Urjit Patel's resignation: Markets see red, rupee falls by 114 paise

Equity markets sank on Tuesday as news of Reserve Bank of India Governor Urjit Patel quitting rattled investors, who were already nervous after exit polls had signalled that the Narendra Modi-led BJP would suffer setbacks in key assembly elections.

The BSE Sensex was down 420 points or 1.2 per cent to 34,539.58 in morning trading; the wider NSE Nifty 50 tumbled 105 points or 1.0 per cent to 10,383.15 points.

In one of its steepest falls, the rupee plunged by 114 paise—more than a rupee—and was trading at 72.46 against the greenback versus Monday's close of 71.32.

The RBI and the Centre had been at loggerheads over the past one month on various matters like transfer of the central bank's excess reserves to the government, easing liquidity to non-banking financial companies and easier lending norms for small and medium enterprises.

After the recent board meeting, the differences between the two sides seemed to have been ironed out and therefore, the sudden resignation of Patel shocked market men and only raises more questions.

“The sudden resignation will lead to questions about whether the government is trying to stifle institutions and whether the resignation is a statement to protect the RBI’s independence. This, along with the lack of policy coordination between the RBI and the government, will mean higher India risk premium, at least in the short term, in an environment where domestic political uncertainty is anyway on the rise owing to the elections scheduled in second quarter 2019,” said Sonal Varma, chief India economist at Japan's Nomura Securities.

Investors do not like uncertainties. Foreign Institutional Investors, who have been net sellers in Indian equity and debt, may see this as a further negative, at least in the short-term, till a replacement is announced soon.

“This seems like the culmination of the differences of opinion between government and RBI on a large range of issues. We had the feeling that the differences are bridging but it suggests otherwise. This will create uncertainty. Appointment of a credible governor quickly can dispel the situation,” said Sujan Hajra, chief economist at Anand Rathi Financial Services.

The biggest achievement of Patel was the whole inflation targeting framework, which the central bank has strongly pursued in recent years. His sudden resignation will once again raise concerns over the stability and independence of the institution and continuation of the policies.

“While the motivation for the RBI governor's resignation is unclear, the independence of a country's central bank is an important consideration in our assessment of a sovereign's institutional strength. We would consider signs that the government attempts to curtail the central bank's independence to be credit negative,” said Moody's Investors Services.

Patel's resignation comes at a time global headwinds like escalating trade tensions between US and China, Britain's parliamentary vote on Brexit and fears of global economy slowing in 2019 had already led to a sharp spike in risk aversion for risk assets like equities, noted Ajay Bodke, CEO and chief portfolio manager at brokerage Prabhudas Lilladher.

“Government needs to urgently appoint an eminent economist, preferably one who has decades of administrative experience by virtue of shouldering various senior roles in the government and who can adroitly manage the differences with the government and at the same time defend the institution's autonomy,” he said.