RBI governor Rajan won't seek second term, UBS downgrades India

Bank of India governor Raghuram Rajan announced he would not stand for a second-term when his current tenure ends in September.

The announcement, made on Saturday, was not wholly unexpected, yet economists at Barclays told clients: "the timing and manner in which the announcement was made came as a surprise."

Indeed, even Indian authorities were apparently caught on the hop.

Rajan had received criticised from various corners for allegedly being to slow when lowering interest rates, but above all as a result of his views concerning free speech and religious expression which some accounts say made Hindu hardliners uncomfortable.

“We have worked with the government over the last three years to create a platform of macroeconomic and institutional stability,” Rajan said.

“I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit.”

Rajan convinced the RBI to take-up inflation targetting in 2015 and worked to build-up the country's foreign exchange reserves, helping to reduce volatility in the currency, the rupee, although thus far im 2016 it had been Asia's worst performing currency.

Among the immediate implications of the governor's exit, Barclays anticipated that the next reduction in the RBI's main policy rate, which was previously expected to arrive in the third quarter of 2016 would now be pushed back to the last quarter of the year.

For Bhanu Baweja, strategist at UBS, Rajan's departure might reflect pressure to maintain cyclical growth at the cost of giving up structural improvements.

Rajan had also been of the view that low inflation was not negative for growth, indeed the opposite given the need to incentivise savers shifting from gold and into financial instruments.

Hence, the strategist said he would be watching to see how the new Governor proceeded.

"Any changes to levels or timing of inflation convergence which signals a prioritization of short-term growth would be a negative in our view."

"We maintain our nifty target of 7500, which is well below the current market value. A cyclical boost from potentially looser policy may help the market in the short term, but it’s the long-term growth that matters, and that’s where risks may have risen. We take India down to neutral relative to the rest of the Asia ex-Japan region."