patch that we have seen over the last two-three months is finally diminishing and the underlying growth that may have anticipated and expected is beginning to show through.
Latha: We have seen the US markets battling with a higher end of their trading range but many of the emerging markets are battling with lower end of their trading range especially in a country like India. Are you seeing greater outflow of funds from emerging to developed markets likely?
A: I think it is very likely. I think that the tapering that started earlier this year is likely to continue to impact the valuation on the US dollar. I think there is a broad sense that the US dollar is likely to strengthen as term yields rise and expectations for interest rates perhaps move forward and obviously this will start putting impact or start having an impact on the valuations of emerging market currencies including India. So, the capital outflow story is likely to continue. I cannot see many so called magic bullets which could certainly cause a reversal in that, for example in such an environment I do not think valuations play a particularly important role.
Sonia: What would the approach be then towards markets like India now?
A: I think there are some positives in India and indeed it is important to bear in mind that the economic adjustment, which has been playing through, has been doing so since 2011. So, India has been essentially adjusting appropriately but that journey is not yet complete. So, oil imports, a contraction in gold imports is allowing trade deficit to narrow. This is reducing some pressure on the rupee and some of the pressure on the central bank to aggressively tighten monetary policy. We are seeing a modest decline, for example in consumer price inflation largely due to a fall in food prices and in-turn will have a positive effect on household consumption but nevertheless the market is still concerned about the deficit that India is running either through trade or current account or fiscal and the reason it is concerned is because these deficits essentially depend on foreign savings to fund domestic expenditure. So, those are the rock on the hard place that India is facing and the adjustment process underway needs to continue.
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