Hope Of Easier Policies Drives Rebound In Rupee, Bonds
Rupee, bonds recover after a shock reaction to Urjit Patel’s resignation.
The Indian rupee rebounded from a sharply lower opening and bonds gained as traders turned their speculative attention to the policy implications of a new governor taking charge at the Reserve Bank of India. Urjit Patel, the 24th governor of the RBI, resigned on Monday with immediate effect.
With little information on who the new governor will be or what the interim arrangement will look like, chatter in trading rooms ranged from the possibility of lower interest rates and easier liquidity, to the hope of more liberal banking regulations.
In response, equities, currency and bonds all recovered just hours after these asset markets opened sharply lower in response to Patel’s surprise resignation.
Will The New Governor Be Dovish?
The benchmark 10-year bond yield which had surged to 7.70 percent in the opening minutes of trade had eased by mid-day to trade at 7.50 percent. Contrary to the belief that bond yields will surge on the uncertainty created by the resignation of a sitting RBI governor, yields actually fell compared to Monday’s close of 7.58 percent.
Markets are hoping that the new governor will be more dovish, said a senior money market trader. Inflation is low and there is scope for easier monetary policy, this person said. At the last monetary policy review, rates and the monetary policy stance were left unchanged. However, inflation forecasts were cut sharply.
A second trader cited similar reasons for the rebound in bond prices and the fall in yields but added that public-sector banks have been active buyers of government bonds in trade today.
Rupee Rebounds On Intervention, Elections
The rupee, too, rebounded from the sharp fall seen on open. After hitting a low of 72.44 against the U.S. dollar in the opening minutes of the trade, the Indian unit climbed back to trade above the 72 against the U.S. dollar mark.
The opening quotes were an overreaction, said a currency market trader. After that there was some intervention with state-owned banks selling dollars which helped the rupee recover, this person said, adding that markets are also of the view that lower oil prices continue to be a positive for India.
State election results, which are being seen as a precursor to the general elections, are also being watched closely by the currency markets. Final results of those polls are awaited.
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Banks Hope For Relaxation In Stressed Asset Rules?
In the equity markets, shares of banks and non-bank lenders were also trading higher in the afternoon session.
Patel was a vocal supporter of tough rules for banks to ensure that the mistakes of the past credit cycle are not repeated. Under his governorship, the RBI announced a tougher Prompt Corrective Action framework and a new set of stressed asset rules as part of the Feb. 12 circular.
“Post the change in guard at the RBI, it is difficult to predict what will be the change in the Feb. 12 circular,” said State Bank of India chairman Rajnish Kumar on the sidelines of an event.
Some of these issues are due to be taken up the RBI’s central board meet on Dec.14. It is unclear whether that meeting will be held as per plan, a board member told BloombergQuint on condition of anonymity.
