What is the Impact of Rajan’s Exit on India?

June 20, 2016

The India’s market braces for a tough week after the Reserve Bank of India Governor Raghuram Rajan announced his exit when his term ends in September in addition to the outcome of the EU Referendum. It is expected to be a wild ride for the Indian rupee as the currency made it to the top list of attention together with the India’s central bank.

IN - Rajan RBI scr jun 20The Economic Times poll showed that stocks, bonds and rupees are expected to slump in the short term reflecting the investors’ reactions to the sudden announcement. Nirmal Jain, the chairman of IIFL Holdings, said that the market was disappointed because his second term would benefit the market and the choice of his successor would be watched closely.

IN - Rajan INR scr jun 20

IN - Rajan Inr msg jun 20

The timing of the announcement ahead of the EU Referendum can hurt the market sentiment further according to Divya Devesh, the foreign-exchange strategist for Asia at Standard Chartered Plc. He forecast the negative reaction of INR and further volatility. Rajan was credited for cutting currency swings by more than half and rebuilding the foreign exchange reserves during his term.

Things are not easy for the stock market, either. The volatility index (VIX), a measure of traders’ expectations of near-term risks, is expected to surge above 20 levels according to Amit Gupta, head of derivatives at ICICI Direct. The measure of  the Chicago Board Options Exchange (CBOE) Emerging Markets Volatility Index also increased by 35% in more than a week, which signals the investors’ anxiety.

Both the Reserve Bank of India and its governor became trending topics on Twitter in India as the crowd divided into two sides. One side is supporting Rajan and his achievements for India, while the other side is arguing that the governor was holding back India’s growth.

However there is no use in trying to change the announced decision. India will soon look to find the successor to Rajan. Arundhati Bhattacharya, the chairman of SBI, is the leading candidate according to the ET poll followed by Arvind Subramanian, the current chief economic adviser to the government of India. The other two candidates are Urjit Patel, the deputy governor of RBI, and Shaktikanta Das, the economic affairs secretary in the Finance Ministry. According to Finance Minister Arun Jaitley, a successor will be announced soon.

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