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Mumbai: When Reserve Bank governor Urjit Patel abruptly resigned late on Monday, it seemed like the markets’ wrath will be incurred sooner rather than later. After all, both the rupee and the Nifty fell over 1.5% in overseas markets such as New York and Singapore on Monday. The unexpected resignation hurts the central bank’s credibility and is likely to provoke a “fierce response" from markets, with the rupee probably plunging on Tuesday, said Hugo Erken, senior economist at Rabobank International.

But after having slept over the matter, investors were calm while trading in the domestic markets. The rupee retraced more than half of its early losses on Tuesday and ended only 0.7% weaker. It weakened further late on Tuesday after the government appointed former finance ministry official, Shaktikanta Das, as the new governor. “It’s an underwhelming choice, even when compared to previous bureaucrats that have held the position," says a senior economist who did not want to be identified.

Nevertheless, the rupee is still above the lows it had reached in the non-deliverable forwards market soon after Patel’s resignation was announced. Ahead of Das’s appointment, bond prices had intriguingly inched up. And the Nifty behaved even strangely, ending the day 0.6% higher, having recovered all of the losses in early trade.

The fact that this calm reaction comes on the back of electoral losses for the ruling BJP almost suggests that the markets are relieved by Patel’s exit. Shares of Yes Bank Ltd and Dewan Housing Finance Corp. Ltd rose 8% and 5% respectively, and those of other banking and non- banking financial companies also rallied. It’s evident investors in these companies are relieved that the tight regulatory regime under Patel is behind them. By this logic, Das’s appointment may well be cheered as well.

“The fact of the matter is that some sections of the market were displeased with the central bank’s tough stance on liquidity and regulation of banks; as such, the relief rally in some of these stocks isn’t surprising," said a fund manager who asked not to be identified. “Under Patel, the central bank had become unresponsive and unapproachable; the governor’s exit is being seen as a relief," is a common refrain from traders and analysts.

Needless to say, this is a myopic view, which the markets are well capable of. Even when Raghuram Rajan unexpectedly didn’t get an extension in his tenure as RBI governor, there were fears of volatility in the markets initially. But the markets had even then taken the news in its stride, on the back of a view that the next governor would be more dovish in his stance.

In fact, the markets’ sanguine view of the changes in RBI’s leadership is troubling. “A relaxation on the regulatory front may yield near-term gains such as more liquidity, but just the fact that the central bank’s independence is under threat is a far more worrying factor from a medium-term perspective," says the head of research at an institutional brokerage.

“The markets will watch every move of the new governor, to see if the government’s demands are being given in to," says the above-mentioned economist. As such, the markets’ reaction may not be immediate, but may get reflected in the days to come. The markets should also be worried about the large shift in vote and seat share in three states, especially with political pundits linking it to the agrarian crisis.

All told, while the markets’ calm response to these twin blows may be puzzling, as the fund manager quoted above says, “Often, price adjustments to such events play out over time."

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