The rupee came under pressure on Monday, following Reserve Bank Governor Raghuram Rajan's surprise announcement to not seek a second term. Dr Rajan said on Saturday that he will return to academia after his current three-year term expires in September, ending weeks of speculation about his future as RBI governor. Meanwhile, equity markets overcame a weak start to edge higher.
- The rupee slumped nearly 1% to 67.68 per dollar today
- The selloff was triggered by Raghuram Rajan's no to term 2 as RBI chief
- The Sensex also fell before making a sharp recovery
Here are the latest developments:
1) The rupee, which fell to near one-month low of 67.68 dollar in early trade, recovered to 67.37 by 12.40 p.m. Traders had predicted the currency to fall by 15 to 20 paise, but the rupee fell by as much 60 paise in morning trade on Dr Rajan's exit.
2) The rupee's pullback from day's low of 67.68 per dollar was helped by the Reserve Bank's reported intervention to curb the volatility in the currency, traders said.
3) Dr Rajan has been a key force behind the outperformance of the rupee vis-a-vis other currencies, so his departure from the central bank is being seen as a major negative by foreign investors, analysts said.
4) Traders fears that Dr Rajan's exit may lead to capital outflows from the country at a time when global investors are already nervous ahead of the key Brexit referendum in UK on Thursday. India has attracted over $60 billion in foreign portfolio investments since Dr Rajan's appointment in September 2013 and some investors could start getting skittish, traders warned.
5) The focus has now shifted to Dr Rajan's successor, with analysts saying that they do not expect any long-term impact to markets as long as his replacement is seen as credible and somebody who can defend the central bank's autonomy at a critical juncture in its history.
6) "The choice of successor must be based on finding a leader that will continue the new monetary project, targeting lower inflation," said the head of portfolio management for emerging Asia at PIMCO, Luke Spajic.
7) Equity markets, which opened with 0.7 per cent cut, also rebounded to trade higher today. The Sensex and Nifty rallied over 0.6 per cent, tracking gains in global equity markets and the onset of monsoons in Mumbai. Gains were led by IT stocks, which rose tracking the weakness in the rupee.
8) The inherent strength in India's macro environment is also supporting domestic stock markets, analysts say. "Markets generally have come become more resilient to outflows to negative news given the improvement in fundamentals," said Mitul Kotecha, head of FX and rates strategy for Barclays in Singapore.
9) Some analysts expect Dr Rajan's exit to boost equities as interest rates are likely to fall further.
"A decision not to renew Rajan would create a lot of unhelpful noise... it would be a negative for the currency but an initial positive for the stock market since it would mean easier monetary policy," said Christopher Wood of CLSA.
10) Meanwhile, Fitch Ratings said India's sovereign ratings will not be affected solely by the unexpected departure of Dr Rajan at the end of his term in September, adding the country's policies would be the main driver.
(With inputs from agencies)