Raghuram Rajan’s decision to announce his exit two and a half months ahead of the expiry of his present term as Reserve Bank of India (RBI) governor has taken financial markets off-guard. This comes at a time when investors are already tentative given volatilities due to global factors.
Mr Rajan’s exit is likely to lead to a knee-jerk reaction from the stock market as well as the currency markets that is already in the middle of a volatile period due to concerns related to the possible exit of Britain from the European Union (EU).
The referendum on what is being popularly termed as 'Brexit' would be held on June 23.
“Raghuram Rajan was a darling of the markets and so there could be some amount of knee-jerk reaction on Monday. But, I don't think there would be a huge impact. Also, this is not going to impact India's perception overseas,” says U.R. Bhat, Managing Director, Dalton Capital Advisors (India).
Week later?Some market participants said he could have postponed the announcement by a week.
“There would be some initial reaction on the currency when markets open on Monday. We expect RBI to intervene to tackle volatility,” said Jayesh Mehta, MD & Country Treasurer, Bank of America.
“Could have been done next week,” said Mr Mehta when asked about the timing of Mr Rajan’s decision.
BrexitMore recently, the Bank of Japan and the US Federal Reserve have also expressed concerns if the British referendum results in that country’s exit from the European Union.
The governor, though, was confident that India will tide over the Brexit episode successfully.
“We have worked with the government over the last three years to create a platform of macro-economic and institutional stability.
Handling volatilityI am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit,” Mr Rajan said in a note to RBI staffers announcing them his decision to leave RBI. The governor also referred to the country’s foreign exchange reserves being at an all-time high and that the outflow due to maturing of FCNR (B) deposits, that were garnered in 2013 to tide over the currency crisis, will be a non-event.
“We have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event,” he said.
“If I was an investor, I would not become bearish on the country because of this event only. However, one cannot rule out some initial reactions,” said Nirmal Jain, Founder and Chairman, IIFL Group.
Centre to act“Markets will look to the government for indications on who will be Rajan's replacement and on whether the government is committed to the reforms Rajan had kickstarted,” added Mr. Jain.
The recent past has seen the benchmark Sensex move by more than 300 points in a single day on a few occasions dictated by the negative or cautious global trends.
Mr. Rajan was seen largely as a pro-market and pragmatic governor with an independent view.
