Not Rexit, but Brexit is what Indian markets are more bothered about

The mature reaction of the Indian markets after Reserve Bank of India governor Raghuram Rajan decided not to take a second term has come a surprise for all.

Though the stock markets opened about 0.6 percent lower, they quickly recouped losses with the benchmark indices Sensex and Nifty galloping into the green territory. The rupee too largely bounced back from the lows hit at the open against the dollar.

At 12.05 pm, the Sensex was at 26,738.81, up 112.90 points or 0.4 percent from previous close.

Here are three reasons why the market managed to hold the ground today:

Better global cues: Apart from the Rexit - a term coined by the investor community for the exit of Raghuram Rajan - the other issue that was bothering the global markets was Brexit - the UK’s exit from the European Union. The government there is conducting a referendum on whether the country should stay or leave the union on 23 June.

Last week’s opinion polls showed that the “Vote Leave” faction is neck-in-neck with the Britain Stronger in EU campaigners. Though the UK’s exit from the EU may not result in a global recession-like situation, there have been fears that it will have a deep negative impact on the global economy.

However, now the fears that “Vote Leave” may gain dominance are receding. In reaction, Asian stocks gained on Monday, boosting a recovery in both sterling and investors’ taste for risk assets. Oil also extended gains in Asian trading as a weaker dollar and easing worries over Britain’s exit from the EU supported crude. The Indian markets holding ground has to be seen in this context.

Investors are not that worried about Rexit: Investors approach to developments at the RBI was best explained by high profile investor Rakesh Jhunjhunwala. “We should not forget that the policies are going to continue. Nothing really change whether Rajan is there or not… Rajan is not the only man in India who will bring in continuity. I believe the legacy of Rajan at the RBI will continue,” he told CNBC-TV18 in an interview.

Markets got ample time to adjust: Timing of Rajan’s announcement that he would not take up a second term at the RBI came has to be noted - it came on Saturday, giving the market players and the government ample time to maneuver. Initial reaction in the market was indeed negative. But then buying emerged at the lower levels as probably the anticipation of a deeper fall was overdone.

All in all, the markets are more bothered about not Rexit but Brexit.

As AK Prabhakar, Head of Research, IDBI Capital said, “In fact, there are much bigger international concerns that investors are looking forward to. If UK exits from European Union on 23 June, there will be chaos in international stock markets and a straight 10 percent crash in global equities is not ruled out.”

He also pointed that even bigger concern for India arises on the currency front.

“We are expecting the rupee to depreciate between 70-72 levels against the dollar by year-end, mainly because of withdrawal on Foreign Currency Non-Resident (FCNR) deposits in September, and the US election later this year, which is likely to strengthen US dollar against major international currencies, including India,” said Prabhakar.

The rupee today opened 0.89 percent down at 67.68 over Friday’s close and quickly recouped part of its losses. At 12.05 pm, the currency is trading at 67.37 against the dollar, down 0.43 percent. The RBI is said to have sold dollars around 67.5, according to a Reuters report.

BofA Merrill Lynch Global Research expects the RBI intervention to smoothen any rupee volatility.

“In case of BREXIT later this week, it would likely allow any US Dollar strength to play out till Rs68/USD levels. We calculate that banks should be able to fund US$10bn of outflows on maturity of US$26bn of FCNR deposits in September. If BREXIT stalls capital flows, we expect the RBI to roll over the 2013 FCNRB scheme,” the global brokerage house said.