Raghuram Rajan exit decision looms over equity, money markets

Investors are awaiting Monday stock-market opening with their fingers crossed. Will the decision by Raghuram Rajan to hang up his boots at the central bank influence foreign investors in India? Will Rexit, as social media called the decision by the RBI governor to exit, on the lines of Brexit (an abbreviation for possibility of British exit from the European Union when the country holds a referendum on June 23), wreck markets, with a deep impact?

Many believe that Rajan's decision by the weekend may leave a negative impact and spur a knee-jerk reaction on Monday, and the government may be forced to quickly bring in a credible and convincing person at the helm. Many others believe Rajan's decision couldn't have been at a worse time as India copes with a delayed monsoon and the global markets face potential volatility on account of Brexit.

"It's highly probable that unless the government comes with an equally strong name in coming months, there would be outflow of foreign capital from India and markets would get fairly volatile in the short term. Especially on Monday, we can see a little bit of knee-jerk reaction," said Nikhil Khandelwal, managing director of Systematix Shares & Stocks.

Samir Lodha, a forex expert and MD, QuantArt Market Solutions, however, dismisses any major impact. "Apart from a knee-jerk negative reaction I don't see much problem for the economy. Rupee and inflation are steady more because of commodity price softening and low rates of developed world. Rajan has got more credit than due," said Lodha, adding that any knee-jerk reaction in the financial markets will be an opportunity for investors.

Forex experts expect the rupee to open at least 30 to 40 paise lower and the RBI may step in to sell dollars to protect the currency if there is some volatility. Dollar positions in the market are expected to get unwinded and the exporters are also unlikely to come in at this stage. "We expect dollar outflows reacting to the news on Raghuram Rajan and the yields in the bond market are also expected to rise by 3 to 4 basis points," said a forex dealer.

Another senior forex expert said, " Initial volatility will settle down but the market will keenly watch who the successor will be after Rajan leaves. The reactions in the equity markets will be contained as the domestic government institutions will try and protect market positions but the forex and bond positions may be weakened a bit. The losses may be recouped by the end of the day but initials losses are expected both on the bonds and on the rupee. "

Ashutosh Khajuria, executive director and chief financial officer, Federal Bank, said forex markets may have some temporary jerks but there would not too much of upheavals in the forex markets. "Rajan has build a brand equity for India in the international markets. It would have been good if he was around to see through his reforms but RBI is an institution of very capable and competent officials who can steer clear the economy in case of any stress. India economy is in a comfortable position as far as the fiscal deficit is concerned and other macroeconomic indicators."

According to Lodha, Rajan is credited for softened inflation and steady currency markets. "Inflation came down more because of commodity price softening than monetary policy. On the other hand, high interest rate made it very difficult for Indian companies to do business and banking sector saw stressed assets. When Rajan took over, currency market already was steady thanks to comments from Bernanke. However, Indians credited Rajan for the same," he said.

"Current account deficit is turning into surplus because of softening of crude price. and Rajan has little role there," adds Lodha.

According to him, Rajan's effort to clean up the banking system and his ability to speak up boldly what is right is certainly something which is appreciable. "Also, the comfort that Rajan will intervene aggressively on both sides made Indian rupee a stable currency," said Lodha.

Khandelwal said Rajan was clearly seen as a strong central banker in this tough global economic environment with a clear implementation roadmap for the two major macro factors - inflation and interest rates.

"He has also been instrumental in initiating a clean-up of banks through a systematic process of asset quality review. Rajan's decision is a negative development from a short-term perspective; and rupee and markets should remain volatile over the course of next four days," he said.