QuickTake Q&A: India Sees Rallies Before Central Banker Is Named

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The long and speculation-filled wait for India to name its next central bank governor is nearing an end. Raghuram Rajan’s term at the Reserve Bank of India expires on Sept. 4, and traders expect Prime Minister Narendra Modi to name a candidate willing to lower one of Asia’s highest benchmark interest rates, currently 6.5 percent. Stocks and bonds have rallied while investors wait on Modi, who has kept his cards close. Local media reports point to Urjit Patel, Subir Gokarn and Kundapur Vaman Kamath as among the front-runners. Beyond interest rates, Rajan’s successor will confront decisions on reviewing bank assets and positioning India’s rupee.

1. What did Rajan do?

Rajan took charge of the central bank in 2013 as an appointee of the Congress-led government, which Modi ousted the following year. Despite occasional tensions, Rajan convinced Modi’s government to formalize an inflation target and create a monetary policy committee -- part of the biggest overhaul of India’s central bank in its history. Consumer-price gains averaged 5.2 percent since January 2015 as oil costs fell, slowing from a high of 11.5 percent in November 2013. (They were 6.07 percent in July, breaching the upper bound of the bank’s target.) Rajan’s decision to return to academia at the end of his term came after a Modi ally attacked him both personally and for keeping interest rates too high.

2. What might his successor do differently?

Expectations that the next central bank governor will be more aggressive in easing policy have fueled a sovereign bond rally that has sent the benchmark 10-year yield to the lowest since 2009. Meeting them will be difficult, though. While more stimulus will make it easier for companies to refinance loans, it risks stoking consumer inflation, which in July rose at the fastest pace in two years.

3. Why is the decision so important for banks?

A gauge of shares of Indian state-run banks has climbed 13 percent since Rajan announced his departure as investors wager his successor will be a less-stringent enforcer of asset reviews that have seen bad loans surge. Kamath, the former chief executive of ICICI Bank Ltd., has said the bad-debt problem is overblown and that soured loans will turn around in the “short term” as economic growth picks up. Bank stocks account for 22 percent weight in the benchmark S&P BSE Sensex index.

4. Why is the decision so important for currency traders?

One of the biggest challenges for the next governor will be to maintain foreign-exchange stability in an uncertain global environment. Rajan has been credited with growing India’s war chest of currency reserves to a record and slashing rupee volatility by the most among emerging-market peers during his term. He took over days after the rupee sank to an unprecedented 68.845 per dollar.

5. What are the first challenges likely to be?

The new governor will almost immediately be put to test as Asia’s third-biggest economy is likely to see an outflow of about $20 billion starting in September from maturing foreign-currency deposits. His or her sway over monetary policy will also be in question as India moves to setting interest rates by committee from the prevailing system where the governor has the last word.

The Reference Shelf

  • A story on Rajan’s final policy review as governor.
  • A QuickTake Q&A on India’s forthcoming national sales tax.
  • A story on the long rally in Indian bonds.
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