Markets, rupee volatile after Rajan says no to second term as RBI governor

ON a day when the stock and currency markets were expected to be hit by news of Reserve Bank of India (RBI) governor Raghuram Rajan not seeking a second term and worries Britain leaving the European Union or ‘Brexit’, big purchases by domestic institutions, possibly including Life Insurance Corporation, helped the Sensex rebound from its morning lows. The rupee, however, lost ground opening sharply lower at 67.685 to the dollar and ended the session at 67.318, 23 paise weaker than Friday’s close.

Foreign portfolio investors (FPIs) — who have been net buyers to the tune of $636 million so far in June — sold shares worth $57 million, according to provisional data.

“The decision of the incumbent RBI gover nor not to seek a second term will likely unsettle investors sanguine about India,” Kotak Institutional Equities had noted on Sunday.

Pressure from sales by FPIs was countered by domestic institutions who shopped for stocks worth R724 crore. That helped the Sensex rebound from its intra-day lows of 26,447.88 points — down 178.03 points — and to close the day 241 points higher at 26,866.92. Interestingly, domestic institutions have been sellers in June so far, off loading stocks worth R1,917 crore.

Market watchers believe there could be volatility in the near term. “Most FPI investors view India as a preferred and stable market in an uncertain world given the powerful appeal of its macroeconomic stability, ongoing economic and social reforms and longterm growth prospects.

They will now have to grapple with India’s Rexit and and a possible Brexit in the next few days,” KIE wrote.

Credit Suisse wrote in a report it expects the rupee to depreciate to 67.70 in three months and 71 in 12. “We think that the governor’ s unexpecteddeparture is negative for the currency as it raises uncertainty over the new monetary policy framework, managing potential volatility around events like FCNR redemption in September -November 2016,” the brokerage noted.

The rupee was weak even in the offshore market. The onemonth offshore non-deliverable forward (NDF) fell by 0.49% to 67.75 to the dollar in the evening. The three-month NDF weakened by 0.50% to 68.43. Apart from the yen and rupee, most Asian currencies were trading in the green on Monday. Market watchers said they believe the central bank may have intervened at levels of close to 67.60, although this could not be confirmed.

Economists at Bank of America observed that while changes at the RBI excite media interest, “markets typically move on if the successor proves himself, as is mostly the case”. They expect RBI intervention to smooth any rupee volatility. “In case of Brexit later this week, it would likely allow any US dollar strength to play out. Our Asia forex strategists expect the rupee to depreciate to Rs68.5/$ in September from Rs67.3/$ today,” they wrote on Monday.

Economists at Citigroup said that while some knee-jerk reaction to the event — the RBI governor not staying on for a second term — was possible, they expect the markets to wait for more clarity on the new name and, more importantly, his views on continuity versus change. “If the new governor is able to strike a right balance between the two then he will gain credibility and market focus is likely to shift back to improved macro fundamentals ,” they observed. Ci tigroup economists also said that maintaining continuity in central bank stance is a key metric of a stable economy. “We think that some of the changes brought in by Rajan (flexible inflation targeting doctrine, CPI headline being the target) are irreversible. However, the new governor might have different views on appropriate level of real interest rate, pace of attaining the 4% target given growthconsiderations and liquidity management framework ,” they wrote.