Investors in the bond and stock markets are keeping their fingers crossed with the rupee expected to bear the immediate brunt of Reserve Bank of India chief Raghuram Rajan’s exit, analysts said on Sunday.
The “rock star” central banker loved by foreign investors announced in a surprise move on Saturday that he won’t seek a second term after September.
Experts said Rajan’s decision may dent investor confidence in India’s economy and fuel concerns about a continuation of the RBI’s policy, especially in taming inflation and cleaning up massive bad debts held by state-run banks.
When markets open Monday, the rupee is expected to weaken by 30 paise against the dollar from its current position at 67.08, bond traders told HT on condition of anonymity because they are not authorised to speak to journalists.
Rajan’s return to academia came despite growing calls from industry leaders for a second term and apprehensions that his exit may hamper ongoing RBI reform work in bolstering the currency and reining in the current account deficit.
But market analysts appeared confident the RBI and government will step in, in case the rupee bleeds for a prolonged period, saying India has enough foreign exchange reserves to counter any fall.
“The rupee may see a slide that is natural due to a recent inflation spike but more important will be how the FIIs react. If they pull out, that may put some pressure on the rupee,” said Nilesh Shah, managing director of Kotak Mutual Fund.
“RBI’s intervention will save the day for the rupee.”
Rajan’s exit comes at a time when markets are bracing for the ramifications of Britain’s possible exit from the European Union — a scenario that may see foreign institutional investors (FII) pull out of India in droves.
This might also put pressure on the Sensex that has been on an upward trajectory but hasn’t received much support from muted industrial growth figures.
The reaction of FIIs will be crucial as they have been the driver behind the India’s bull run in recent years to become the world’s fastest-growing major economy.
Government data says FIIs invested close to Rs 4,000 crore in Indian stocks so far in June but as the date nears for the British referendum on staying in the EU, FIIs may choose to pull out of emerging markets such as India and stay invested in the dollar for safety.
“India has enjoyed a macro sweet-spot in recent years... (However) external risks have been high during this period, with weak export demand, concerns about Fed, China, EU, UK referendum and regional geopolitics,” said Deutsche Bank chief economist Taimur Baig.
Rajan’s announcement – in a letter to RBI staff— came after months of tension with the government and the ruling BJP, whose supporters accused him of hurting the economy by not cutting the interest rate deeply enough.
But the banker – often called India’s James Bond for his intellect and handsome looks – refused to admit to any animosity with the ruling administration.