RBI chief’s decision not to seek second term may roil markets

Equity markets are likely to react negatively on Monday after Raghuram Rajan announced his decision to step down as Reserve Bank of India (RBI) Governor when his term ends on September 4.

Market experts feel that the Nifty could fall at least 100-150 points as Rajan was seen as a crusader improving the fundamentals of the economy.

“I am very, very sad about Rajan’s decision. He stabilised the economy. Under him, the fiscal deficit and current account deficit improved,” said VK Vijayakumar, Chief Investment Strategist at Geojit BNP Paribas.

The decision has come at a time when the global economy is grappling with issues like Brexit and rate hikes in the US. Also around $20 billion is expected to leave India when FCNR deposits mature between September and November.

However, long-term investors need not worry as the economy is in better shape now and hence the shock will get absorbed. India’s foreign exchange reserves were at an all-time high of $363.46 billion in the week ended June 3.

Kunj Bansal, ED and CIO, Centrum Wealth Management, is not overly worried. “Speculation has been going on for some time now. Hence Rajan’s decision should not entirely surprise the market. There could still be some sentiment-based move in the market,” he said. “The ending of Rajan’s tenure does not change anything fundamentally for the economy. India has had many governors in the past who have seen the country through tough times and who, at different times were succeeded by able and knowledgeable governors.”

In the last decade, YV Reddy’s tenure (2003-2008) was the best for Indian equity markets with the Nifty tripling, partly also due to the bull run of 2004-2007. Rajan’s tenure has been the second best with the Nifty gaining 50 per cent (till date).

After he was appointed Governor on September 4 2013, the rupee recovered from its all-time low of 68.85 to the dollar on August 28 (amid the Asian currency crash on news of the US likely tapering its quantitative easing), ending September at 62.77 — a 10 per cent appreciation.

This helped the equity markets also recover. In September 2013, the Nifty and Bank Nifty jumped 5 per cent and 6.3 per cent respectively. Until August, the two indices were down 8 per cent and 28.5 per cent respectively.

By the end of 2013, the markets had recovered as the rupee began stabilising. The Nifty ended rising up 6 per cent while the Bank Nifty closed down 10 per cent.

If Rajan’s entry had a positive impact then his exit could have the opposite effect.