“While I was open to seeing these developments through (monetary policy committee and banks’ clean-up), on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016," this is what Reserve Bank of India Governor Raghuram Rajan told his colleagues while bidding them goodbye.
While the news of Raghuram Rajan’s exit or ‘Rexit’ came on Saturday, market observers braced themselves for a difficult Monday. But, instead the market put up a strong show with the BSE benchmark Sensex closing 241 points or 0.9% higher at 26,867 points.
Experts feel that since the announcement came on a weekend and not a weekday, it saved the market from any irrational knee-jerk reaction. “Market is in bullish mode and so any negative news is getting discounted very fast. This news came on Saturday so investors had two days to coolly think about it and then react,” says Ambareesh Baliga, independent market expert. He adds other events such as the upcoming Brexit vote, onset of monsoons and Government’s FDI-related announcements on Monday would overshadow the news of Rajan’s exit.
On Monday, Government of India eased FDI norms in 9 sectors. E-commerce companies that distribute India-manufactured food products can now get up to 100% FDI. In the defence sector, up to 100% FDI is allowed without the mandatory condition that foreign partners need to bring in “state-of-the-art” technology.
The local sourcing norms for entities undertaking Single Brand Retail Trading of products having ”state-of-the-art” and “cutting edge” technology was also relaxed up to three years. This move is expected to give boost to Apple’s bid to open its signature stores in India as the condition that stipulates companies to source at least 30% of their components or merchandise locally won’t be applicable for now. Domestic airlines and airports were also opened to 100% FDI. The move could pave the way for foreign airlines to operate in India through wholly-owned subsidiaries.
According to Nandan Chakraborty, MD, Institutional Equity Research at Axis Capital, the upmove in the market can be attributed to the easing fears that Britain would vote for exiting the European Union. “Brexit is a much bigger concern for the market than Rajan’s exit. If that happens Euro will become weak, dollar will strengthen. A strengthening dollar means a weaker rupee and that is not good news for the portfolio returns of foreign institutional investors that are putting their money in India.”
The opinion polls over the weekend suggested that the ‘Remain’ campaign was pulling back into lead ahead of the June 23rd referendum which will decide whether Britain will continue to stay or opt out of the European Union. While investors would soon know Britain’s preference, for now it must prepare itself for a future without the former IMF chief economist running the show at Mint Street.
That not necessarily will be such a bad future, reckons Andrew Holland, CEO, Investment Advisory at Ambit Capital. “RBI Governor leaving is not a market moving event. While we would have liked the continuity, people are getting too negative that the new person coming in will not be able to carry on the same good work.” Many people also expect the new Governor would do what Rajan did not i.e. initiate more rate-cuts,” Baliga adds.