Reserve Bank of India Governor Urjit Patel resigned citing “personal reasons” at a time when there was friction between the central bank and the government over certain contentious issues.
While the move is widely expected to send the country’s financial markets on a downward spiral, brokerages say there will be an impact, but only for a while.
The lack of policy coordination between the RBI and the government will mean “higher India risk premium” in the short-term as domestic uncertainty is already rising with the upcoming elections, Sonal Varma of Nomura wrote in an emailed note.
“In our view, the resignation should have no bearing on the direction of monetary policy, which is decided by the monetary policy committee, and which we believe is set to take a dovish skew owing to fundamental reasons (low growth-low inflation). However, decisions on the regulatory functions of the RBI could be affected.”Sonal Varma
This will also lead to a lot of speculation and muddy the waters for the market, according to Macquarie’s Inderjeetsingh Bhatia. “Market reaction will likely be swift regarding both the Governor resignation and elections results,” he wrote. “Fiscal/monetary policy outcomes now get intertwined with political outcomes and steps by the government in the next few days become very critical.”
Indranil Sen Gupta of Bank of America Merrill-Lynch has a definite view on the impact on monetary policy. “What next, at the RBI, after Governor Patel’s resignation? We continue to expect the RBI MPC (monetary policy committee) to cut rates by 25 basis points in either February or April with November inflation set to dip to 2.8 percent on Wednesday,” Gupta said in a statement.
Yet, Indian equities will continue to do well next year, according to UBS’ Tanvee Gupta Jain. “Any risk to the central bank's credibility is unambiguously negative for Indian assets and that's how markets have reacted to the news,” Jain said in a statement. “Indian equities are a top trade for emerging markets in 2019, and we expect it to do well in the midst of the current market circumstances.”
(This story has been published in an arrangement with Bloomberg Quint.)
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