Emerging Markets: What Has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)  

(1) The lack of change in the statement by the Brazilian central bank suggests that another 50 bp is now more likely.
(2) The Central Bank of Russia has introduced some more flexibility into its managed ruble float.
(3) The Reserve Bank of India cut its marginal lending rate by 50 bp to 9.00%
(4) India is looking to sell INR-denominated debt abroad – with the help of the World Bank

(1) The lack of change in the statement by the Brazilian central bank suggests that another 50 bp hike is now more likely. The bank raised rates by 50 bp yesterday to 9.50%, as expected, leaving the statement exactly the same as in the last few meetings. So it’s all about the BCB’s communication now. We assume that the curve will flatten and a 50 bp hike will soon be priced in for the November meeting – though this also means that the risk will shift towards a disappointment. Aside from regular speeches, the minutes (due on October 17) will take an unusually high importance this time around.

(2) The Central Bank of Russia has introduced some more flexibility into its managed ruble float. It did so by widening the “neutral” or “non-intervention” band from 1 ruble to 3.1 rubles, while keeping in place other parts of the intervention mechanism. We expect further cautious steps towards FX liberalization in the coming years. Governor Nabiullina said the bank aims to stop its intervention bands in 2015. However, we note that the bank’s timetable for FX liberalization has always turned out to be too optimistic.

(3) The Reserve Bank of India cut its marginal lending rate by 50 bp to 9.00%. The announcement added further support for local bonds and equity prices. The scaling back the emergency measures comes as INR rallied from nearly 69 to the current sub-62 level against the dollar. We have long advocated that some of the aggressive rate hikes may have caused more harm than good given the volatility this provoked in the fixed income market. So we are happy to see them being reversed. We remain constructive on Indian assets in the short term, but we prefer to stay on the sidelines with INR. Despite the confidence boost from the new central bank governor, many of India’s structural problems remain in place – not to mention that Fed tapering has only been postponed.

(4) India is looking to sell INR-denominated debt abroad – with the help of the World Bank. This is yet another effort to lure much needed foreign capital. The idea is to sell $1 bln of bonds which would carry the IFC’s credit rating but also give investors exposure to INR fluctuations and interest rates. The debt is settled in USD and the proceeds invested by the IFC in India. According to Bloomberg data, foreign investors have divested just over 30% of their local debt holdings since May, with holdings falling to the lowest since December 2011. Again, we maintain our disparate view towards India: constructive in local assets (rates and equities) but on the sidelines regarding INR.

This piece is cross-posted from Marc to Market with permission.