Rupee falls by 1.5% after Urjit Patel’s unexpected resignation

12/12/2018

new delhi: The rupee fell sharply against the US dollar on Tuesday after RBI governor Urjit Patel abruptly announced his resignation on Monday.
The rupee was trading at 72.46 against the US dollar, down 1.5%, as compared to Monday’s close of 71.32. The dollar also gained other currencies, putting further pressure on the rupee.
Patel resigned from the position citing personal reasons with immediate effect on Monday, nearly 10 months before the completion of his term in September next year. “On account of personal reasons, I have decided to step down from my current position effective immediately,” Patel said in an 88-word statement released after market hours on Monday.
Patel’s shock exit has raised worries about further outflows from Indian markets. The counting of votes in five states began today from 8am. Early trends indicated a tight race between the Bharatiya Janata Party (BJP) and Congress in Madhya Pradesh and Chhattisgarh as the opposition was ahead in Rajasthan.
Credit rating agencies indicated they were watching the development closely, though a knee-jerk reaction was unlikely.
“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,” rating agency Moody’s said in a statement.
“That said, our assessment of institutional strength ultimately focuses on the quality and policy outcomes of the institutions themselves, not on the individuals leading them. We currently assume that the RBI will continue to pursue price and financial stability and implement policies towards these goals.”
Forex advisory firm IFA Global has said Patel’s resignation has “dampened risk sentiment onshore as questions arise again about friction between the government and the RBI. Foreign portfolio investors are likely to take this extremely negatively and we could see a sell-off in debt and equities.” “We will see a knee-jerk sell-off. If the declines come with a bad poll outcome for the BJP, we may see a big drop,” Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management said while commenting on the impact of Patel’s surprise exit on markets.
Market veteran Ajay Bagga said that longer-term, the government will need to be cautious of outflows from overseas investors. “A lot of communication will be needed to foreign institutional investors to give them confidence,” he said.
The swings in global crude prices and the backdrop of global financial turmoil amid concerns over US-China trade war has heightened the volatility in the rupee.
An index that measures the US dollar against a basket of six major currencies has jumped 5.5% so far this year as investors pile on the dollar as a safe haven bet amid worries over global growth. Adding to turmoil in global forex markets, the British pound tumbled to its lowest against the US dollar since April 2017 after prime minister Theresa May postponed a parliamentary vote on her Brexit deal with the European Union, panicking investors about deepening political uncertainty in the United Kingdom.
India’s current account deficit in July-September to its widest in over four years, according to data released on Friday. But the current account deficit is likely to ease after the recent sharp drop in global crude prices, easing some pressure of the rupee, analysts said.
The rupee had fallen about 14% in the first nine months of this year but has recovered since hitting a record low of 74.48 against the US dollar on the back of the drop in oil prices.
The central bank has been locked in a tense face-off with the government in recent months. A speech by RBI deputy governor Viral Acharya on October 26 blew the lid off a disagreement between the bank and the central government over monetary policy and who controls the institution’s reserves. While historically there have been differences between the RBI and the government, the extent of the rift and its public nature were unprecedented.
The government has wanted the central bank to hand over more money from the RBI reserves to help fund its fiscal deficit and give it more flexibility for spending on its plans. The RBI currently hands over profits earned from various activities in the form of a dividend. But the government also wants to tap a share of the RBI’s $48.73 billion of capital reserves. The central bank has consistently rebuffed the demand.

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