By Jacob Wolinsky. Originally published at ValueWalk.
Raghuram Rajan Departure Shocks The Investing World with many are worried about the implications for India and the global economy. The news was announced via a letter posted on the Reserve Bank of India website on Saturday. However, despite all the big events right now and the fact that many analysts are in the Hamptons on the weekend the event quickly become a big topic and the sell-side is also weighing in.
Financial Times, Flickr – CC 2.0]
Here is what they are saying.
Raghuram Rajan – analysts react to departure
Ambit Capital
Even as all RBI Governors since 1992 have been granted an extension, the current Governor’s term extension is in jeopardy mainly owing to resistance from two important power centers that this dispensation is beholden to – the RSS and the senior bureaucracy in the Ministry of Finance. In view of these unique complications, we reiterate our point that there exist material risks to Dr. Raghuram Rajan continuing as the RBI Governor post-September 2016 and place the probability of his term renewal materializing at 50%. In terms of alternatives that could be considered, we highlight that Dr. Urjit Patel appears to the best option given that he possesses the appropriate skills from a macroeconomics perspective besides holding out the promise of independence.
Elara Securities
Question on Continuity: Of objectives and priorities
One of the landmark recommendations of Financial Sector Legislative Reforms Commission (FSLRC) has been the formation of the Financial Sector Regulatory Appointment Search Committee (FSRASC) which was set up last year and had interviewed candidates for Chief of SEBI, India’s market regulator. The government has already tasked the committee with shortlisting candidates for CB governor. In a break from tradition, this will be the first time the RBI governor will be appointed through this route, which clearly signals a major shift in establishment’s stance to end the special treatment given to CB governor.
Dissuading from name guessing, what’s clear is that the new incumbent will inherit far less discretionary powers and the continuity, in agenda, in objectives and in priorities at Indian CB is thus far more likely. Governor Rajan deserves equal credit with government for this.
UBS
Matters for market sentiment given success with reform/inflation/INR volatility Markets, especially debt/currency markets have recently reacted negatively to any newsflow on Dr. Rajan not getting re-appointed. Both investors and we have been positive on RBI Governor’s efforts, with varying degrees of success, on: 1) Banking sector reforms including financial inclusion; 2) Inflation targeting now formally adopted and 3) Volatility in currency vis-à-vis GEM has been lowered in his term and more so in the last 1-2 years. Beyond near-term sentiment being adversely impacted from an exit, if at all, of Dr. Rajan, what will drive markets thence will be the new RBI Governor and MPC composition/stance, in our view.
Nomura
Although Dr. Raghuram Rajan’s exit will be a negative in the short term, we do not expect any lasting medium-term effects. The RBI as an institution has strong credibility and should be able to weather this disruption well. As such, its independence should remain intact.
We also do not expect Raghuram Rajan’s exit to dilute the flexible inflation targeting framework, with the government and RBI having already signed an agreement on the issue. Over time, the setting up of an MPC will move monetary policy decision making from an individual (the RBI governor) to a committee. With the committee responsible for achieving these inflation targets, we do not believe monetary policy can turn a blind eye to inflation, irrespective of who the RBI governor is. Therefore, in the current environment of rising headline inflation and sticky core inflation, we expect repo rates to remain on hold, but we expect the RBI to continue to provide more liquidity to enable better transmission of the cuts already delivered thus far.
SocGen notes:
Buy India equities Q2 has been good for Indian equities: the currency has remained stable, local elections have been favourable to Prime Minister Narendra Modi, and the government got legislative approval for a new bankruptcy code. The latter point is especially important. It suggests that the process of NPL recognition is making progress. The Reserve Bank of India has signalled its intention to deal with bank NPLs by March 2017. The chart on the left shows the greater recognition of non-performing loans in the latest fiscal year bank results (the share of “restructured assets” which are performing but sub-standard loans have decreased while the share of gross NPLs has increased).
In our opinion, dealing with NPLs will support earnings recovery, the main missing ingredient in the India story.
That policy is now in question
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