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Macro + FX Strategy India: Shock RBI Governor Resignation Creates More Uncertainties

Tuesday, 11 December 2018 (RBI) Governor Urjit Patel quit with immediate effect on Monday (10 Dec) citing “personal reasons”, cutting short his three-year term which was to end in September 2019. His resignation came amidst several high-profile clashes between the government and RBI over a number of issues including the extent to which the banks are to recognize non-performing assets, Ho Woei Chen the injection of liquidity into the stressed non-banking finance sector, and higher dividend payment Economist [email protected] to the government to help narrow the fiscal deficit. The unexpected move also came ahead of RBI’s last board meeting scheduled this Friday (14-Dec) where governance changes are expected to be Peter Chia discussed. Senior FX Strategist [email protected] With intensifying concerns over the RBI’s independence, Moody’s has said that any attempt by the government to curtail the ’s independence would be credit negative. Fitch has also weighed in to say that Patel’s resignation has raised the macroeconomic risks.

The RBI is expected to name an interim governor for the central bank soon with speculation pointing to N. S. Vishwanathan, currently the most senior of the four deputies at the central bank. Potential candidates for the next governor are said to include Vishwanathan, former RBI deputy governor as well as several names of current and former Finance Ministry officials.

We expect monetary policy continuity though bias could turn more dovish, continuing on Patel’s comment at the December monetary policy meeting that there is the possibility of “commensurate policy actions” if inflation continues to undershoot which seemed to suggest room to cut interest rates.

The RBI has kept its benchmark repo rate unchanged at 6.50% in the last two meetings (October and December) but shifted to “calibrated tightening” stance from “neutral” since October despite the sharp revision in its near-term inflation forecast. Taking into account of the sudden departure of Governor Patel and the softer inflation and growth outlook, RBI is expected to tilt towards a rate hold at the February 2019 meeting while a rate cut cannot be ruled out if the growth outlook weakens further. Oil price trajectory and the progression in Fed’s monetary tightening which will affect the country’s inflation, trade balance and currency are key indicators to watch.

Uncertainties Over RBI May Have Solidified USD/INR’s Recent Bottom At 70 The Indian rupee, INR has reacted negatively to Patel’s sudden resignation. It fell 0.65% to 71.83 per USD on Tuesday after dropping 0.74% on Monday. Concerns over RBI’s independence and a potential dovish change in the monetary policy stance are likely to keep the INR on the defensive, threatening to undo part of INR’s 5.9% gains against the USD in November.

In our latest quarterly report published last Friday (7-Dec, see report here), we had highlighted a likelihood of USD/INR bottoming at around 70 in the near term before heading higher in 2019, underpinned by a challenging macro outlook for India. Also, the USD is also supported by further rate hikes by the Fed (we expect 1 hike in December and 3 more hikes in 2019). As such, we reiterate of USD/INR point forecasts at 71 in 1Q19, 72 in 2Q19 and 73 in 3Q and 4Q19.

India: Shock RBI Governor Resignation Creates More Uncertainties Tuesday, 11 December 2018 1 I Page Inflation Was Mostly Contained Under Governor Urjit Patel

Source: Macrobond, UOB Global Economics & Markets Research

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