The market will quickly try to suss out if the new person has the spine to stand up to New Delhi, and if he doesn‘t, the rupee will bear the consequence, says Ambit's Saurabh Mukherjea
Following RBI Governor Raghuram Rajan's decision not to seek an extension after September, the market will be closely watching if the NDA will debase RBI as an institution, said Ambit Capital's Saurabh Mukherjea.
"If you look at India over the last 20 years (successive governments) have pretty much debased every institution there is out there," Mukherjea told CNBC-TV18.
"The next 1-2 years will be a good test of the RBI’s ability to stand up to New Delhi and do our own thing,"he said.
Mukherjea said the job of a central banker was tough in every country, given the tussle between the government and the central bank.
"It is even tougher in our country where you have really little support from the ancillary apparatus; it is a big call for the NDA how much they try to diminish the RBI’s importance," Mukherjea said.
The new Governor's position will be expiring a little after the 2019 elections.
"So you can imagine the kind of pressure the new person will face in the 12-month run up to the elections.
The market will quickly try to suss out if the new person has the spine to stand up to New Delhi, and if he doesn’t, the rupee will bear the consequence," Mukherjea said.
He said the currency market was most vulnerable at this stage, the bond market next, and the equity market would be least impacted by Rajan’s exit.
In a contrarian view, Ajay Srivastava of Dimensions Consulting believes that while there could be a knee jerk reaction on the equity front, the news will not hurt India's economy deeply. Srivastava said that many sectors like micro, small and medium enterprises (MSME) and agricultural commodities were neglected to a large degree under Rajan's regime and that growth was being jeopardised in favour of cleaning up the banking sector.
On a long term basis, liquidity will be closely looked into and monetary easing will be critical, Srivastava added.
However, the two agreed that any dips in the Indian equity markets can be bought into in Monday's trading session.
Below is the transcript of their discussion with CNBC-TV18’s Latha Venkatesh and Anuj Singhal.
Q: This market is already dealing with uncertainties about Brexit, do you think timing of Rajan’s exit news would be bit of a problem and will there be a knee-jerk reaction?
Srivatava: I cannot preclude if there will be a knee-jerk reaction but I don’t think this exit is going to be deep lasting on the economy. One good signal this exit brings to the table is what was lost was the whole MSME sector, the agriculture sector, small industries were being neglected. I think the BJP realized that on the ground level the development was not translating, there was unemployment, industry was struggling and they had no choice but to take this harsh action.,
Growth was being jeopardized in favour of banking system, maybe in faovur of the larger corporate – the large swath of Indian industry was suffering badly for liquidity, loans, interest costs etc. So, on long-term basis, if there is a change of paradigm to growth then it is positive for market in my view and that is what we will see as time goes by – we will see more and more growth related measures, including perhaps lowering of interest rates, including liquidity being much more abundant than it has been in the past two years.
My view, on longer-term basis if big correction happens because of this, it is a great buying opportunity. For first time recognising that growth is an issue and somebody is doing something about it.
Latha: What is your sense of the markets reactions all three of them –bond, rupee and equities?
Mukherjea: Let us start with the foreign exchange (FX) market that is where the affect will be the first we felt most keenly. If you think about it for the last eighteen months we have seen our capital account surplus. You have seen the capital account surplus dwindle pretty steadily from 1-1.5 percent to barely 0.2 percent now. Against that backdrop of a dwindling the capital account surplus (CAS) what we have is in the next six-seven months the possibility of USD 20 billion of foreign currency non-residential (FCNR) outflow that is around a percent of gross domestic product (GDP). So, even if Rajan hadn’t exited we would have seen a pressure on the rupee in any case in the next six months. The exit will exacerbate the pressure on the rupee. So, of the three markets FX, bonds and equities, I think FX is the most vulnerable in the current context.
Number two, in vulnerability I would say is the bond market. Remember fixed income investors play with returns in the high single digit or if they are fortunate in the low double digits. In that context 5-7 percent rupee depreciation is a big event for fixed income investors and hence I think bond markets are likely to see fairly meaningful pressure in terms of foreign institution investor’s (FII) debt heading for the exit which obviously exacerbates the pressure on the currency it becomes a bit of a vicious cycle.
Least vulnerable of the three I would say is equities because of the sort of ambiguous impact of this. You could argue that Rajan’s exit could potentially lead to a governor who follows easy money policies, goes ease on the banking system and thus allows the New Delhi to reflate the economy through a mixture of ease monetary policy and taking it ease on the non performing assets (NPA) issue.
Bad for the currency, bad for the bond market but in the near-term ambiguous impact on equities, so I would look at it in that sequence. Totality of it all leaving aside the specific impacts on markets, I think the signal the sense to the global investor and to the global investment community, the signal it sense is fairly retrograde and that is something I think is a more subtle a softer signal that is something we all will have to live with for at least the next six months until a new governor establishes his or her credibility.
Q: For a day or two maybe the PSU banks could rally, stock market overall impact could be something which we could debate but what would be in the impact on fund flows?
Mukherjea: FII equity flows have dwindled anyway rapidly over the last 12 months, so the FII story died 12 months and market was running on domestic fund inflows. The question is how quickly will equity flow turn south and commonsense says we are likely to see some FII outflows over coming months.
The important question will be, if government brings in a governor with an easier monetary policy perspective, less of an inflation hawk and boost NPAs in the banking system – If government brings in such a governor and ramps up excitement in the market and we get GST through in the monsoon session then can you get the domestic investor excited enough to come into the stock market?
The stock market hope now will largely rest on the government being able to G-up the domestic investor and turn some of the black money flows away from gold and real-estate, into financial system. But the FII equity investor as a driver of Indian stock market died over the last 12 months. I don’t expect them to take a positive view of India anytime soon.
More to come