Raghuram Rajan’s decision to not take up a second term at RBI will cause immediate near-term impact and is negative for the Indian rupee and equity markets, but this not the end of the ‘India story’, says CLSA India Strategist, Mahesh Nandurkar.
In a report titled, “Rajan exit”, CLSA India credits the Narendra Modi government for playing a vital role in containing inflation in the Indian economy. “Undoubtedly, Rajan has played a big role in building India’s credibility among the international investment community and his exit would disappoint many investors. However, we do not believe this is an end of the ‘India story’,” writes Mahesh Nandurkar.
Nandurkar goes on to add, “The government’s policies to contain food inflation have played a large role in containing overall inflation. The future will depend on who the successor is.”
Elaborating on the potential impact on Indian markets and Rupee, he says, “The immediate near-term impact is negative for rupee and equity markets, especially in the context of the upcoming Brexit worries and large US dollar outflow worries as NRI deposits mature.” “We continue to maintain our cautious view on the market owing to the mismatch between valuations and fundamentals. Overweight IT (HCL Tech and TCS), private financials (HDFC Bank and IndusInd), Power Grid, Reliance, Sun Pharma and Zee,” he adds.
The market is likely initially assume Rajan’s successor to be relatively easy on the interest rate environment. A potential increase in the long-term CPI target from 4% currently to say 5% could help this process, he feels.
From a medium term perspective, Nandurkar is of the view that any potential dilution in the fiscal targets would enable the government to spend more. “In general, there is greater chance of growth oriented monetary and fiscal policies in the future. If these two indeed happen, it would be good for equity markets in the medium term but will raise investor concern about the long-term macroeconomic stability and hence the currency.”
“What would complicate matters further is the potential $20 billion outflow in the fourth quarter of this calendar year as the three-year old NRI deposits mature. While the RBI has hedged its US dollar liabilities, some of its counter-parties might not be fully prepared and this could cause Rupee volatility,” he concludes.