Raghuram Rajan exit: Market experts see Sensex, rupee taking hit early Monday

India’s key stock market indices, the benchmark Sensex and Nifty, may react adversely on Monday morning in reaction to Raghuram Rajan’s decision to step down as RBI governor after his three-year tenor ends in early September. Rajan being a favorite with both domestic and international brokerages because of his bold policy initiatives and straight talks had received overwhelming support from all corners over last few months, particularly, after he was repeatedly attacked by the BJP member Subramanian Swamy for hurting growth and maintaining hawkish stance.

In a message to the RBI staff, Rajan made it clear that he “will be returning to academia when my term as Governor ends”.

However, Rajan also said, “I will, of course, always be available to serve my country when needed.”

Stock market experts believe there could be some knee-jerk reaction in early trade, while currency market may also turn wobbly following the governor’s decision not to seek an extension for his second stint at the mint street.

According to a Reuters report, traders predict the rupee would likely fall by 0.15 to 0.20 rupees per dollar at the start of trading, but the RBI would intervene to prevent excessive volatility. The rupee closed at 67.0775/67.0875 per dollar on Friday.

The Sensex, which ended 100 points higher on Friday at 26,626, may start the session on Monday with a negative bias, while a weak close on the Wall Street could fuel further weakness in the market, say market analysts.

“There could be initial fall in the market, as investors were really hoping Rajan might get a second term. Now that, he has decided not to continue after his first term, focus would now shift more over who will be the ideal candidate replacing Rajan, and what would be the government’s stance, especially at a time when it is striving to boost growth in a subdued global economic environment,” said G Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory.

Foreign brokerages, which were mostly forthcoming in their support for Rajan, feel the downward risk to India’s stock market and currency market is much higher in the near-term as most of them believe Rajan’s policy decision were instrumental in stabilising the rupee and controlling the inflation.

“We expect Sensex to fall in early trade on Monday, as his sudden decision not to continue as RBI governor has come as a surprise for most of them. In fact, most foreign investors were hoping the government may give him extension based on his track record,” said an official with a foreign brokerage, who refused to be identified due to the company’s policy.

The governor is highly respected among global investors for his expertise and track record. If he were to leave the Reserve Bank of India, “the immediate impact would include a fall in the ­Indian stockmarket and a weakening of the currency’’, said Mohamed A. El-Erian, former chief executive of money management giant Pacific Investment Management few weeks back. “Indeed, I suspect that many share my view that he is one of the very best central bank governors in the world,” said El-Erian, chief economic adviser for financial services firm Allianz.

Nilesh Shah, managing director of domestic mutual fund brokerage firm Kotak Mahindra Asset Management, had also said, “Rajan has done a fantastic job so people want that policy ­continuation to happen.”

More recently, the support for the RBI chief had come from Infosys co-founder NR Narayan Murthy. “India should be very fortunate to have him (Rajan) serve this country for not just one, I would say two more terms,” Narayana Murthy had said in a interview to the Economic Times last week.

According to Murthy, Rajan had been instrumental in steering the country’s monetary policy, despite facing a barrage of criticism from some elements in the government over last few months. But, Rajan’s decision to keep a check on consumer price inflation, which has been in low single-digits for a year now, has won him several accolades from domestic and international investment fraternity in recent past.

Of late, online petitions seeking support of a second term for the former IMF chief economist had garnered close to 60,000 signatures. The petition had urged Prime Minister Narendra Modi to allow a second term to Rajan at the RBI.

Over the past year, Rajan had cut interest rates three times, negotiated a new monetary policy framework with the government and pushed banks to come clean on their nonperforming loans.

A media-based survey done last month also found that 90 percent of CEOs wanted Raghuram Rajan to continue as the governor of Reserve Bank of India.

However, Rajan had been facing a continuous attack from within the ruling government. Among others, Subramanian Swamy, a BJP leader, criticised RBI chief’s failure to lower interest rates and boost the economy. Earlier this month, Subramanian Swamy launching another attack on RBI Governor Raghuram Rajan, said he had planted “a time bomb” in the Indian financial system that will explode in December.

Swamy wrote twice to Modi calling for sacking of the RBI chief even before his term comes up for renewal in September. Swamy last month said Rajan’s interest rate policy had led to “the collapse of industry and rise of unemployment in the economy”.

On 26 May, Swamy had levelled six allegations against Rajan and asked the Prime Minister to sack him immediately. He had also claimed that Rajan was “mentally not fully Indian” and alleged that he has “wilfully wrecked the economy”.

However, Chokkalingam of Equinomics summed up saying that although Rajan’s exit decision could weigh on the market in initial trades, broader market would soon recover. India is not a one man phenomena, and foreign investors will have to come back to India as the country offers them huge growth opportunities, which has been missing in China, Japan and other European markets for over a year.