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. “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 seem to be remarkably calm while trading in the domestic markets. The rupee has retraced more than half of its early losses and is now only 0.6% weaker compared to Monday’s close. Bond markets have strangely inched up. And the Nifty is now 0.5% higher than Monday’s close, having recovered all of the losses in early trade.
To think 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 have risen 6% and 5% respectively, and those of other non-banking financial companies have risen by about 2%. It’s evident investors in these companies are relieved that the tight regulatory regime under Patel is behind them.
“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 refrain we’re hearing from traders and economists alike.
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.
The fact remains that Patel’s resignation is unprecedented and increases the risk premium for Indian markets, especially for foreign investors. And it is imperative that the government handles the appointment process of the next governor well, and try and relieve investors’ nerves. “If a credible replacement is appointed quickly, we expect sustained market impact to be insignificant,” analysts at Credit Suisse wrote in a note to clients.
Of course, much depends on the government’s next moves. As such, there remains a fair bit of uncertainty. The markets may be ignoring the risks from the governor’s departure for now, but that doesn’t mean they have brushed off these risks completely. As the fund manager quoted above says, “Often, price adjustments to such events play out over time.”