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Rexit: Markets looking for signals of continuity

Though most experts are upset at the turn of events, they feel that the impact on the economy and market are limited in the long run.

, ET Bureau|
Updated: Jun 20, 2016, 07.26 AM IST
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MUMBAI: Speculation about whether the government will extend the services of RBI Governor Raghuram Rajan was raging for the last several weeks. Finally, Rajan has decided to clear the air in his letter to the staff of the central bank.

Are the market participants upset with Rajan’s exit? Yes. "There will be some concern with any major change. Treat it similar to a management change in companies," says Chandresh Nigam, MD & CEO, Axis Mutual Fund. Rajan’s good track record is another reason for this.

"Rajan has done amazing job in inflation control, liquidity management, etc. So most people were expecting an extension for him," says Rajiv Shastri, MD and CEO, Peerless Mutual Fund. "People were expecting continuity because RBI and Rajan were instrumental in raising our global image," says A Balasubramanian, CEO, Birla Sun Life Mutual Fund.

More than the non-extension of his term, most people are upset at the manner the events played out. "RBI and other regulators are supposed to be independent entities. Subramanian Swamy vitiated the atmosphere through unnecessary allegations, affecting the global impression about India. This should have been handled much better," said the CEO of a mutual fund requesting anonymity.

Though most experts are upset at the turn of events, they feel that the impact on the economy and market are limited in the long run. "Treat it like a great company losing one good employee. It is bad for the company, but not the end of it," says Balasubramanian. In other words, investors should continue to bet on the India growth story. "Investors should not change their asset allocation based on events like this. Since India’s economy is doing well in the long term, there is nothing to worry now," says Vikaas M Sachdeva, CEO, Edelweiss MF.

Read our entire coverage on Rexit

Balasubramanian concurs with this view. "Investors should not bother too much about events like this. The country is in the right direction and the long-term direction of the market is driven by fundamentals and not just by individuals," he says.

Investors will get a clearer picture about how things are shaping up when the government appoints Rajan’s successor. "We had good RBI Governors in the last 20 years and hope that the government will appoint another good governor now," says AK Sridhar, CIO, IndiaFirst Life Insurance. "Since investors are more interested in the continuity of policies, markets will be happy if the government and the new governor give good signals."

Market participants, however, expect volatility in the short term. "Debt yield may also move up by 5-10 bps," says Sridhar. One should expect similar short-term volatility in equity and currency market as well.

"Short-term volatility induced by this event may not be high, because some news about this was there for the last several days. In other words, this did not come to the market as a surprise," says Sachdeva.

What should investors do in this situation? Rate sensitive sectors will benefit if the new governor obliges the government with more rate cuts. If that happens, long-dated debt funds and tax-free bonds will benefit. That means, any short term spike in yield should be used as an opportunity.

Experts have similar view on equities as well. "The overall macro economic situation is stable. So if any major fall happens on Monday, investors should treat it as a buying opportunity," says Nigam.
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