India: Patel throws in the towel
Governor Patel’s sudden exit from the Reserve Bank of India intensifies market uncertainty and is negative for the Indian rupee (INR). The USD/INR is just shy of our end-year 71.50 forecast (spot 71.3). We continue to see the pair re-testing the 73 level within the next three-to-six months
RBI governor Patel throws in the towel
We noted in our ‘Asia week ahead’ note last Friday that investors would stay clear of Indian markets ahead of polling results for the five state elections to be announced today. And we have more reasons to think so now, following the news yesterday about Reserve Bank of India’s governor resigning ahead of the forthcoming RBI board meeting later this week (14 December).
Urjit Patel’s resignation for ‘personal reasons’, well before the expiry of his term in September 2019, in fact, goes to reinforce the widened rift between the central bank and the government. Clearly, central bank independence is compromised, and the government indeed now has greater control of the central bank and its reserves, which are required to plug the widening fiscal deficit in the election year.
What's next?
Whoever replaces Patel, most likely the most senior deputy governor, or a hand-pick of the government, the next central bank chief will be under intense pressure from the government to concede to the latter’s demands for more growth-friendly policies ahead of general elections in early 2019. The news is clearly a significant negative for the markets; even Moody’s deplored it as being credit negative.
The opinion polls for state elections are neck-and-neck between Modi’s Bharatiya Janata Party and its main rival Congress Party, and the outcome will be crucial for the incumbent retaining power in the general elections. We aren’t expecting today, or probably during the rest of the week, any positive news for the local markets. The politics will continue to overshadow the economy as most of India's monthly economic data (consumer and wholesale prices, industrial production, and trade) will likely be pushed into the background.
Going forward, the focus will remain the way the RBI conducts its monetary policy. And based on the current economic dynamic, and the political pressure to ease, the RBI leaving policy on hold through mid-2019 remains our baseline. Any policy easing on grounds of lower inflation is unlikely to do enough to boost growth in time to enhance political odds in favour of Modi.
The USD/INR is just shy of our end-year 71.50 forecast (spot 71.3). We continue to see the pair re-testing the 73 level within the next three-to-six months.
Download
Download article
11 December 2018
Good MornING Asia - 11 December 2018 This bundle contains {bundle_entries}{/bundle_entries} articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).