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Top economist says rupee rising ex-dollar ‘easy call’

Barring the resurgent US dollar, the Indian rupee set to rise against most currencies, says Avinash Persaud, senior fellow, Peterson Institute for International Economics and non-executive chairman of London-based investment banker Elara Capital.

“The steps that the government is taking to tackle ease of doing business and boost manufacturing will lead to [an upward] revaluation of the rupee,” Persaud, a top economist who is seen as a leading global voice on issues such as risk, liquidity and currencies, told CNBC-TV18’s Latha Venkatesh and Sonia Shenoy from the sidelines of an Elara investment conference.

On the issue of when the Federal Reserve would raise rates for the first time in about nine years, Persaud said the question should not be when the US central bank would hike but what would the pace of tightening. “And the Fed would be behind the curve on inflation and growth,” he said.

How would the Fed tightening impact equities around the world? Low interest rates have led to low discount rates of earnings along with bringing a sense of risk reduction, he said. “Both will continue [regardless of the Fed tightening].”

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

Sonia: The big theme globally that everyone is talking about is the strength that we have seen in the dollar and that has caused a huge selloff across emerging market currencies whether it’s Brazilian real whether it’s the Russian ruble, the naira but surprisingly, the rupee has remained resilient. What could be the reason for that and what is your assessment of whether the rupee will be saved the blushes?

A: [ECB chief] Mario Draghi has made life quite difficult for [Fed chair] Janet Yellen. He has triggered strong dollar appreciation around the world with easier European monetary policy, expectations of tighter US monetary policy down the road and this has lead to weaker emerging market currencies around the world — very broad based weakness.

But of all the emerging market currencies the rupee is the best performing. I think there could well potentially be a significant revaluation of the rupee going on. The rupee has always been — as a competitive rate in terms of price competitiveness, in terms of whether goods are cheap here or abroad — the problem for India’s trade accounts and current accounts has been non price competitiveness.

All the barriers to trade, the barriers to exporting, the barriers to doing business and making things in India and the belief that this government is tackling some of those barriers is leading to the potential of a revaluation of the rupee. So bucking this trend could continue for a while.

Latha: Where do you see the rupee in 2015? Do you see it depreciating under the pressure of strengthening dollar at some point in time if not now or do you think this continued appreciation in delta — whatever its intrinsic value — is going to be the story of 2015?

A: The easier call is how the rupee behaves relative to other emerging markets and that is that the rupee will continue to be one of the best performing currencies. Very important for investors who tend to think in terms of blocks of assets and for the block of emerging market assets the rupee the best performing.

However, whether it still able to outperform the dollar in a strong dollar environment is going to be a tough one and the Indian authorities are going to be nervous about strong rupee, they are going to be nervous that this will unsettle their plans for boosting manufacturing. We have seen the RBI quite keen or quick to ease monetary policy wherever it has the opportunity to do so and that’s going to make it hard for the rupee to appreciate against the dollar but it will be the best performing emerging market currency.

Latha: When will the Fed hike rates?

A: The key to investing in financial market is not that question. The key is to know whether the Fed is going to be early or late, whichever month it is and I think there are number of reasons to be certain that they are going to be late.

The politics is against they moving early, the absence of inflation, concerns about the strength of the recovery, a broad base nature, employment and wages means that whichever month it is the pace of tightening, the timing of tightening is going to be late rather than early.

Latha: Will it be disruptive and what will be the disruption?

A: The market isn’t going to look at just the timing. It is going to be the level of the rate rise and the accompanying statement in terms of the indication of whether this is the first of many moves or the first move and then a pause.

It has a very complex set of thinking that will come out from that first move and so the issue is whether you put all that into context; the pace and the strength and the timing are the Fed being ahead of the curve, ahead of inflation or perhaps being too relaxed and behind and my bet is they are going to be too relaxed and behind.


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