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Markets Don't React to Rajan's Exit
Mon, 20 Jun 09:30 am

Major Asian stock markets have opened the day on a positive note. Stock markets in Japan and Hong Kong are trading higher by 2.2% and 1.1% respectively. Benchmark indices in Europe ended their previous session on Friday on a positive note with stock markets in UK ending the day higher by 1.2%. The rupee is trading at 67.16 per US$.

Indian stock markets opened the day 200 points lower but recovered quickly. The BSE Sensex is trading lower by 26 points (down 0.1%) and the NSE Nifty is trading lower by 13 points (down 0.2%). Further, BSE Mid Cap and BSE Small Cap are trading lower by 0.2% and 0.1% respectively.

Barring capital goods sector, major sectoral indices have opened the day in red with stocks from telecom and banking sectors are witnessing selling pressure.

RBI governor Dr Raghuram Rajan has decided to deny another term at the central bank. The recent political attack on Dr Rajan and his plain speak on some of the government's plans and policies seem to have prematurely terminated the tenure of one of India's most deserving central bankers. And his exit could likely put India's economic stability at a temporary risk.

As Ajit Dayal wrote in The Honest Truth recently...

  • In a world where investors are looking for countries likely to have imbalanced budgets, high debt, and a need for foreign exchange - India needs to ensure that the "bright spot" adjective does not go to our heads and a lax government or RBI messes up. Governor Rajan's two eyes see the pitfalls, the risks, and the bottlenecks that can - once again - ruin yet another opportunity for India to break out of its one-eyed rate of growth. And risk seeing a decline in the INR.

Reportedly, his exit is likely to be marked by currency market volatility. Economists have forecasted the rupee to weaken to a low of 70 per dollar by the end of the year. There are various uncertain macro factors prevailing which can drag the rupee lower.

The first of such recent events could be UK leaving the European Union. This could lead to an economic chaos, forcing a safe-haven flight to the dollar assets. The second being the threat of a US Fed hike in interest rates in the later part of the year. The third being dollar outflow on account of redemption of FCNR deposits of around US$ 20 billion.

Moreover, the capital inflows have also fallen to a seven year low in the March quarter. Further, the rising prices of the crude oil could add further pressure to the rupee. While, Dr Rajan has been successful in curbing the volatility in the dollar-rupee exchange rate, it would be interesting to see how the new RBI governor establishes his/her credibility on this front.

In another news update, cash reserves at automobile companies rose to the highest levels in FY16 on good operational performance coupled with cheaper raw material.

Cash reserves at Ashok Leyland, Maruti Suzuki India, Bajaj Auto, TVS Motors and Mahindra and Mahindra rose to the highest levels in absolute terms in seven years. Reportedly, most of these companies are expected to use the cash reserve in strengthening their existing research and development (R&D) and new model introduction. With a lot of existing production capacity remaining unutilized, there are no major substantial investments lined up on building new capacities. This in-turn has also boosted the cash reserves.

Strong cash reserves in the balance sheet will ensure smooth running of the business and would help in meeting any exigencies if and when it comes.

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Jan 19, 2018 (Close)