Dubai
India’s stock markets and the rupee are headed for a bout of volatility after the influential central bank governor, Raghuram Rajan, decided not to seek a second term in office. The extent of the volatility and its tenor will be decided by how quickly the government names a successor as well as that person’s identity. (Rajan will continue in the role until early September.)
“There’s no shortage of talent for the top position and a few names are already being mentioned for the top position at the Reserve Bank of India,” said Paras Shahdadpuri, Chairman of Nikai Group and senior member of Indian Business & Professional Council. “I think the government has moved quickly to relay its thoughts on the transition. But, short-term, foreign investors will wait until there is clarity on the new governor’s policy strategy and whether there will be a marked shift from that overseen by Rajan. Any short-term concerns will hinge on that.”
As soon as the markets opened Monday in India, the rupee came under immediate pressure, weakening 0.7 per cent to 67.5350 a dollar as of 9:07am in Mumbai. The currency has slid 2 per cent this year, making it Asia’s worst-performing currency. Currency exchange houses in the UAE did not report any spike in India-bound remittances early on Monday, but added that expat Indians could be waiting for a further weakening.
According to Adeeb Ahmad, CEO of LuLu International Exchange, “With economic development on track in India you can expect the rupee to improve in the long run. We feel the rupee would not breach 65.80 in the near future. But there would be an impact in the short term following the news of Raghuram Rajan not seeking a second term as RBI governor.”
If the Indian stock markets do go on a wild ride in the coming days, banking stocks as well as those in real estate and infrastructure could be in for intense pressure from investors. Banking stocks, in particular, could be hammered if it is felt that the new candidate will not be as aggressive in cleaning up the bad loans in the sector as Rajan was. That policy also meant banks had to get aggressive in naming and shaming economic defaulters, with Vijay Mallya of Kingfisher group being the most prominent. (For the markets to show a return to stability, nature needs to do its bit, through offering up a normal monsoon.)
During his tenure, Rajan’s overriding policy perspective was not to let inflationary pressures overwhelm the economy. To this end, he kept interest rates within a narrow — but still high — range, and this has been cited as one factor leading to pinpricks in his relationship with senior ministers — and some vocal opponents outside of the government.
“Hopefully, the government will not allow his exit to signify a return to fiscal and monetary extravagance at the expense of economic stability and sustainability,” said Rajendra Kalur, CEO at TrustPlutus Wealth Managers India. “To ensure this, the government has the difficult task of appointing a governor who is not only autonomous but seen to be one. And discreet enough to draw the line.
“But the exit of Rajan has put paid to the romantic symbolism some experts painted about India, reminiscent of the [Paul] Volcker — [Ronald] Reagan era.” (Volcker was the US Federal Reserve Governor at the time of the Reagan administration.)
True, it was with Rajan that the Reserve Bank of India’s governorship assumed such a high-profile way beyond the financial, business and government circles. His every public pronouncement — more often than not understated — was put under the scanner for wider meanings.
With him vacating the scene, the Indian government will have some of its image getting tarnished in the process. Before his ascension to Prime Minister, Narendra Modi had been a virulent critic of any policy that led to a weak rupee. Now it will be a weakening currency his government has to cope with.
Plus, there are matters related to perception — “If politics is going to take centrestage in the new governor’s appointment, it will not do much good for the government in the near term,” said Glenn Netto, an ad industry professional and buying head at BPG Maxus. “It was not just Rajan’s policies— his presence right through his governorship immensely helped stabilise the Indian economy, the markets as well as domestic and overseas investor confidence.”
BOX — The rupee has been through a lot
From a low of 68.80 to the dollar in August 2013, the rupee revived to 58.55 in May 2014, which was when the general elections delivered a resounding victory for the BJP.
“Various factors have been attributed to the volatile currency movement, including falling oil prices, as well as weakening Asian and global markets,” said Adeeb Ahmad of LuLu Exchange. “Of late, much of the fluctuations are attributed to the Fed rising interest rate, and FCNR maturing from September to December 2016 to the tune of around $30 billion along with Brexit fears.
“We foresee there would be an impact on the rupee in the short term following the news of Raghuram Rajan. But looking at the major currencies’ position, we feel the rupee might not weaken to the extent of expectations.”
The rupee’s range against the dollar was between 58.50 and 64 during 2014. In 2015, it was between 61 and 66.65. In the year to date, the range fell between 66.25 and 67.68
-M.N.
