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Brexit, Rajan Exit Could Increase Market Volatility

Monday, June 20, 2016
By Dominic Rebello

A tumultuous global economy and the Brexit referendum likely on Wednesday, along with RBI Governor Raghuram’s announcement, not to seek a second term could have a major impact on the stock markets, as bruised sentiment and nervousness prevailing on the global economy front, could cause extreme volatility on ‘D’ Street. Brace for a roller coaster ride this week…

This “week is going to be decisive for the world markets including ours as everyone will be closely eyeing the Brexit referendum on June 23rd.. It’s difficult to judge or comment on the possible impact on Indian markets in case Britain votes to opt out from the European Union (EU), but the immediate reaction could be severe especially on stocks of Indian companies operating in Europe” says Jayant Manglik, President, Retail Distribution, Religare Securities Ltd.

This apart, Saturday’s announcement by Reserve Bank of India (RBI) Governor Raghuram Rajan of his decision to step down after his term which ends on September 4, is also likely to weigh on market sentiment.

Calling Reserve Bank of India (RBI) Governor Raghuram Rajan's exit a bad omen for the Indian economy, eminent economists and former policymakers yesterday said it will be seen by the world as India's non-approval to a policy against inflation and bad loans.

Says ASSOCHAM Secretary General D S Rawat, “Dr Raghuram Rajan leaving the RBI at a time when a tumultuous global economy poses several risks to India along with the banks grappling with an unprecedented challenge of mounting non-performing assets is quite unfortunate…While it is the institutions which are paramount, individuals provide leadership and a quality leadership makes all the difference. That is what Dr Rajan has done to the RBI. Over the last three years, he provided a new dimension to entire approach of the central bank with a global perspective, yet keeping intact, the unique advantages of the Indian economy and eco system.” He expressed the hope that Dr Rajan is persuaded to reconsider his decision.

Rajan's colleague at Chicago University Booth School of Business Luigi Zingales termed it is a huge loss for India, while Harvard University professor Gita Gopinath said it was deeply disappointing that the government instead of fighting hard to keep Rajan has let him go amid all the distasteful comments by those questioning his commitment to India's best interests. History will judge Rajan as one of the most effective central bankers of not just India but of the world, Gopinath told PTI.

Arundhati Bhattacharya, Chairman, SBI said "Dr. Rajan is a person of very high caliber, who has built ably on the reputation of our Central Bank and given it a very large measure of credibility."

Indian-origin economist and British Labour Party leader Meghnad Desai said he feels sorry for India's reputation abroad; while World Bank's Chief Economist and India's former Chief Economic Advisor Kaushik Basu said Rajan has been one of the finest central bank governors anywhere.

Incidentally, Dr. Rajan had sent a message to RBI staff informing them of his decision to step down on September 4, when his term expires and pursue his interests in academia. In his own words, Rajan had this to say…” I took office in September 2013 as the 23rd Governor of the Reserve Bank of India. At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”. In my opening statement as Governor, I laid out an agenda for action that I had discussed with you, including a new monetary framework that focused on bringing inflation down, raising of Foreign Currency Non-Resident (B) deposits to bolster our foreign exchange reserves, transparent licensing of new universal and niche banks by committees of unimpeachable integrity, creating new institutions such as the Bharat Bill Payment System and the Trade Receivables Exchange, expanding payments to all via mobile phones, and developing a large loan data base to better map and resolve the extent of system-wide distress. By implementing these measures, I said we would “build a bridge to the future, over the stormy waves produced by global financial markets…Today, I feel proud that we at the Reserve Bank have delivered on all these proposals”.

Now all attention will focus on how Foreign Institutional Investors and traders will view the consequences of both the ‘Brexit and Rexit’ on Dalal Street. Friday will tell…

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