Overview
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RBI governor’s resignation and appointment of Shaktikanta Das
The resignation of the RBI governor Urjit Patel this week, nine months prior to the end of his tenure, came as a surprise despite the ongoing differences between the RBI and the government. This is only the second time in history that an RBI governor has stepped down before the end of their term. The market opened lower on the news given the implications for the currency, interest rates and markets in general over the medium to long term.
The government moved swiftly to appoint Shaktikanta Das as the new governor. As economic affairs secretary from 2015 to 2017, Das has worked closely with the central bank. He is currently the government’s representative at G20 summits. We believe his appointment should help settle markets.
There is only limited scope for tinkering with interest rates, given that the inflation targeting framework is a mandate for the RBI. The central bank is also likely to continue its policy on bad loan recognition and the bankruptcy process. However, it might now take a more flexible approach in dealing with the liquidity situation and loans to small and medium enterprises (SME).
BJP’s loss in three state-level elections
The Modi-led Bharatiya Janata Party (BJP), lost three key state elections to the opposition Indian National Congress party. Although Modi’s party faced anti-incumbency in all three states, the election results indicate the revival of the Congress party and the increased potential for it to lead a coalition of anti-BJP parties. This also creates heightened uncertainty for markets ahead of the national elections in May 2019.
For corporates, this uncertainty may lead to a further push-back in the private sector capex cycle. However, if we look beyond the near-term uncertainty, the situation looks more promising. Banks and private sector balance sheets have been cleaned up over the last five to six years and capacity utilization has been slowly inching up.
We believe the investment cycle should pick up irrespective of either a BJP or a Congress-led government following next year’s election. The worst-case scenario would be if a coalition of smaller parties (a third front) formed the next government, without a clear vision for the future. However, we do not expect this outcome.
Outlook
The earnings cycle in India has been weak in recent years and a recovery in earnings has not yet materialised. Meanwhile, valuations have corrected to more reasonable levels. Markets could remain volatile in the near term, but India’s longer-term structural growth story remains intact. And we are unlikely to see a major shift in domestic policy direction under either a BJP or Congress-led government.
