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Business News/ Market / Stock-market-news/  Raghuram Rajan’s exit plan shocks foreign brokerages
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Raghuram Rajan’s exit plan shocks foreign brokerages

Brokerages predict negative impact on the rupee and the stock markets in the near term, adding the risk of unfinished jobs looms

Credit Suisse expected uncertainty to prevail until at least the name of the successor is announced, which is the next thing to watch out for. Photo: Abhijit Bhatlekar/ MintPremium
Credit Suisse expected uncertainty to prevail until at least the name of the successor is announced, which is the next thing to watch out for. Photo: Abhijit Bhatlekar/ Mint

Mumbai: Foreign brokerages expressed their shock and displeasure on Reserve Bank of India (RBI) governor Raghuram Rajan’s sudden announcement of not opting for a second term, over the weekend.

Late on Saturday, in a surprise move, the RBI governor announced he will not opt for a second term and will return to academia after his term ends in September.

“Before the potential Brexit shock, the Indian market will need to weather the Rexit shock," CLSA said in a note.

“RBI governor exit comes as a downside surprise," Credit Suisse analyst Deepali Bharghava said in a note, pointing that political pressures may have at least partly contributed to his decision, rather than purely his voluntary choice, judging from his message.

“The immediate near-term impact is negative for INR and equity markets, especially in the context of the upcoming Brexit worries and large US dollar outflow worries as NRI deposits mature," CLSA analysts said, adding that they continue to maintain their cautious view on the market owing to the mismatch between valuations and fundamentals.

As expected, the rupee and stock markets reacted negatively. BSE’s benchmark equity index Sensex fell as much as 0.67% or 178.03 points to 26,447.88, but recovered later to trade higher.

At 10.49am, the rupee was trading at 67.38, down 0.44% from its previous close

“This is a negative surprise as markets (and we) were expecting him to continue. Dr. Rajan added credibility to the RBI and there is no obvious successor of a similar stature," Nomura economists said in a note on Sunday.

“The Indian rupee is, meanwhile, bracing for an exit of its own," DBS Group said in a note, pointing to Rajan’s announcement.

The risk of unfinished jobs also made the brokerages nervous. The clean-up drive of banks’ balance sheets and the setting up of a monetary policy committee were key among his unfinished business

“There is also a risk of some delay in unfinished reforms such as formation of a monetary policy committee, bank restructuring and allowing repo transactions in the corporate bond markets," economists at Nomura added.

According to Citigroup, building a consensus around a flexible inflation targeting framework in a short time frame would probably be the defining contribution of Rajan.

“While achieving macro stability was an important milestone, cleaning up of the banking system is work in progress," a Citigroup economist said in a note on Sunday.

CLSA pointed that Rajan has played a big role in building India’s credibility among the international investment community and his exit would disappoint many investors, but it does not believe it’s an end to the “India story".

“However, we do not believe this is an end of the ‘India story’. The government’s policies to contain food inflation have played a large role in containing overall inflation. The future will depend on who the successor is," CLSA said.

Credit Suisse expected uncertainty to prevail until at least the name of the successor is announced, which is the next thing to watch out for.

“Of the key names that are being considered for the post of the governor as per the media, three are veterans of the RBI who we think broadly were in sync with the new monetary policy framework, introduced under Dr Rajan," Credit Suisse added.

Some felt the transition of governorship will be smooth.

“Experience suggests that the baton usually passes smoothly at the RBI, although changes always excite media interest. Markets typically move on if the successor proves himself, as is mostly the case," Bank of America-Merrill Lynch said in a note on Monday.

“Gov Rangarajan (1992-97) broke the back of money driven inflation. Gov Jalan (1997-2003) successfully combatted the 1998 Asian crisis and nursed a solid recovery through 9/11 and the dotcom bust. Gov Reddy (2003-08) stockpiled FX reserves to shield the economy from the 2008 global financial crisis," BoFa-Ml economists pointed out.

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Published: 20 Jun 2016, 12:06 PM IST
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