Impact of RBI Governor Rajan’s Exit Muted By FDI Reforms

When India’s Reserve Bank of India’s governor Raghuram Rajan announced that he would not be signing up for a second term , financial analyst expected the news to jolt the Indian markets severely but the announcement of a fresh round of reforms in Foreign Direct Investment (FDI) helped to quell disquiet in the markets.

Stock markets dropped this week on opening as expected, losing over 170 points but revived after news broke that FDI norms have been eased in a host of industries. Aviation stocks and those in the defence industry rallied especially. Key airline stocks such as Spicejet and InterGlobe moved up by over 7 percent as did companies such as Reliance Defence and BEL.

Markets finally ended up by 437 points at close of trading. However some experts believe that Rajan’s exit comes at a bad time considering the delayed monsoon and global uncertainty including Brexit. The government is under pressure to bring in a credible and respected authority as replacement primarily to assuage concerns of foreign investors.

Financial Times

In a statement, Nikhil Khandelwal, managing director of Systematix Shares & Stocks said,

It's highly probable that unless the government comes with an equally strong name in coming months, there would be outflow of foreign capital from India and markets would get fairly volatile in the short term.

The rupee fell by over 60 paise on the news of Rajan’s exit but then recovered after the RBI intervened selling almost $300 to $400 million. Large corporate houses also offloaded almost $200 million. Forex experts believe that the rupee might continue to see pressure and there will be more capital outflows out of India.

Ashutosh Khajuria, executive director and chief financial officer of the Federal Bank stated that forex markets would settle down in time and while it would have been good to have Rajan around to see through his reforms, RBI as an institution has officials capable of steering the economy.

Samir Lodha, a forex expert and MD at QuantArt Market Solutions said that the standout contribution from Rajan were his efforts to clean up the banking sector and his confidence in speaking up. Additionally Rajan’s strategy of intervening in markets decisively in both directions has resulted in the rupee becoming a stable currency.

According to Khandelwal, Rajan was viewed globally as a strong central banker who was capable of handling the tough global scenario with a steady hand and was seen to have a clear roadmap for managing interest rates and inflation.

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