Stocks, rupee seen falling after RBI chief Rajan declines another term2 min read . Updated: 19 Jun 2016, 05:45 PM IST
Rupee is expected to fall by at least 50 paise in opening trade on Monday but bankers say RBI will continue to keep a tight leash on the currency through intervention
Mumbai: Domestic share indices and the currency are expected to drop in a knee-jerk reaction on Monday after the Reserve Bank of India governor Raghuram Rajan said that he will not seek a second term as the head of the central bank.
In a letter to the RBI staff, Rajan has said that he would return to academia after his current term ends on 4 September.
“....on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed," said Rajan.
While there has been speculation on Rajan’s term for some time now, the announcement from Rajan came as a surprise. Some parts of Rajan’s letter released on the central bank’s website also led to speculation that the government may not have supported a second term for Rajan.
“While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia," Rajan’s statement said.
Bankers and market analysts said a quick announcement of a successor is needed now.
“It is very crucial that the government should clarify who comes in place now to avoid volatility in the markets. These are tremendously big shoes to fill and overseas investors will be looking at his exit with negativity," said Ananth Narayan G, regional head—financial markets for South Asia and ASEAN at Standard Chartered Bank.
The biggest impact will be felt on the rupee.
“Currency, is where the pressure will be maximum, Capital account surplus has gone down steadily for the last year and a half. Further that we are likely to see FCNR outflow of around $20 billion coming in next six months, which is around 1% of GDP. Even if Rajan had stayed he would have seen the pressure on rupee. Now, with his exit, the pressure on rupee could exacerbate," said Saurabh Mukherjea, chief executive of Ambit Capital Pvt. Ltd.
The rupee is expected to plummet by at least 50 paise in opening trades on Monday, but bankers said that the central bank will continue to keep a tight leash on the currency through intervention.
“Of course, markets will be weaker on Monday and traders would take advantage to bring down the rupee, but i guess the RBI will be watching as well," said Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch.
Market speculation on who will be the next governor has already started. Names of deputy governor Urjit Patel, chairman of State Bank of India Arundhati Bhattacharya and chief economic advisor Arvind Subramanian are doing the rounds as possible candidates.
Rajan’s decision to exit comes at a time when market volatility is on the rise. Given the prevailing uncertainty in the markets due to key events such as referendum on Britain’s exit from the European Union on 23 June and the redemptions of the foreign currency non-resident (FCNR) deposits due between September and November, Rajan’s exit would add to the volatility, bankers said.
“The timing is the worst because already there is so much pressure on markets because of global uncertainties. The change at the helm of RBI puts continuity under a cloud and that is more detrimental than anything," said an economist at a private bank seeking anonymity.